The government has sought a one-year extension in the “Pakistan Raises Revenue (PRR)” project worth $400 million financed by the World Bank to revise selected project development objective indicators to enhance attribution and to delink from measurements that no longer exist.
The Ministry of Economic Affairs’ restructuring paper proposes to
- Extend the duration of the project by one year to June 30, 2025, to ensure adequate time for the completion of the IPF component of the project;
- Revise selected PDO indicators to enhance attribution and to delink from measurements that no longer exist;
- Revise select DLIs and IRIs to reflect the extended project duration; and
- Revise select DLIs and verification protocols to reflect developments not envisioned during the design of the project.
PDO indicators include (i) Tax to GDP ratio (Percentage) while the proposed changes are; changed to increase FBR’s total collections as a percentage of GDP from 8.5 percent of GDP in fiscal year 2023 to 8.8 percent in fiscal year 2025 to enhance attribution and better capture implementing agency’s efforts. Accordingly, the targets are updated. (ii) Hours to prepare, file, and pay/withhold CIT and GST measured by the ‘paying taxes indicator’ in Doing Business (excluding social security contributions) while the proposed changes are; Doing Business (DB) Report is no longer published by the World Bank.
The methodology to measure progress on this indicator is changed from a DB report to using a case study approach to capture progress. (iii) Hours spent for customs clearance at the border per the ‘trading across borders’ Doing Business indicator (average of exports, imports) while the proposed changes are; Doing Business (DB) Report is no longer published by the World Bank.
The methodology to measure progress on this indicator is revised to use real-time data on Goods Declarations cleared in 48 hours or 2 working days. The indicator name has also been changed to “Efficiency in custom clearance of key exports and imports”.
- DLI 1: Scope of Withholding Regime Reduced while the proposed changes are; the end-target is revised to reducing withholding lines from 20 to 30 by June 2023. In subsequent years the targets are revised to reducing 50 percent of withholding tax agents in at least four key sectors in the last two years of the project, instead of reducing withholding lines to 20.
This revision will enable the FBR to continue to take advantage of the data collection through the withholding lines while reducing compliance costs for well-documented taxpayers by reducing their interaction with the intermediate withholding tax agents. The overall allocated amount remains unchanged. Total DLI amount (unchanged): $32 million.
- DLI 3: Coordination with provinces while the proposed changes are; To facilitate continuous data sharing while being realistic on the varied provincial tax authorities’ capacity for data management (mostly still manual or in MS Excel), the description of DLR 3.4 for “algorithm-based” data sharing in FY2023 is suggested to be replaced with “Systematic (regular) and digital data sharing system with all provinces functional, including validation of the accuracy and reliability of data sent/received.”
The overall allocated amount remains unchanged. Total DLI amount (unchanged): US$ 34 million.
PRR is a five-year Investment Project Financing (IPF) project of $400 million with a results-based component and an IPF component. The results-based component ($320 million, or Component 1) disburses against documented execution of eligible expenditures under the Eligible Expenditure Programs (EEPs) and the achievement of the Disbursement Linked Indicator (DLI) targets. These DLIs are linked with four objective areas:
- simple and transparent tax system,
- effective control of taxpayers’ obligations,
- facilitation of compliance, and
- institutional development for efficiency and accountability.
The IPF component ($80 million, or Component 2) mainly focuses on investment in the Federal Board of Revenue’s (FBR’s) ICT systems, including ICT equipment and software, cargo weighing, contactless scanning, and laboratory equipment for customs inspections (goods). It also finances consulting and non-consulting services for software development, technical assistance (TA), and training.
The project is currently rated as satisfactory against progress toward the achievement of its development objective. It is currently rated as Satisfactory for progress towards achievement of Project Development Objectives (PDO). So far, the project has disbursed US$ 291.31 million, which is about 74 percent of the total project amount of US$ 400 million.
Recent mid-term review and implementation support missions have found notable achievements under the results-based component on several DLIs as well as progress on the implementation of the IPF component. However, some PDO indicators need to be updated to reflect data availability and enhance attribution.
Overall progress is as; Simple and transparent tax system (DLIs 1, 2, 3). The number of withholding tax lines has reduced from the baseline of 58 in the fiscal year 2019 to 33 in the fiscal year 2022 (DLI-1). The FBR has established and staffed the Directorate General for Revenue Analysis with qualified economists.
With the help of this team, FBR has published detailed tax expenditure and evidence-based revenue forecasts for 2020-22 and published the tax gap analysis report in 2022 (DLI 2). This has been done for the first time in the history of FBR, supporting enhanced transparency of the tax system. Furthermore, all four provinces have signed MOUs for data sharing with the Federal Board of Revenue (FBR), as well as MOUs for input adjustments in sales tax, and have adopted FBR’s valuation tables for immoveable properties (DLI 3).
Effective control of taxpayers’ obligation (DLIs 4, 5, 6).
FBR has increased the tax base by adding 2.96 million new taxpayers, identified through automated data sharing and ICT-based Business Intelligence tools during fiscal year 2020-fiscal year 2024 (DLI 5). There is encouraging progress on the implementation of Track and Trace or electronic monitoring of the production system, which was previously delayed due to court cases (stay orders taken by different firms).
Electronic monitoring of the production system has been installed in the sugar, fertilizer, and tobacco sectors, while implementation is in process in the cement sectors.
However, due to the slow pace of progress to date, there is a need to review the overall target (10 sectors) for this intervention (DLI 4). Furthermore, FBR has restructured the audit wing and has established a compliance unit (the Directorate General of Compliance Risk Management; DG CRM) and audit unit.
It has adopted a regulation on risk-based selection of audit (to allow 90 percent of audit cases to be selected using a risk-based tool) and developed an Audit Management Information System (AMIS).
Based on these reforms, in fiscal year 2023 FBR has completed 53 comprehensive field audits of large taxpayers for cases selected by the risk-based selection tool and monitored by the Compliance Unit through AMIS, with associated reports to the management (DLI 6).