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Serious flaws detected in tax reform project implementation

ISLAMABAD (December 19 2002) : The Central Board of Revenue (CBR) consultant, Maxwell Stamp, has detected serious shortcomings in the smooth implementation of the tax reform project and proposed a minimum period of six years for completion of the programme, says a document prepared for the World Bank.

A 'concept note', jointly formulated by Policy-Tax Reform Wing and consultants from UK, has pointed out that the CBR is not yet fully equipped to achieve the ambitious objectives relating to revenue administration modernisation.

Giving a realistic picture of tax machinery, it observed, “The computer literacy is low, technical knowledge in areas such as risk management, audit, valuation and classification is low, and awareness of modern techniques, their application and implementation, is very limited. During the first 18-month period of the reforms a start is being made to rectify these shortcomings”.

'Taxation Review Pakistan Concept Note' said that external resources and technical expertise will, however, be necessary for some time to come.

Experts in designing and developing tax and custom policies and procedure, IT systems/human resource policy, organisational and legislation reforms will be required to support CBR and each of the Board members will have primary ownership of the work to be done in their areas of responsibility. Keeping in view the experience of revenue administration reforms in other countries, it is understood that success requires intensive and dedicated projects having a life span of at least six years.

The CBR has directed its members to carefully study the concept note before its submission to the World Bank.

Tax reform strategy would be instrumental in creating a national database of taxpayers indicating records pertaining to assets, trade, history, performance, import/export data.

The Statutory Rules and Orders (SROs) would be simplified so that the taxpayers could easily understand the amendments.

The CBR will establish criteria to identify taxpayers who represent greater risk to revenue.

This will enable the authorities to keep more intensive check on taxpayers covered under the above-mentioned category through computerised monitoring system.

The Task Force on Reform has unearthed four major hurdles on the sales tax side.

These are identification of taxpayers, filing tax returns, audit of taxpayers' accounts and recovery of unpaid sales tax, additional tax and penalties.

These four areas would be particularly addressed in the project.

Audit of taxpayers' record will be the prime focus but the other three functions listed above form a comprehensive package, which needs improvement.

It is intended to review, develop and extend the existing computerised system. This will include devising a computerised audit selection programme together with a method of recording the results of audit work. To make the effective use of the new system, staff will receive further training.

The potential for a more immediate increase in the revenue from sales tax is much greater than in the case of income tax because the tax is based on business transactions and accounted for monthly.

Commenting on income tax, it says that the income tax administration will also move away from 100 per cent verification to risk assessment and post return audit checks.

This will be supported by information obtained, if required, from not only customs and GST but also other organisations including other taxpayers having financial transactions with the taxpayer and/or similar taxpayers within the same area.

The location of field offices would be reviewed with a view to both a tighter management structure and a better service to taxpayers.

On the central excise side, the number of excisable commodities would be reduced. This will enable the administration of the central excise to be subsumed within the sales tax administration.

These changes in the scope of excise will inevitably result in staff reductions. To deal with the situation, the staff would be given other duties or transferred to other government departments.

The procedure of licensing, return submission, accounting, enforcement and audit are different to those of sales tax even though excise taxpayers will almost invariably be sales tax payers.

Nevertheless, a computerised system will be devised (including the provision of management information) to record and manage the remaining activities subject to CED.

Custom reforms would focus on the speedy clearance of all goods particularly export-related items.

This will be based on risk assessment principles, in which customs' intervention is targeted towards the percentage of shipments that pose the highest risks, to replace the 100 percent physical examination that treats all shipments equally.

The targeted and selective approach will be supported by post-clearance audit, which will provide assurance over the quality of risk-based decision making.

New clearance procedures will reduce substantially both the personal interface between customs officials and importers and their agents and maintain a clear audit trail of each step of every transaction.

Arrangements relating to other customs regimes such as transit, duty drawback and bond operations will also be reviewed with the objective of streamlining their operation.

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