Stalemate over FBR overhaul

ISLAMABAD:

Finance Minister Dr Shamshad Akhtar and the Inland Revenue Service (IRS) stood firm on their respective positions on Friday, raising the likelihood of military intervention to break the impasse over sending a summary to the federal cabinet for the approval of the tax machinery overhaul.

A day after her outburst against the taxmen, Akhtar visited the Federal Board of Revenue Headquarters to explain the rationale for her plan to dissolve the board and establish new independent entities for Customs, the IRS, and policy-related boards.

However, sources indicate that both sides did not budge from their stated positions, and the meeting ended inconclusively. Now, there is a possibility that the matter will be referred to the military establishment, said the sources.

The finance minister adhered to her position on the proposed model of the FBR’s restructuring, insisting that the oversight role of the two new tax departments, arising from the FBR, should be given to boards led by private individuals. This model, along with the breakup of the FBR into the Customs Board of Revenue and the Federal Board of Inland Revenue, was not acceptable to the IRS service.

On Thursday, Akhtar stated that the FBR was giving her a hard time, vowing that she would not budge and would keep pushing her version of the FBR restructuring until her last day in office.

On January 3rd, the Special Investment Facilitation Council (SIFC) had approved a proposal for the restructuring of tax administration, along with digitalisation proposals. However, the SIFC requested the finance minister to hold inter-ministerial consultations, as required under the Rules of Business, 1973, and then submit a summary to the cabinet within two weeks.

The inter-ministerial meeting held on the same day decided that the Secretary Revenue Division would head both new boards. However, this was not reflected in the draft summary suggested by the finance minister.

Until Friday, the last day of the two-week deadline, a consensus draft of the summary could not be finalised due to differences between the FBR chairman and finance minister.

The finance minister did not accept the summary version of the FBR chairman, who is also the Secretary Revenue Division, regarding the restructuring. Under the Rules of Business, the authority to send the summary rests with the Secretary Revenue Division.

Sources indicate that the finance minister has now sent her version of the summary to the FBR chairman, mentioning only one concern expressed by the chairman.

Read Finance minister condemns FBR’s resistance to overhaul

Akhtar’s version of the summary states that the finance minister has not agreed to the proposal of the Secretary Revenue Division chairing the two Oversight Boards of Customs and Inland Revenue. She argues that independent oversight will not be possible if the boards are chaired by the Secretary Revenue Division, who would be a civil servant of the same cadre. Instead, she proposes that independent domain experts should chair the two oversight boards separately for the Customs Board and the Inland Revenue Board, while the Secretary Revenue Division would be a member of both.

Sources said that the Secretary Revenue Division wanted his complete dissenting note to be presented to the federal cabinet for the decision.

During Friday’s meeting, the finance minister was cautioned that wholesale changes could undermine revenue mobilisation efforts, and there could also be legal challenges to the restructuring efforts. Some changes, like appointing director generals as heads of both tax services, might face legal obstacles, as existing laws do not provide such cover.

The FBR chairman informed the Senate Standing Committee on Finance that the proposed restructuring would require various amendments to tax statutes and related laws, legislation for Customs and Inland Revenue Establishments, and changes in respective rules and Rules of Business.

It has been pointed out that such extensive legislative and administrative changes can be subject to legal challenges, resulting in significant transition costs and potentially impacting revenue collection efforts.

According to Akhtar’s version, customs and inland revenue organisations will be headed by respective director generals, appointed by the government from their cadres on the recommendation of the Federal Policy Board for a fixed tenure. The DGs will have financial and operational autonomy in their respective organisations.

These organisations will not be attached departments nor will they report to the revenue division. The DGs will be accountable to the oversight boards.

The revenue division will provide policy guidance and resolve conflicts between customs and inland revenue. The present policy wings of IR and customs involved in the federal budget-making exercise leading to the presentation of the Finance Bill in Parliament shall be part of the revenue division. However, rules and SROs relating to the implementation of law will be the responsibility of DGs IR and customs.

Majority of Customs Service Group officers support the restructuring, which would empower them and give them financial and administrative autonomy.

A survey published by the World Customs Organization in 2020 shows that 27% of countries worldwide have Customs Administrations integrated with Inland Revenue as a single organization, while 73% have separate Customs Administrations. The Customs Department within a ministry is the most prevalent model (41%), and a completely independent Customs Agency accounts for 24%.

Published in The Express Tribune, January 20th2024.

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