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Factsheet November 18, 2019

Pakistan Raises Revenue (PRR)

What is PRR?
Pakistan Raises Revenue (PRR) is a program of the Government of Pakistan to sustainably increase domestic revenue by broadening the tax base and making it easier for citizens and businesses to pay their taxes. This will make it possible for Pakistan to finance the investments in infrastructure, education and health needed for the country to accelerate and sustain growth.

Why is PRR needed?
PRR addresses a fundamental challenge for Pakistan’s development prospects: a chronic shortfall of revenues. No government can function if most of the country’s people and businesses do not pay their taxes. Pakistan collects less in taxes than what it needs to cover the government’s main service delivery functions. The results are budget deficits, a growing public debt burden, and acute shortage of funds to invest in country’s infrastructure and human capital. Pakistan has a very narrow tax base. This is due to exemptions and concessions for some large economic sectors and industries, including agriculture, construction and textiles. Likewise, a lot of tax revenue is lost due to widespread tax evasion. In FY2017/18 only 1.12 million firms and individuals filed and paid income tax. Recent estimates by the World Bank indicate that Pakistan is collecting only half of the economy’s tax potential, leaving almost two thirds of GST liabilities and more than half of income tax uncollected. For example, most retail traders do not pay taxes.
At the same time, Pakistan’s system is very complex and even people and companies which would like to pay their taxes find that it costs significant time and money to comply. For example, the division of the General Sales Tax General Sales Tax on Services (GST) between the federal government that collects tax on goods and the provinces that collect tax on services, means that firms that provide services across Pakistan need to file 60 tax returns a year only for GST and comply with different laws, regulations and administrative procedures for the federal level and each of the four provinces.

What does PRR do about these challenges?
PRR supports the simplification of the tax system by financing targeted results aimed at reducing the burden of the withholding regime on firms and individual taxpayers. It will help maximize transparency about the costs and benefits of tax exemptions. Importantly, PRR will help with harmonizing tax collection principles and mechanisms across the federal government and the provinces.
PRR also will make it easier to pay taxes by supporting a single GST portal for the Federal Board of Revenue (FBR) and provincial tax authorities, and a risk-based tax audit system to reduce the frequency of audits for most taxpayers. It also finances automation in customs controls to accelerate border clearance for imports and exports. Finally, it strengthens tax authorities’ capacity to gather and analyze taxpayer information to effectively control tax compliance.

What will PRR finance and how much does it cost?
PRR is financed with a $400 million IDA concessional credit from the World Bank. The World Bank’s concessional financing has a maturity of 30 years and an interest rate of 1.25 percent after a 5-year grace period. This financing cost is lower than the government’s own cost of funds. The commitment charge is currently zero. PRR will finance investments in technology for tax and customs administration (US$ 80 million) and also disburse US$ 320 million against targeted results over a five-year timeframe.

What is GST harmonization?
Harmonization involves agreement among the federal government and the provinces to apply the same definitions, principles, and rates for GST on goods and services. This means that the federal government and the provinces would revise their legislation and regulations to apply the same definitions of economic activities subject to GST on goods and services, levy GST based on the same principles (based on the place of sale/consumption rather than the firm’s headquarters), and – preferably but not necessarily – standardize their tax rates. GST tax rates also need to be streamlined. There are currently 26 different rates for different categories of goods and several rates for different services in different provinces. These multiple rates complicate both tax administration and compliance by taxpayers.
Harmonization will enable GST collection through a single online portal where firms will file, pay GST, and claim GST refunds for both goods and services at the same time. GST harmonization will help the FBR and provincial tax authorities to expand their tax bases and increase compliance by sharing taxpayer information.
GST harmonization however does not require the concentration of GST collection in a single tax authority for the federal government and the provinces. PRR is based on the provisions of the 18th Amendment 2010 and therefore assumes that the provinces will continue to collect the GST on services.

Does PRR support FBR reform?
PRR supports the FBR to become a high-performing organization based on best practices and technology that have demonstrated results across the world. To apply these technologies and practices successfully, the FBR needs to align its internal structure with its functions such as taxpayer registration, tax assessment, arrears management, audit, and litigation. A function-based structure will enable the FBR to achieve efficiency gains by simplifying and automating the processes for each function. It will enable FBR officers to develop specialized expertise in technical areas such as business intelligence, tax audit or litigation. The PRR also supports the position of a Chief Information Officer who will provide the FBR with cutting-edge expertise for the development of its technology systems.

This page was created in November 2019