In a dramatic development, the World Bank has distanced itself from the planned creation of Inland Revenue Service (IRS) in Pakistan under the $83 million tax administration reforms project to avoid possible penalties from the Inspection Panel, leaving the government in a quandary over how to go ahead with the merger of various tax collection groups.
Background discussions with relevant authorities and official record suggest that the creation of IRS to administer domestic taxes (income tax, sales tax and federal excise) was not part of the original tax reforms programme approved by the World Bank.
The situation has taken such a serious turn that the government has been asked to withdraw its request for extension in the programme till December 2011. The programme should have been closed by December 2009, but was extended for three months till March 31 this year.
As far as the World Bank is concerned, it has already stopped further payments for the project and threatened to ‘adjust’ the amounts already paid. The “project is fraught with problems of disbursements which is hampering its implementation”, said Federal Board of Revenue chairman Sohail Ahmed. He is also worried about the Inspection Panel’s plan to visit Pakistan by the end of February because it would invite ‘unwelcome media attention’.
The government faced another setback on Friday when the Federal Public Service Commission, currently in the process of fresh recruitments under the central superior service (CSS), declined to acknowledge the IRS as a legitimate service group of federal government employees.
“At present, there is no service group in the name of Inland Revenue Service”, FPSC chairman Justice (retd) Rana Bhagwandas told Dawn.
Asked if the commission had been consulted by the government before the creation of IRS, he said the matter was sub judice and hence he should not comment on it. He, however, advised this correspondent to ‘go through section 7 of the FPSC Ordinance and draw your own conclusion’.
The crux of section 7 is that creation of any service group should be made only on the advice of the FPSC and recruitment or promotion of government servants in pay scale 16 and above in any group should be made in consultation with the FPSC.
The government has not yet consulted the FPSC about the conversion of customs and excise group and income tax into IRS, officials said.
The World Bank mission led by Satu Kahkonen has also informed the government that the Inspection Panel would be visiting Pakistan in the fourth week of February to investigate the matter and hence it would not be possible for the bank management to defend the creation of IRS on legal grounds.
The World Bank has also informed the government about its decision to delete actions relating to ‘new integrated tax administration’ from the policy matrix because the Inspection Panel had taken ‘cognizance and registered for investigation’ the merger of customs and excise group and income tax group into IRS on complaints that the move violated the World Bank policies and the Constitution of Pakistan.
“This development has put the FBR/GoP in a needlessly embarrassing position especially since the FBR has kept World Bank completely informed of the process,” the FBR chairman said. He has now written to Finance Minister Shaukat Tarin to provide Rs1.4 billion during the current fiscal year and another Rs1.5 billion next year to complete related activities.
Interestingly, the project cost was originally estimated at Rs6.5 billion when the bank was part of the project with Rs5.5 billion loan.
According to FBR chairman, ‘integration of tax administration and creation of a new occupational group’ was one of the structural benchmarks adopted in the $11.3 billion standby arrangement with the International Monetary Fund.
On the advice of the IMF and World Bank, the establishment division took approval of Prime Minister Yousaf Raza Gilani and issued orders for creation of the group in September 2009.
“For the World Bank to initially press for the FBR to undergo these reforms and make them as benchmarks in GOP’s negotiations with IMF, and to now take adverse notice of successful implementation by FBR/Gop, is totally inappropriate and undesirable,” the FBR chairman said.
In a related move, chief commissioner of large taxpayers unit in Karachi Ms Yasmin Saud has declined to accept postings of 13 officers of customs and excise group under her command saying they had not opted to become part of the IRS and hence could not be expected to work willingly.
“Practically speaking, making such officers work in an integrated division against their options is not likely to give the required results as their transfer is perceived by them as a parking place”.
On January 19, the Inspection Panel of the World Bank had registered for investigation a complaint by Pakistan’s customs and excise group officers’ association and had put World Bank President Robert B. Zoellick and Pakistan’s representative on its executive board on notice till Feb 18 before formally starting the investigation.
As a result of one of the panel’s investigations, Paul Wolfowitz, the former deputy secretary of defence in the Bush administration, had to resign as the World Bank president in 2007. This is the second time a World Bank-funded programme in Pakistan has been taken up for the panel’s investigation since its inception two decades ago.
In the previous investigation into the $785 million National Drainage Programme, the bank was found to have violated its own policies and procedures, resulting in loss of lives and property. The management was forced to pay compensation for 318 deaths and tens of thousands of damaged houses in Thar, Thatta, Badin and Hyderabad because of drought, cyclones and floods.