FBR reforms, again?

Prime Minister Shehbaz Sharif’s warning against resistance to tax reforms has once again put a spotlight on the efforts to restructure the Federal Board of Revenue (FBR). The warning came after a pen-down strike call by the Inland Revenue Service Officers Association (IRSOA) in opposition to the reforms and subsequent punitive action against several officers.

Since 2000, successive governments have borrowed hundreds of millions of dollars from the World Bank to restructure tax administration. However, persistent weaknesses in compliance, audit and enforcement raise a fundamental question: why have repeated reforms over two decades failed to deliver lasting results, and how will the latest transformation plan be different?

The first major reform initiative began in 2000, followed by the World Bank’s approval of $102.9 million for the Tax Administration Reform Project in 2004. By 2012, the programme had established or upgraded 57 offices and facilities, including Large Taxpayer Units, Regional Tax Offices, Model Customs Collectorates and taxpayer facilitation centres. It also provided 11,445 items of equipment, including computers, alongside vehicles and improved office infrastructure.

The reforms introduced partial automation, universal self-assessment and the transfer of sales tax and federal excise administration from Customs to Inland Revenue. However, manual procedures persisted, limiting efficiency gains. Much of the investment appeared to improve working conditions rather than revenue collection. The World Bank’s 2012 completion report recorded disbursements of approximately $48.4m and rated the project’s outcome as “moderately unsatisfactory”, warning of a high risk to its sustainability.

Successive reforms since 2000 failed to produce results; investment in technology likely to remain ineffective sans central database to document transactions

Former FBR chairman Shabbar Zaidi says he had over $200m available for reforms during his tenure but chose not to spend it on the projects unlikely to succeed without fundamental institutional changes. He says that investment in technology would remain ineffective unless the government establishes a central economic database to record and document transactions. Without reliable data on economic activity, tax officers could not effectively verify income declared in tax returns or identify concealed income, he argues. The priority, therefore, should be documenting economic transactions rather than spending more money on administrative reforms.

Despite the earlier project’s un-favourable assessment, the World Bank approved another $400m under the Pakistan Raises Revenue Programme in 2019, followed by $70m in additional financing in 2025. Total approved financing for the two projects reached $572.9m, although this does not represent actual disbursements.

A major institutional change came in 2009 with the creation of the Inland Revenue Service (IRS), integrating sales tax and federal excise with income tax administration. The restructuring triggered resistance from Customs officers and disputes over authority, senior positions and career progression. Both services subsequently expanded their organisational structures through dozens of new directorates and field formations. This expansion raises questions about whether new formations addressed operational needs or also accommodated promotions and postings. Their staffing, expenditure, overlapping responsibilities and contribution to revenue collection require independent evaluation.

During the 2024 caretaker government, the then finance minister Shamshad Akhtar proposed separating Customs and Inland Revenue into distinct organisations with independent oversight. The proposals faced resistance from tax officials. Consequently, the restructuring was not implemented.

International experience offers no single organisational model. India maintains separate central authorities for direct and indirect taxes, while Australia and Britain operate integrated revenue administrations. The International Monetary Fund (IMF) and Organisation for Economic Cooperation and Development (OECD) emphasise professional competence, accountability and effective enforcement.

Tax expert Ikramul Haq says repeated restructuring and foreign financing would not improve FBR’s performance without fundamental institutional changes.

“Technology is necessary. Faceless assessment, digital invoicing, production monitoring and intelligent risk selection can reduce discretion. They cannot substitute for institutional design.”

He calls for separating tax policy from collection, merit based recruitment and promotions, and evaluating performance through voluntary compliance, recovery, refunds and reduced litigation rather than gross collection alone. He argues that corruption, poor performance and disagreement over reforms require separate treatment, while political accountability is equally necessary.

The FBR’s revenue composition illustrates the continuing challenge. According to its FY25 yearbook, withholding taxes accounted for 58.2pc of gross direct tax collection, while collection on demand contributed only 4.6pc. These figures raise questions about the returns from investment in offices, vehicles, staff benefits and performance incentives. The Auditor General also identifies demand collection as an indicator of departmental performance. However, the biggest challenge is to minimise the tax gap in the sales tax, which is reported at over Rs3 trillion.

Audit effectiveness remains another concern. The State Bank’s FY24 annual report noted that risk-based audits, introduced in 2019, had not been implemented across all functional levels. Manual interventions and poor recovery continued to weaken enforcement. The Auditor General’s FY25 report also identified deficiencies in tax assessments, recovery and litigation management. Procedural failures in tax litigation have attracted scrutiny. In December 2025, the Lahore Tax Bar Association sought an investigation into appeals dismissed by Lahore High Court because of missed statutory deadlines, raising questions about legal supervision and accountability within the revenue machinery.

The government’s emphasis on rising income tax return filings also warrants examination. The FBR reported 6.7m returns by Oct 14, compared with nearly 5m during the corresponding period last year, an increase of 34.38pc. However, higher filing numbers alone do not establish improved compliance, particularly when differential withholding rates encourage taxpayers to enter the active taxpayer list.

The latest FBR transformation plan focuses on digital enforcement. Faceless customs assessment began in December 2024, while the National Faceless Centre for Inland Revenue was established in Islamabad last month with nationwide expansion planned by June 2027. Automated case allocation and reduced interaction between taxpayers and officers may limit discretion and improve transparency. However, digital systems cannot independently guarantee competent audits, legally sustainable assessments or recovery of outstanding demands.

The question is whether artificial intelligence, digital invoicing, production monitoring and automated risk assessment can improve tax compliance without stronger audit procedures and enforcement accountability. These technologies can detect discrepancies and verify transactions, but their effectiveness depends on proper investigation, legally sustainable assessments and actual recovery. For instance, identifying fraudulent input tax adjustments or mismatches between production and sales achieves little unless violations lead to enforcement action. The success of digital reforms should therefore be measured not by the number of suspicious cases detected but by recoveries, reduced fraudulent claims and measurable improvements in tax compliance.

Published in Dawn, The Business and Finance Weekly, October 26th, 2026

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