IMF highlights conflict of interest loopholes as fiscal deficit hits Rs 428bn

As the fiscal deficit widens to Rs 428 billion in five months, the International Monetary Fund (IMF) has expressed concern over hiring a new management at the Federal Board of Revenue’s (FBR) data arm and outsourcing its core functions without first developing a conflict of interest policy.

The observations made by the IMF in its Governance and Corruption Diagnostic Assessment on Pakistan Revenue Automation Limited (PRAL) confirmed a February story by The Express Tribune that had highlighted these lapses.

“Although legally required, a code of conduct and conflict of interest policy have not been developed,” said the IMF report published last week. It said “this is particularly concerning as PRAL hires staff on competitive wages – it also uses third parties to outsource some of its core functions”.

A meeting was held on Friday at the Prime Minister’s office, where participants had to scramble to find a way to defend the government in parliament and before the media, government sources said. There was a suggestion that Finance Minister Bilal Azhar Kayani should give the government’s response to the parliament.

The IMF’s observations on PRAL highlight the poor state of FBR’s data and technology arm, which operates on an ad hoc basis and where board members directly interfere in management affairs. The government is yet to appoint a new CEO of PRAL.

But the IMF has now pointed out that the government hires people from the market without developing a conflict of interest policy.

The Express Tribune had reported in February that PRAL’s board had begun its work without first disclosing the potential conflict of interest or developing a code of conduct, a requirement under the law.

The IMF report said the FBR’s management and oversight of key risks, such as the risks created by outsourcing data management to PRAL, needed significant strengthening. He added that PRAL lacks a systematic overview of potential data management and security risks and does not maintain a risk register. Transaction logs are only reviewed after a reported event, rather than being used proactively to identify potential risks, according to the report.

IMF said effective FBR supervision of PRAL is crucial. While key mechanisms such as weekly project portfolio meetings and a service level agreement are in place, the FBR must have ongoing assurance that PRAL is operating within its mandate and complying with all FBR requirements.

Collection of taxes

The FBR’s fiscal deficit is widening with each passing month, making it difficult to recover the losses in the coming months. Statistics showed that against the target of Rs 5.14 trillion, the collection of five months (July-November) stood at Rs 4.715 trillion, i.e. a shortfall of Rs 428 billion. The FBR asked the central bank to keep commercial banks open on Saturday in the hope of getting about Rs 15 billion more.

This comes despite the government imposing new taxes in the budget, raising rates and taking some enforcement measures. FBR has been struggling to achieve a healthy growth rate despite huge advances.

Also, there is no permanent member of the Inland Revenue Enterprises. The three-month surcharge for Dr Hamid Ateeq Sarwar expired in mid-November, which the government is yet to extend.

The FBR collected Rs2.19 trillion in income tax in five months, missing the target by Rs177 billion. Sales tax collection stood at Rs 1.67 trillion, short of the target by Rs 250 billion.

Federal excise collection stood at Rs326 billion, slightly below the five-month target. Duty collection was Rs 520 billion, Rs 1 billion higher than the target due to increased imports.

FBR missed the November tax collection target of Rs 1.035 trillion by a margin of Rs 157 billion. The total collection stood at Rs 878 billion.

A senior tax official said the monthly shortfall would come down to Rs 135 billion, subject to certain advances falling due on Saturday.

Businesses have already been crippled by the heavy tax burden, which has been acknowledged by the national coordinator of the Special Investment Facilitation Board, Sarfraz Ahmad. He has outlined a plan to reduce these taxes.