FBR Plans Sales Tax Zones as Tax Gap Falls to 5% of GDP

ISLAMABAD: The federal government is considering setting up dedicated sales tax zones within the Federal Board of Revenue's (FBR) Large Taxpayer Offices (LTOs) and Corporate Tax Offices to narrow the tax gap and strengthen revenue collection.

Sources said FBR Chairman and his team briefed Prime Minister Shehbaz Sharif on Monday about progress on reforms designed to restructure the tax authority. The proposed specialised zones aim to tackle substantial revenue leakages and reinforce sales tax administration and enforcement.

According to sources, the sales tax gap is believed to exceed the gaps in income tax and federal excise duty (FED), as well as revenue losses linked to smuggling. They partly attributed the situation to what they described as years of inadequate focus on sales tax administration within the FBR.

The government is also weighing plans to expand the FBR chairman's authority to improve operational efficiency and speed up institutional restructuring.

Under the proposals, the chairman could receive broader powers to recruit and dismiss officials and bring in professionals from the private sector. Implementing these changes may require amendments to the relevant civil service rules.

Sources said the Prime Minister's Office would soon form a committee to review the proposals and move the reforms forward.

Action Against Officials Behind Strike Also Under Consideration

Sources said Prime Minister Shehbaz Sharif expressed displeasure over the pen-down strike announced by the Inland Revenue Association in response to the ongoing reforms.

The association later withdrew its strike call after meeting the FBR's Member Administration and Member Operations.

Sources indicated that disciplinary proceedings could be initiated against officials who announced the strike, although no formal action has been confirmed.

Prime Minister Calls for Faster Implementation of FBR Reforms

Separately, Prime Minister Shehbaz Sharif chaired the weekly review meeting on FBR affairs and instructed the tax authority to speed up implementation of its reform programme.

Describing the initial outcomes as encouraging, the prime minister emphasised the need to strengthen the FBR's ability to address the tax gap.

He called for greater reliance on technology, effective staff training, transparency and accountability to ensure the reforms deliver measurable results. He also directed officials to accelerate the rollout of a faceless system across tax collection functions.

The prime minister said FBR officers must improve their performance in accordance with public expectations, stressing that the reforms served the wider national interest and would continue.

He further ordered indiscriminate action against corrupt officials. Officers and employees showing improvements in conduct and performance should be given an opportunity to reform, he said, while those persisting in corrupt practices or consistently performing poorly would have no place in the organisation.

Tax Gap Falls to an Estimated 5% of GDP

During the meeting, FBR officials presented an update on technological, operational and human resource reforms.

The briefing stated that the estimated tax gap had fallen from 6% to 5% of gross domestic product (GDP) over the preceding three years following the introduction of reform measures.

Officials said more effective use of technology had substantially curtailed the discretionary powers of FBR officers, helping improve transparency and strengthen oversight of tax administration.

The meeting was also informed that newly recruited FBR officers were undergoing training at the Lahore University of Management Sciences (LUMS). Training programmes for existing personnel had also been introduced.

In addition, a peer-rating mechanism had been implemented to evaluate officers' performance.

FBR Audit Capacity Increases Fourfold

According to the briefing, the FBR has recruited 957 third-party auditors through merit-based contracts to expand its audit capabilities.

Officials said the deployment of these auditors had increased the organisation's audit capacity fourfold, allowing broader examination of tax compliance and improved identification of potential revenue leakages.

The tax authority is also undertaking extensive technology-led restructuring, recruiting specialised technical staff and introducing a performance-linked incentive mechanism.

These initiatives are intended to improve institutional efficiency, reinforce compliance monitoring and strengthen the FBR's ability to detect and recover unpaid taxes.

The meeting was attended by Federal Ministers Ahsan Iqbal, Azam Nazeer Tarar, Ahad Khan Cheema, Muhammad Aurangzeb and Attaullah Tarar, alongside Minister of State Bilal Azhar Kayani, Attorney General Mansoor Usman Awan and senior government officials.

The proposed sales tax zones, expanded administrative powers and technology-driven restructuring are part of the government's broader effort to improve tax compliance, reduce revenue losses and strengthen Pakistan's tax collection system.