. DCN: C}lrfA- /f-T'oL.- /Nf- t:9CPI I RCEfor Khyber Pakhtunkhwa Resource Mobilization Activity

USAID PAKISTAN FROM THE AMERICAN PEOPLE ~~~

-1 IJ-cr 1'7.-cf), r US Agency for International Development (USAID) / Pakistan Request for Categorical Exclusion (RCE)

Khyber Pakhtunkhwa Resource Mobilization Activity (KPRM)

Project/Activity Data: Activity/Project Title: Khyber Pakhtunkhwa Resource Mobilization I Solicitation #:N.A. Activity (KPRM)

Contract/Award Number (if known) :

Geographic Location : Pakistan; 391

Originating Bureau/Office : USAID Pakistan, FAT A/KP Office

Supplemental IEE: □Yes IZ!No DCN and date of Original document: I

□Yes IZI No Amendment: DCN and ECD link(s) of Amendment(s): N.A Programmatic IEE: □Yes IZI No Amendment No .: NA

Funding Amount : $10,000,000 Life of Project Amount: $10,000,000

Implementation Start/End : Jan 01, 2020 to December 31, 2024

Prepared By: Aisha Nazir Date Prepared: June 24, 2019 ·

Expiration Date (if any) : June 30, 2024 Reporting due dates (if any) : N.A. Environmental Media and/or Human Health Potentiall y Impacted ( check all that apply) : None IZI Air □ Water □ Land □ Biodiversity □ Human Health□ Other□ Recommended Threshold Determination: □ Negative Determination D with conditions □ Deferral IZI Categorical Exclusion □ Positive Determination

Climate Change: □GCC/Adaption □GCC/Mitigation Not required

Adaptation/Mitigation Measures:

□ Exemption □ USG Domestic NEPA action

□ Climate Change Vulnerability Analysis

The CRM completed for Pakistan ~s CDCS has identified that climate risk and vulnerability level for this type of activities is of no/low risk and no further CRM at activity level is required .

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DCN: _____ __,._,,....--- - -RCEforKhyber Pakhtunkhwa Resource Mobilization Activity

us Agency for Jnternatfonal .l)evelopinent ((JSAID) I ti@.nl'ij Request for Categorical Exclusion (RQ-E)

Khyber Pakhturikhwa Resource Mobilization Activity (KPRM)

SUMMARY OF FINDINGS:

1.0 BACKGROUND A.ND PROJECT/ACTIVITY DESCRIPTION: 1.1 -Purpose and Scope of RCE .

The purpose of this Request for Categorical Exclusion (RCE) in accordance with 22 CPR 216 is to provide the firstreview of the reasonable foreseeable . effects on the environment,. as well as recommend Threshold Decisions, for the "Khyb~r i>akhtunlchwa Resource _Mobilization (KPRM) Activity or the '' Activity". Sub-Activities planned to ·be implemented µnder this activity are ·consideredto have no negative effect on the natural or physical environment. This RCE is in accordance with 22 CFR 216.2 (c) (1) (i); and 22 CPR 216.2 (c) (2) (i), (iii), (v}; (xiv) and (xv). . .

1.2 Background

The KPRM activity is the Mission's $10 million foµr-yeat actjvity implemented by the USAIDPakistan FATA/KP Office. The intervention is aligned with the Development Objective One goal of "Expanded writ of govemment along the AF IP AK border region" and contributes to futermediate result (lR) 1,1 .2 "GoP and FAT A systems integrated" and JR 1.1.3". "Capacity to implement reforms strengthened~~.

As a result of the 18th Amendment to the Paldstani constitution in 2010, a key revenue so'ur¢e, the General Sales Tax on Services, was devolved to _proviiwes, decentralized the collection _of the tax: as well as th~ resulting revenue, giving the provinces an opportunity to improve their own .source revenue, However~-to date, as a result of capacity constraints and lack of coordination and integration between the government entities responsible for revenue generation, the Government of Khyber Pakhtunkhwa (GoKP) has , been uriable to. fully exploit the sources of revenue dtwolved tQ the province. This has resulted in liinited fiscal space; in other words, the GoKP 1:}as limited ability to raise public spending in areas such as basic s.ervices provision arid law enforcementcapacity without underiniriirig -fiscal sustainability. According to the GoK.P's Budget Strategy Paper fot 2019-20, 80 percent of the proviuce's budget js likely to be used foi' r.ecmTing expenditure ; Increasing space for development- sp~nding wi11 require the government to improve revenue mobilization while reducing costs/expenditures.

Khyber-Pakhtunkhwa (KP) provi~ce remains heavily dependent on fiscal transfers from the federal governrnent. ln fisc.al yer;ir 2016.-17; transfers from federal government accounted for 95 percent.of the provincial revenue, according toa financial statement of the GoKP. Once dominated by-agriculture, the provincial share of GDP is ·now dominated by services sector (67 percent)., followed by industry (20 percent) and agriculture (13 percent). A 2018 analysis by the Khyber Pakhtµnkhwa Revenue Authority (KPRA) of the Ge,nera1 Sales .Tax on Services indicated that by improving tax compliance from an estimated 23 percent of eligible

DCN: ----------,,---- -- -RC E for Khyber Pakhtunkhwa Resource Mobilization Activity

taxpayers to 75 pel'tehtoftc1Xpaye;rs, KP could triple its taxrevenue and teduceits dependency on federal transfers :

The merger of the former F edera1ly Administered Tribal Areas (FATA} with KP creates new .challenges and ·opportunities for the province. While the .newly merged distdcts · of KP haye been given a five-year t1;1,x exemptio•n, goirtg forward KP's taxation system and development expenditures will extend to the region. FATA was historically exempt from taxation and . hence lacks basicinfrastructui·e and systems to collect taxe·s. Given that FATA fa one of the poorest regions of Pakistan, th~ inetger will affect KP ~ s fiscal situation and increase the need for development financing; In the interim, KP mustimprove the . efficiency and effectiveness of its revenu e mobilization, . while also preparing fo gradually extend its systems to the newly merged districts after the tax exemption .period .

1.3 Description of Activity:

111e goal of this activity is to support the. GoKP in increasing its capacity to mobilize revenue. Enhanced Reveri,ue Mobilization will be achieved by improving KP's r:ev·enue mobilization capacity, delivery systems, and processes, thereby optimizing the local revenue base of KP province and leading to an increase in its Own Source Revenue (OSR). Increased revenue will increase KP' s· fiscai space and hertce focrease the amount ofresources available for developmental and ·service delivery ptitposes. Th.i's will also decrease the . d¢pendence of the GoKP 0~1 the federal transfers and inctea se,its ability to finance its development expertditw-es, contributing to it$ joumey to self-relia.nce. USAID's Joqrney to Self .,Reliance will serve as guiding principles to achieving this purpose.

Improved Domestic Revenqe Mobilization will be achieved by improving KP's revenue mobilization capa city, delivery systems, and processes, thereby optimizingihe local · revenue base of KP province and leading fo an increase in its OSR.

The Contrilctor mustptopose a:ctiYities that accomplis.h the objectives ofthts Contract by achieving the folfowing _results: ·

The Project will focus , oh .three objectives:

Objective l: Increased Voluntary Compliance Objective 2: ImprovedEfficiency pfKPRA in revenue_Management Objective 3: Improved . Cootdinatioil Frameworks within and across taxation systems

1.3.1 Objective 1: Increased Voluntary Compliance

This component Will build on the progress made againstthe following sub-components:

1.3,1.l.1 Innovative communication and taxpayer educatiop

KP Revenue Authority needs to establish an effective syf?fem of _communica tion to pr9~ctively engage representative bodies from unorgani zed market sectors through.focu sed activities: persua-sion, advocacy, mot ivation? feedback loop and connectivity with revenue governance. Under this component civil societ y .organizations, univer i ities, media, bar co1µ1ci1s, chambers

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DCN: ___________ _ RCEfor Khyber Pakhtunkhwa Resource .Mobilizaiion Activity

and youth, women and other vulnerable populations will be engaged in ·taxpayers increased awareness and willingnessto play their rolefo reven11e generation and nation·building. The same forums will be .used for documentation of unorganized economies for accelerated revenue. collection. Social media forums will be mobilized for awru:eness and promoting tax culture in the province.

I I

1.3.1.1.2 Automation & cost ef(ective s.ci-vi.ccs to reduce compliance costs. for taxpayers/ T~xpayer services ·

/ I

Dµe to the comple:x;ity of the·taxlegislation, demand for taxpayer services is high. Yet the level of taxpayer service is low. Since the KP-Revenue authority is already lacking. professional staff for taxpayers' communication, maintaining the required professional sl<ills to satisfy growingtaxpayel's' demand for services is dtfficult. An.impo.rtant change will be to provide many services online. Nonetheless, at the presept ·stage of ongoinKtrans:formation, taxpayers will need to visit tax offices for some of the services. To approach this demand of services a centralized call center, competently·staffed1 will ·be established under the project The contractor may look at developing. amobile application for the e filing and e- payments.

Harnessing information tec.lmology for modetnizati011 of business processes is the cornerstone for an efficient t~ administration. In a qigital e- tax· organization, the design is centered on the taxpayer as the client who will be provided withe-Access, e-Response and e-Tax governance. The, project will eliminate KPRA' itwolvement jn toutine proce1>ses of calculation and filing of tax returns. It will. introduce new and efficient, tax control systems based on improved understanding of risk factors. New developments will significantly expand .remote information services provided to the taxpayers, particularly ,.it will provide· infomiation througfrweb forum, mass media, tlP{payei:s gt1idelines and othei• awareness programs, as well as hot lines and call center service~ ..

The IT component of the project will support better taxpayer Bervice, reduce contact between tax officials and taxpayers, and strengthen KPRA's effectiveness in detecting tax evasion. The new Integrated Tax Management System (ITMS) will provide significant enhanc·ements to:the Aulhority, This system wm be a customized system crafted by the KPRA IT team developed according to their particular needs and requirements. The introduction of the integrated system to manage taxes, plus the establishment ofinteragency data exchanges, Will allow for signifi,cant cross Inatching of information to identify non:-compliap.{ taxpay~rs and taxpayers whose reported taxable activities ar'e outside the n01ms as detem1ined by the risk management system. The system will also generate auto notices to the taxpayers for their upcoming payments as reminders.

1.;?,1.i.3 Institutional developm:cnt ofKPRA to improve S.ervit!e deliv¢ry standards

To.stitutional Development is a critical component which will help to improve the internal discipline and enhance a sustainable and consistent workforce within KPRA. This component includes three sub-components:

a) Org?n:ization and Management

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DCN: __________ _

RCEfor KhyberPakhturikhwa Resource Mobilization Activity

With a move towards an automated environment, a leahel' and a more modern _approach to orgari1zational design and stmcttJre needs to be established. The Authority is working on a proposal tq the Provincial government for a reforrpeq organizational structure for KPRA to reflect a functional approach. The new 01·ganizational structure would initiate several functional departments/directorates and collectorates. Subsequent to the approvai of the hew otganizational structul'e for the Head Quarter, the Authority Will undertakt; organizational r~structuring for :the regional offices. This will be critical for"the refortns : embarked on under this project as well as by the . government .This might result in ·the organizational review and design of appropriate , level of organizational shuciure in a modem tax administration. This may foclude reorganization and consolidation ofKPRA, based on functional rationalization of personnel anq system$. I)evelopment of a moi1itoring system for the management to assess the perfo1mance of the entire ·tax administration will resijlt in improved service delivery standards. The offeror might look at the benefits of Study tours, traming and seminars to absorb new trends in tax organizational structure. This will be. to other revenue authorities as well .as a.cademia like· NUST, IBA, COMSATS and other reputed institutes -forICT, co.rnmunic'1tion and other disciplines.

b) Human Resource Management KP.RA fa strnctured .in thi'eelayers: Directorates, Collectorates and Regional Collecto.rates. KPRA is severely understaffed, and there is a disproportionately small number of 1ax auditors ·and tax·collectors and staffperforming routine functions. As routine fu11.ctions such as re.turn processing artd desk audit wiH be automated and centralized) the staff unde11al<.ing these fun,Gtions will need to be redeployed and retrained for more ·specialized a~dit -~d collection fui;ictions. To recruit the .required professional experti se, development of a modern HR management system is a priority for the Authority. The main objectives of the comprehensive HR system are: professional development of the staff, increased effidency ai1d effectiveness , flexibility in managing staff, . and ensuring 1J:anspatency.

c) Capacity building. Enhancing staff capacity in risk management, :Specialized audit l computer skills, .appeais and taxpayer service wUl be critical for th.E;. su9cess of the reforms . Consolidation of co:re back-C>ffice tax functions of audit, enforced cpllec.tion and investigation at the field level, Collectorate and regional offices only for Fro.nt-office .functions such as taxpayer service and taxpayer education will .req~ire advanced expettise "in analyzing consolidated taxpayer database, identifying risks and. conducting risk-based audits an:d investigation, and delivering high quality ta~payet services. ·

Currently, KPRA does not have a training facility. The Authority plans to-set up regional training facilities in three regions with .co.:rnputer. Iabs and video-conferencing ·facility in ord~r to reach out ~o a large rimhber of tax officials. Thesy facilities can also be used fo:r taxpayer education and mass outreach. The project will also support curriculum development? fra:infng programs in various tax functions, revenue forecasting and estimation, study tours, as well as equip regional training centers and computer labs, and develop e..:ieaming systems.

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DCN: ___________ _

RCEfor Khyber Pakhtu.nkhwa Resource Mobilization.Activity

The offeror can conduct a feasibility study for establishment of school of taxation and financial management and deveiopment of training policy and ~trategy bas·ed on. needs assessment. Development of e-lea,mihg and distance learning- can be another option, This sub component -will depend on the need asses sment results and will be discussed with the KPRA as well as. the US AID to .find the most efficient and workable solution .

1.3.1.1.4 Monitoring ·taxpaye1·s perception of services and seek feedback

This component will ensure that there is adequate ti:ansparency and accountability in the system so that the feedback m'echanism is effective and .help in the oyetall efficiency and effectiveness .of the tmc govem~mce. The. offeror should .. look into innovative ways of engaging the youth $1d women, especially from th:e·newly -merged districts in the activities for this area.

1.3.2 Objective 2: Improved Efficiency of KPRA in revenue Management

This component will build on progress made against the following sub-components:

1.3.2.1 Internal Control and Internal Audit

In KPRA, the internal control and audit function of the Authority is notwell developed. In a modem tax administration, it is cdtical to have a ·s.trong internal contr ol and internal audit unit in ,orderto carry out periodic checks o:rtl).e various funotions ·performecl at the field Jevel. This ensures quality and helps identify gaps in functioning so that necessary corrective actions may be taken. These checks are required for all major functions ofthe Authority , including desk audit, field audit , taxpayer service, enforced collection, and refund management. There:is need for developing a modern ~pproach. Moreover, the mechanisms for measuring the pe1formance of the field unit~ jn respect of their functions need to be improved. Internal control and audit are imp01iantpreventive measures which will help the Authority detectproblemissues and attempt to solve them .

1.3.2.2 Tax Policy Analysis

The capacity ofFin<1-nce Department to do good .quality tax policy analysis, forecasting and policy formulation is Very weak Recently, fjnance Department.together with KPRA~ ha~ undertaken a huge task of revising the Finance Act? 2013 to address some of the tax policy challenges. While this will take . the 'recent proposal for ·amendment to t he Finance Act, 2013 an.cl addressed many policyissues, few improvements ate proposed to the administrative and procedural p~ut of the Act.

Finance Department will nee.cl to address legislativ e and administrative hurdles to allow kPRA to be more _effective in fuffilling its role to combat tax ev~sion and defauit. Legal ·ptovi sions will need to be added fo'r f;iciiitatil).g online inter-agency data exchange 81J.d 1nfo1mation matching, The project will .support capacity strengthening of Finance Department in analyzing and developing good tax ·policy and legislation .

1.3.2.3 Tax Audit

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DCN: __________ _

RCEfor. Khyber Pakhtunkhw(l Resourc~ Mobilization Activity

The mainstreai:nlng ofrisk-based audit will require focus• on fewer but more targeted audits, which will need a much larger proportion of specialist auditors in the totai s(aff composition. The current deployment of auditor$ is ,xety low by international startdal'ds. KPRA plans to strengthen the audit function and staffing as well as improve auditing techniques for 9omplex audits. The World i3ank has been providing technical assistance for developing sector notes and guidelines. There is aneed to develop a risk analysis -system to produce risk-based profiles for audit seiection. This proje_ct will build on this and consol1date it in the Integrated Tax Management Sy$tem as. well as support capacity buµding of audit staff.

1.3.2.4 _Enforced CQllection

One ofthemo~t serious proble111s KPRA is facing is growing stock of~ax arrears due to litigations, non-documentation, lack of tax culture-etc. Tax arrears have been focreasing significantly over the past years. The Authority needs to considerably strengthen its arrears management program which will require: (1) the legai f'ramew01k goveming aiTeats management; (ii)the .areas management strat~g:y and it$ supporting business proces~es·; and (iii) the management and smtcture of enforcement resources. Many of these measures will be suppo11ed by the.project

1.3.2.5 Appeals

An effective appeals process is critical to the ihtegdty of the tax syst~m. The cµll'ent system of appeals is not perceiyed to be •independent or ti;ansparent since it is ·under the direct control of KPRA. Also tracking of appeals filed by taxpayers is not up to the mark. Highly skilled ·staff with a thorough understanding of tax legislation is required in this unit. It is also appropriate for staff to be not directly involved with audits to assess the merits of objections and appeals and dete1mine remedial action if any tha,t i<PRA oughtto puts·ue. The project will attempt to facilitate the cteation of a transparent dispµt~ resolution 1n:echariism which will inchJde: .(i) ap: independent administrative appeals process within the tax administration; (ii) Strengthening·of Collectorate of Appeals where the taxpayer can appeal if is diss·atisfieci with the outcome of the ad.mirustrative process; anci (iii) strengthening of Appellate Ttib.unal to resolve remaining. matt;ei's of legal interpretation. Modem tracking system for precede_nts will facilitate. dispute resQlution, The Appellate Tribunal should comprise ·of qualified professionals, and these should be considered judicial appointments at the same level as the lower comis. Training will be required for judges as well.

L3.3 Objective 3: Improved Co6rdinatioil Frameworks with,hi and a4;ros~ taxation systems

Integration of the taxation-authorities can be a potential way of-reducing the cqst of compliance and-increasing revenue.; This might need political will .to overcome the i:isks1

associated with strategy, transition process and different legal aitdinstitutiortal frameworks of the involve.ct c;l.epartments. The offel'or Will heed to keep this in mind and come up with a strategy to prepare a fyamework of integration in the last two years of the-project or if and when there is enough political will for the change. Enhancement in tax revenues could also ·be achieved ifKPRA has requited level access to the ·databases ofNADRA, SBP and PRAL This integrated infot'mat1on thr~ugh these soutce.s coupled with strong: forensic and risk based

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DCN: _ ____ ______ _

RCEfor Khyber Pakhtunkhwa Resource Mobilization Activity

audit system will significantly contribute in reduction of tax evasion through increase in compliance level resulting in increased revenue.

2.0 JUSTIFICATION FOR CATEGORICAL EXCLUSION REQUEST

The activities described justify Categorical Exclusions, pursuant to 22 CFR §216.2(c)(l) and §216.2(c)(2), for which an Initial Environmental Examination or an Environmental Assessment are not required because the actions do not have an effect on the natural or physical environment.

Specifically, the KPRM activity, as currently planned, falls into the following classes of action:

a) education, technical assistance, and training [216.2(c)(2)(i)]; b) analyses, studies, and workshops [22CFR216.2(c)(2)(iii)]; c) document and information transfer [216.2(c)(2)(v)]; and d) activities that will develop the capability of recipient countries to engage in

development planning, activities which involve the application of design criteria or standards developed and approved by A. I. D [216.2(c)(2)(xiv), (xv)]. As cmrently planned, no interventions will directly affect the environment.

3.0 CONDITION FOR USAID COR RESPONSIBILITY: The Categorical Exclusion is recommended with the condition that COR of the activity will regularly submit the SOW for individual assignments/tasks for MEO/MCIL review and clearance to ensure that it adequately stipulate review of environmental compliance of audited activity as warranted.

4.0 CLIMATE CHANGE INTEGRATION 4.1 Country Climate Change Information (Baseline Information) 1

•2

•3

According to USAID/Pakistan FAA 118/119, Climate Change, and Ecosystem Services Assessment, and the Global Climate Risk Index (2017), Pakistan is one of the ten countries most affected by climate change and is highly vulnerable to future impacts .

4.2 USAID Climate Risk Management Requirements In the revised ADS 201, dated January 23, 2017, Climate Risk Management is a required analysis for new projects (ADS 20 l '.3 .3 .13) and activities (201.3 .4.5). The Mandatory Reference for ADS Chapter 201, Climate Risk Management for USAID Projects and Activities, dated October 12, 2016, outlines the process and provides tools for so doing.

4.3 Project Activities And Recommended Climate Risk Management Actions: KPRM Activity will: Increase in- house capacity ofKPRA for economic research and analysis, regular review of proposals for revenue mobilization and budgetary impacts, reforms

1 Global Climate Risk Index 2017, available at: https://gennanwatch.or g/en/download/ 16411.pdf 2 USAID/Pakistan FAA 118/119, Climate Change, and Ecosystem Services Assessment 3 Pakistan Climate Vulnerability Profile available at: https ://www.cl imatelinks.org/resources/pakistan- clirnate.­vulnerabi lity-pro file

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J)CN: ---------- --RC E for Khyber Pakhtunkhwa Resource Mobilization Activity

1n taxation policy, assessment and compliance system, linking tax bases across taxes and gove.inni.¢nts, and enharicjng capacity of provincial government to meet their revenue potential; . Improve the processes of internal control and auqits, ·and .introduction of new .and effective audit systemfor internal audits, .based on risk factors; Improve the voluntary compiiance by implementing web-based access totaxpayei's, developingTax:payer education strategy and feedback med1anism; and automation · and. modernization of the HR systems on; other rnvenue authorities .model also includil}g mana.getnent of staff redeployment and training needs. The CRM completed fo_r Pakistan's CDCS has identified that climate risk ~d vulnerability level for this type of activities of no/low ·risk and no further CRM at activity level is required.

5.0 REVISION_S

Irt acco1·dartce with 22 CFR 2J6 .3(a)(9) if a project/activity is revised or rtew .1nfo1mation becomes available, which indicates tha:t a propo_sed action might be "roajor11 and its effects "sigl).ificant." The Determination will"be ·reviewed a.nd revised by the originator(s) ofthe projects and activities and -submitted through the MEO to the Bureau Environmental Officers, OAP A, fot approval. If warranted, .an environmental assessment (EA) will be launched to prepare scoping staten1ertt -and EA report. The scoping and EA process~ if determined necessary during scoping, vVill follow and comply with 22 CFR 216-3(a:)(4). It is-the responsibility of the CORI AOR/PM to inform the MEO and BEO-OAP A? in a timely manner, ofahy changes in the scope and nature ofapprov ed activities. These changes may w'ruTartt the revision of the approved thre.shold decisions.

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DCN : ------------RC E for Khyber Pakhtunkhwa Resource Mobilization Activity

US Agency for International Development (USAID) / Pakistan Request for Categorical Exclusion (RCE)

Khyber Pakhtunkhwa Resource Mobilization Activity (KPRM)

CLEARANCE/ APPROVAL OF ENVIRONMENTAL ACTION RECOMMENDED:

CLEARANCE:

Mission Environmental Officer: and Climate Integration Lead

y~ bA . A ' ZlZ

Regional Environmental Advisor: ~C=le=ar=e=d_,v_,_,ia=--e=m=a=ic=....l _ __ _ Central, South Asia and OAP A Andrei Barannik

OPM Office Director:

Deputy Mission Director:

p\~ROVAL: f-tt\f") Mission Director:

w/J,'-ts

imJl 1 Odil~ CONCURRENCE:

Theodora Dell

Date:

Date:

Date:

Date:

Date:

Bureau Environment~! Officer:~ <':: OAPA ~ hristopher Payrre- -

Date:

6/u/2a/O, r 7

June 25. 2019

Distribution: 1). Project files, 2). Mission IEE Data base, 3). OAA, 4). RLO

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