Record Rs2.2T in Tax Exemptions
In a remarkable development, the coalition government has provided an unprecedented Rs2.24 trillion in tax exemptions during the previous fiscal year. This staggering amount raises concerns about Pakistan’s standing among international financial institutions and foreign nations.
The value of tax exemptions, totaling Rs2.24 trillion, witnessed a 28% increase compared to the previous fiscal year. This sum represents 43% of all exemptions granted by the Pakistan Tehreek-e-Insaf (PTI) government throughout its four-year tenure, according to the latest figures released on Thursday.
During the unveiling of the Pakistan Economic Survey 2022-23, Finance Minister Ishaq Dar presented data indicating a 28% surge, equivalent to Rs483 billion, in the cost of tax exemptions within a single year. These figures are perplexing, considering that the government withdraws tax exemptions annually.
The sum of Rs2.24 trillion granted in tax exemptions in just one year surpasses the entire cost of constructing the significant Diamer-Basha dam. The previous government had granted a cumulative total of Rs5.2 trillion in tax exemptions over a span of four years.
Although tax exemptions are legally protected under tax laws and have been approved over the years, no government has successfully curtailed them.
According to the Economic Survey, the estimated tax expenditure for the fiscal year 2022-23 amounts to Rs2.239 trillion, covering income tax, sales tax, and customs duty concessions.
The withdrawal of tax exemptions has consistently been a requirement in every program signed by Pakistan with the International Monetary Fund (IMF). However, successive governments have not only protected these exemptions but also expanded the list of beneficiaries. The value of exemptions, totaling Rs2.24 trillion, could become a contentious issue during loan negotiations with the IMF or when seeking budget support loans from the World Bank under the pretext of tax reforms.
Income Tax
The Federal Board of Revenue (FBR) estimates that the cost of income tax exemptions for this year amounts to nearly Rs424 billion, compared to Rs399 billion in the previous fiscal year. These exemptions constitute 19% of the total cost of exemptions granted this fiscal year. Various allowances accounted for income tax exemptions worth Rs14.5 billion, exceeding the previous year. Additionally, the government provided tax credits amounting to Rs52 billion, a decrease of Rs13 billion from the previous year.
Furthermore, Rs232 billion in exemptions were granted on total income under the Second Schedule of the Income Tax Ordinance.
The reduction in tax liabilities resulted in a loss of approximately Rs4.4 billion, significantly higher than the previous fiscal year. Another Rs69 billion was lost due to exemptions from “specific provisions,” surpassing last year’s figures.
Additionally, approximately Rs27 billion worth of income tax exemptions were granted for miscellaneous purposes, which the FBR did not provide an explanation for. These tax exemptions were also utilized by judges of superior courts, the President of Pakistan, military generals, federal bureaucrats receiving allowances, pensioners’ income, and army institutions.
Sales Tax
Sales tax exemptions experienced a 28% increase, rising from slightly over Rs1 trillion in the last fiscal year to Rs1.3 trillion in the current year. In absolute terms, sales tax exemptions incurred an additional cost of Rs280 billion, primarily due to exemptions on petroleum products.
Throughout the previous fiscal year, the government maintained a 0% sales tax on petroleum products but implemented a fixed levy of Rs50 per liter on petrol and diesel.
According to the survey, sales tax exemptions on petroleum products resulted in a loss of Rs633 billion.
Sales tax exemptions accounted for 58% of the total tax exemptions.
Exemptions on products protected under the Fifth Schedule of the Sales Tax Act experienced a significant increase, amounting to Rs140 billion, compared to the previous year’s cost of Rs11 billion. The Fifth Schedule pertains to the zero-rated tax system.
Exemptions granted to importers saw a steep decline, reducing from Rs527 billion to Rs258 billion, primarily due to reduced imports.
Additionally, Rs133 billion in exemptions were provided for local supplies, which was Rs100 billion less than the previous year.
The government implemented reduced sales tax rates on various goods, resulting in a cost of Rs130 billion in the current fiscal year, a decrease from the previous year due to lower sales.
These exemptions are granted under the Eighth Schedule of the Sales Tax Act, allowing for the imposition of a lower-than-standard 18% sales tax. Sales tax exemptions on mobile phone sales amounted to Rs1 billion, representing a substantial reduction within a year due to the withdrawal of reduced rates.
Customs Duty
The cost of customs duty exemptions rose to Rs522 billion, compared to Rs343 billion in the previous year, marking a 52% increase of Rs172 billion, according to the survey. Tax losses of Rs193 billion were incurred due to concessions granted to the automobile sector, oil and gas exploration sector, and the China-Pakistan Economic Corridor, showing an increase of Rs132 billion in just one year.
Approximately Rs173 billion worth of duties were exempted under the Fifth Schedule of the Customs Act, which pertains to goods exempted from customs duties. This exemption cost was Rs3 billion higher than the previous year.
Conclusion
In conclusion, the government’s record-breaking Rs2.2 trillion in tax exemptions has raised concerns about Pakistan’s international standing. Despite the annual withdrawal of tax exemptions, the government has consistently protected and expanded the list of beneficiaries. These exemptions could pose challenges during loan negotiations with the IMF and the World Bank, particularly in the context of tax reforms.
Published in PakWeb, June 9th, 2023.
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