Annual cost of tax exemptions granted to various segments of society and foreign investors hit a new high of 1.3 trillion rupees again, an increase of more than 14% in one year, according to Pakistan Economic Survey 2020 -21.
Cumulatively, the government has granted 3,430 billion rupees in tax exemptions for three years, which is even more than the cost of servicing the federal government’s debt.
These tax exemptions were approved during the period and are protected by tax legislation. But, no government, including Pakistan Tehreek-e-Insaf (PTI), has been able to reduce these exemptions, some of them placing additional burdens on other classes.
“Tax expenditures have been estimated at 1.314 billion rupees” due to income tax, sales tax and tariff relief for fiscal year 2021, says economic study that Minister Finance Shaukat Tarin launched Thursday.
The Rs 1.3 trillion exemptions were Rs 164 billion or 14.2% higher than the concessions granted in the previous fiscal year when the PTI government granted Rs 1.15 trillion in exemptions. This is the largest number of concessions granted in a fiscal year.
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Talks between Pakistan and the International Monetary Fund (IMF) under the 6th review and approval of the upcoming budget have stalled on the IMF’s demand to remove sales tax and income tax exemptions . But the government is unwilling to withdraw these exemptions, which feared they would further fuel inflation and reduce the purchasing power of the population.
The Federal Board of Revenue (FBR) is expected to collect Rs 4.7 trillion in this fiscal year and assuming the government can recover the full Rs 1.3 trillion, tax collection in this fiscal year would have been Rs 6 billion.
Compared to Rs 378 billion in income tax exemptions granted in the previous fiscal year, the RBF estimated the cost of income tax exemptions this year at Rs 448 billion, according to the investigation. There has been an 18.5% or Rs70 billion increase in the cost of income tax exemptions, mainly due to tax breaks given to powerful industrialists, civil servants and certain entities.
The exemptions of Rs 448 billion were equivalent to more than a third of the total cost of exemptions granted in the current fiscal year.
Income tax exemptions amounting to Rs 37.3 billion were granted under various allowances, Rs 105 billion in tax credit and Rs 267 billion in total income exemption.
An amount of Rs3 billion was lost due to the reduction in tax rates, and another Rs2.7 billion due to exemptions from “specific provisions”. Income tax exemptions worth Rs 32.6 billion were granted due to various exemptions.
These income tax exemptions are also used by superior court judges, the President of Pakistan, military generals, federal bureaucracy allowances, and retiree income.
The government has lost 578.5 billion rupees due to sales tax exemptions, which amounted to 518 billion rupees a year ago. There has been an 11.5% or Rs60 billion increase in the cost of sales tax relief in one year. The share of sales tax exemptions accounted for about 44% of total tax exemptions.
An amount of 12.9 billion rupees was lost due to exemptions on products which were protected under the Fifth Schedule of the Sales Tax Act. The fifth annex concerns the zero-rate tax system.
There has been a significant reduction in exemptions granted to importers, which have fallen to 174 billion rupees from 256 billion rupees a year ago. Exemptions of 156 billion rupees were granted on local supplies, three times more than the previous year.
The government is also imposing reduced sales tax rates on various products, which cost Rs 208 billion in this fiscal year, up from Rs 83 billion a year ago. These exemptions are granted under Schedule Eight of the Sales Tax Act, which allows for the imposition of a sales tax below the standard of 17%.
An additional 27 billion rupees was lost due to low rates of GST collection on cell phone sales.
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The cost of customs spending jumped to 287.8 billion rupees from 253 billion rupees the previous year. There was an increase of Rs34 billion or 13.4% compared to the previous year, according to the survey.
The government suffered tax losses of Rs 56 billion as a result of concessions to the automotive sector, oil and gas exploration sectors and the China-Pakistan economic corridor. But those losses were almost 42% less than last year.
The duties of Rs 137.4 billion were lost under the Fifth Schedule of the Customs Act, which deals with goods exempt from customs duties. These exemptions were significantly higher than Rs88 billion in this respect last year.
The tariff exemptions of Rs 34.2 billion were granted due to low rates applicable to various bilateral free trade and preferential trade agreements. The amount is lower than the previous year.
Likewise, concessions worth 12.6 billion rupees were granted under Chapter 99 of the Customs Act and exemptions of 47.6 billion rupees were granted on exports, according to the economic survey.
Posted in The Express Tribune, June 11h, 2021.