The federal government has decided in principle to withdraw most of the Rs470 billion tax exemptions in a phased manner over the next three years and leave untouched those concessions, which, if withdrawn, can create political upheaval in the country.
The decision was taken on Monday by Prime Minister Nawaz Sharif in a meeting attended by Punjab Chief Minister Shahbaz Sharif, seven federal ministers and officials of the Ministry of Finance and the Federal Board of Revenue (FBR), say government officials.
The meeting was convened just a day ahead of the December 31 deadline, set by the International Monetary Fund (IMF), for chalking out a comprehensive plan to withdraw tax exemptions granted through Statutory Regulatory Orders (SROs) and make administrative improvements in the FBR.
The IMF had also asked the government that the plan must be endorsed by the political leadership including all stakeholders in order to avoid hurdles in the way of its implementation.
“FBR officials will meet the prime minister again today (Tuesday) for finalising the plan,” said FBR Chairman Tariq Bajwa while talking to The Express Tribune.
The FBR had carried out a detailed study of its laws and identified about Rs470 billion worth of tax exemptions, officials said. Maximum exemptions are granted in sales tax, followed by customs duties and income tax.
The value of sales tax exemptions has been estimated at around Rs245 billion. Customs duties’ exemptions are around Rs135 billion and income tax exemptions are estimated at Rs90-95 billion.
This is for the first time that an effort has been made to gauge the cost of tax exemptions.
The officials said all the exemptions would not be withdrawn, as some were politically sensitive and others were protected under international trade treaties. The exemptions relating to income tax on pensioners will also not be withdrawn.
The tax exemptions that the government has decided to leave intact will be protected through an Act of Parliament instead of relying on SROs. Any concession that becomes part of the law will be available to all, bringing an end to discrimination. At present, tax rates vary for commercial importers and manufacturers.
PM Sharif approved the proposal, suggesting the start of withdrawal of tax exemptions from the next financial year, starting July 1, the officials said.
Any SRO that carries financial implications will not be withdrawn in this financial year. However, time-bound SROs, which have already lapsed, will be removed from the books this year.
For the current fiscal year, the government has given the FBR a tax collection target of Rs2.475 trillion, which is expected to be missed like previous years. There was a proposal for taking back some of the exemptions this year to bridge the shortfall.
The IMF has already adjusted its fiscal framework and estimated tax collection at Rs2.345 trillion with budget deficit at 5.8% of gross domestic product. This tax target is Rs130 billion lower than the original target.
According to the decision, in the first phase of scrapping tax exemptions, which will start from the next fiscal year, about Rs100 billion of concessions will be withdrawn. Officials described these as “less-harmful” exemptions.
Analysts pointed out that it would be difficult for the government to withdraw the politically unpopular exemptions in its third or fourth year, as the country would be getting closer to the next general elections.
They suggested that the strategy of withdrawing less-harmful exemptions first could work to the benefit of the affluent.
Sales tax exemption on import of crude oil will not be withdrawn in the first phase. The estimated annual cost of tax exemption on crude oil was around Rs90 billion, said the officials. Tax exemptions on medicines and unprofitable entities will also be protected.
Published in The Express Tribune, December 31st, 2013.