ISLAMABAD: Tax exemptions continued to be a thorn in the government’s rosy image as the latest figures revealed that Pakistan sustained a loss of Rs394.5 billion in the outgoing fiscal year.
The loss was only Rs17.5 billion or 4.45% less than the previous year despite the fact that the government withdrew Rs124 billion worth of exemptions in the previous budget.
The development once again put a question mark over the authenticity of the government’s claims of withdrawing tax exemptions in a phased manner under the International Monetary Fund (IMF) programme.
The details of tax exemptions that were made public on Thursday in the Economic Survey of Pakistan for fiscal year 2015-16 are contrary to expectations of significant reduction in losses after the government began the process of withdrawing Statutory Regulatory Orders (SROs) in June 2014.
In fiscal year 2013-14, the federal government stated that total tax exemptions amounted to Rs477 billion. In the last two budgets, the government withdrew a combined total of Rs227 billion worth of exemptions, which should have resulted in about 50% reduction in these losses.
Under an agreement with the IMF, the government undertook a comprehensive study in 2013 to know the exact amount of these losses. However, the figures published in the latest Economic Survey showed that in fiscal year 2015-16, the country sustained a loss of Rs394.5 billion.
Finance Minister Ishaq Dar has already announced that the government would withdraw the remaining SROs in the new budget except those that are socially-sensitive.
Tax exemptions are an especially thorny issue in Pakistan where allegations of corruption in the Federal Board of Revenue (FBR) coupled with a narrow tax base have resulted in the country having one of the lowest tax-to-GDP ratios in the region. The ratio stood at 8.4% of GDP during the first nine months of the outgoing fiscal year.
Slightly over half of the total exemptions were on account of sales tax.
Sales tax exemptions, which stood at Rs225.4 billion last year, reduced to Rs207.3 billion this time around.
Out of Rs207.3 billion, roughly Rs129 billion worth of exemptions were given to industries under the sixth schedule of the Sales Tax Act. An amount of Rs77.3 billion was lost at the domestic stage and another Rs51.6 billion at the import stage. The government is going to withdraw some of these exemptions in the new budget.
The government sustained a loss of Rs43.4 billion due to reduced rates charged from five export-oriented sectors, including textile, carpet, leather, sports and surgical.
While addressing the Economic Survey unveiling ceremony, Dar said the government would introduce a zero-rating sales tax regime for the textile sector from July.
An amount of Rs21.8 billion was lost on account of exemptions on products that are protected under the 5th Schedule of the Sales Tax Act. The 5th schedule relates to the zero-rating tax regime and the cost of tax exemptions under it this year was higher than the previous year.
Another sum of Rs11.4 billion was lost due to exemptions given under the eighth schedule of the Sales Tax Act.
The FBR gave Rs67.3 billion worth of income tax exemptions - Rs16.3 billion or one-fifth less than the previous fiscal year, according to the survey.
The government willingly suffered a loss of Rs50.2 billion due to income tax exemptions given to independent power producers. The second largest amount, Rs5.5 billion, was written off in favour of funds, board of education, universities and computer training centres, which was almost half than the previous year. Another amount of Rs4.5 billion was waived off in favour of various enterprises.
Pakistan also suffered losses of Rs1.7 billion due to lower tax rates on capital gains, revealed the survey.
Unlike income tax and sales tax, there was a surge in custom duty exemptions despite the government withdrawing a huge chunk of it.
Customs duties exemptions stood at Rs120 billion, showing an increase of Rs17 billion over the previous year. Roughly one-third was given under various bilateral free trade agreements. The loss due to reduced customs duty rate under the China-Pakistan Free Trade Agreement increased from Rs26.6 billion to Rs30.6 billion.
Most of the remaining tax breaks were given to the oil, automobile and textile sectors.
An amount of Rs19.5 billion was waived off in favour of vendors in the automotive sector. In addition, Rs22.5 billion was waived off in favour of the automobile sector. The government is still protecting this sector from foreign competition.
Another sum of Rs5.1 billion was written off in favour of oil exploration and production companies on import of machinery, equipments and vehicles.
Published in The Express Tribune, June 3rd, 2016.
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