Hefty tax breaks result in whopping Rs415.8b dent

Does not include Rs50 billion exemption given to IPPs

ISLAMABAD: Despite phasing out a concessionary tax regime under the International Monetary Fund (IMF) programme, the government sustained a whopping Rs415.8 billion in losses due to tax breaks during the outgoing fiscal year, an amount 5.4% higher than the previous year.

The Rs415.8-billion tax expenditure excludes the cost of income tax exemption granted to independent power producers (IPPs), an amount that stood at Rs50 billion. The cost of tax breaks has been published in the Economic Survey 2016-17, which Finance Minister Ishaq Dar launched on Thursday.



By including the IPPs’ tax expense at last year’s level, the total cost of tax breaks in the outgoing fiscal year 2016-17 would increase to Rs465 billion, and near the same level it was when the government started implementing reforms under the IMF programme.

The increase has once again put a question mark over the authenticity of claims of withdrawing tax exemptions in a phased manner under the IMF programme.

During the three-year IMF programme that ended in September last year, the federal government had withdrawn Rs347 billion worth of Statutory Regulatory Orders (SROs).

In June 2013, the total cost of tax expenditures was Rs477 billion. Ideally, the cost of tax breaks should have come down to Rs130 billion by June 2017. Under an agreement with the IMF, the government had also undertaken a comprehensive study in 2013 to know the exact amount of losses. Huge exemptions coupled with rampant corruption in the Federal Board of Revenue have kept the tax base narrow. Revenues amounted to only 8% of Gross Domestic Product during the first nine months of the outgoing fiscal year, according to the finance ministry’s fiscal operation summary.



Sales tax

Over 60% the total tax exemptions were on account of sales tax. The cost of sales tax exemptions, which stood at Rs207 billion last year, jumped to Rs250.1 billion this time around. Most tax exemptions that had been withdrawn were on account of sales tax.

Out of Rs250 billion, roughly Rs157 billion in exemptions were given to industries under the sixth schedule of the Sales Tax Act, which allows industries not to pay any tax at the output stage of goods. An amount of Rs89.3 billion was lost at the domestic stage and another Rs67.6 billion at the import stage.

The government sustained Rs50.4 billion in losses due to reduced rates for five export-oriented sectors - textile, carpets, leather, sports and surgical, which were 16% higher than the previous year.

An amount of Rs25.8 billion was lost on account of exemptions on products that are protected under the fifth schedule of the Sales Tax Act. The fifth schedule relates to the zero-rating tax regime. The cost of tax exemptions under the fifth schedule this year was higher than the previous year.

Another sum of Rs16.4 billion was lost due to exemptions given under the eight schedule of the Sales Tax Act that allows charging goods lower than the standard 17% sales tax.

Income tax        

As against Rs67.3 billion in income tax exemptions given in the last year, the cost of income tax exemptions this year has been estimated at Rs14.1 billion, according to the survey. However, this figure appears understated, as the government has not booked the cost of income tax exemptions given to IPPs.

The only major cost the government has booked under the head is Rs12 billion on account of rationalisation of corporate tax rates. However, this strictly does not fall under the definition of exemption, as rates have been reduced across the board. The corporate income tax rate of 31% is still higher than in the region.

Customs duty

The customs duty tax expenditures cost surged to Rs151.7 billion as against Rs120 billion in the previous year. There was an increase of Rs31 billion or 26.4% over the previous year. Roughly, 26% customs duty exemptions were on account of low rates applicable on various bilateral free trade agreements. The loss due to reduced customs duty under the China-Pakistan Free Trade Agreement increased from Rs30.6 billion to Rs31.6 billion.



Most of the remaining tax breaks were given to the oil, automobile and textile sectors.

An amount of Rs17.6 billion was waived in favour of vendors belonging to the automotive sector, which is lower than the last year. In addition, Rs21.8 billion was waived off in favour of the automobile sector, which is also less than the previous year. The government is still protecting this sector from foreign competition.

Another sum of Rs6.2 billion was written off in favour of oil exploration and production companies on import of machinery, equipment and vehicles.

Published in The Express Tribune, May 26^th, 2017.

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