Tax exemptions jump to record Rs1.31tr

Finance minister says expenditures estimated on account of income tax, sales tax and customs duty concessions in FY21

Shahbaz Rana June 11, 2021
ATL 2021 has replaced ATL 2020 that carried names of 3.12 million individuals and companies. A comparison of both lists showed that over 932,000 names were missing from the new list.. PHOTO: FILE


The annual cost of tax exemptions being given to various segments of the society and foreign investors has further jumped to a new record of Rs1.31 trillion - an increase of over 14% within a year, showed Pakistan Economic Survey 2020-21.

Cumulatively, the government has given Rs3.43 trillion in tax exemptions during three years, which is even more than the federal government's debt servicing cost.

These tax exemptions have been approved over the period and are protected under the tax laws. But, no government, including the Pakistan Tehreek-e-Insaf (PTI), has been able to reduce these exemptions, some of them are putting additional burden on other classes.

"The tax expenditures have been estimated at Rs1.314 trillion" on account of income tax, sales tax and customs duty concessions in the FY2021, states the Economic Survey that Finance Minister Shaukat Tarin launched on Thursday.

The Rs1.31 trillion exemptions were higher by Rs164 billion or 14.2% compared with the concessions given in the previous fiscal year when the PTI government gave Rs1.15 trillion in exemptions. It was the highest amount of concessions given in any fiscal year.

Read: Govt scales back tax target by Rs26b

The talks between Pakistan and the International Monetary Fund (IMF) under the 6th review and endorsement of the next budget have reached a deadlock over the IMF's demand of withdrawing the sales tax and income tax exemptions. But the government is not willing to withdraw these exemptions, which it feared would further fuel inflation and reduce purchasing power of the people.

The Federal Board of Revenue (FBR) is expected to collect Rs4.7 trillion in this fiscal year and assuming that the government can recover the entire Rs1.3 trillion, the tax collection in this fiscal year would have been Rs6 trillion.

Income tax

As against Rs378 billion worth of income tax exemptions given in the previous fiscal year, the FBR has estimated cost of income tax exemptions this year at Rs448 billion, according to the survey. There was an increase of 18.5% or Rs70 billion in the cost of income tax exemptions, primarily because of tax breaks given to the powerful industrialists, government functionaries and certain entities.

The Rs448 billion exemptions were equal to over one-third of the total cost of exemptions given in the current fiscal year.

An amount of Rs37.3 billion income tax exemptions were given on account of various allowances, Rs105 billion in tax credit and Rs267 billion in exemption from total income.

An amount of Rs3 billion were lost due to reduction in tax rates, and another Rs2.7 billion on account of exemptions from "specific provisions". The Rs32.6 billion worth income tax exemptions were given on account of miscellaneous exemptions.

These income tax exemptions are also availed by judges of the superior courts, President of Pakistan, military generals, allowance of the federal bureaucracy and income of the pensioners.

Sales tax

The government has lost Rs578.5 billion worth of revenue due to sales tax exemptions, which was Rs518 billion a year ago. There was an 11.5% or Rs60 billion increase in the cost of sales tax breaks within one year. The share of sales tax exemptions were about 44% of the total tax exemptions.

An amount of Rs12.9 billion was lost on account of exemptions on products which were protected under Fifth Schedule of the Sales Tax Act. The Fifth Schedule relates to the zero-rated tax system.

There was significant reduction in exemptions given to importers that dropped to Rs174 billion from Rs256 billion a year ago. The Rs156 billion exemptions were given on the local supplies, which were three times more than the last fiscal year.

The government also charges reduced sales tax rates on various goods, which has cost Rs208 billion in this fiscal year -up from Rs83 billion a year ago. These exemptions are given under the eighth schedule of the Sales Tax Act, which allows imposition of lower than standard 17% sales tax.

Another Rs27 billion were lost due to low GST collection rates on mobile phones sales.

Read more: ECC meets today to review tax exemption on Covid-19 imports

Customs duty

The cost of customs duty expenditure surged to Rs287.8 billion against Rs253 billion in the previous year. There was an increase of Rs34 billion or 13.4% over the previous year, according to the survey.

The government sustained Rs56 billion tax losses due to concessions given to automobile sector, oil and gas exploration sectors and the China-Pakistan Economic Corridor. But these losses were nearly 42% less than the last year.

The Rs137.4 billion duties were lost under the fifth schedule of the Customs Act, which deals with goods exempted from customs duties. These exemptions were significantly higher than Rs88 billion under this head in the last year.

The Rs34.2 billion customs duties exemptions were given on account of low rates applicable to various bilateral free trade and preferential trade agreements. The amount is lower than the previous year.

Similarly, Rs12.6 billion worth concessions were given under chapter 99 of the Customs Act and Rs47.6 billion exemptions were given on exports, according to the economic survey.

Published in The Express Tribune, June 11h, 2021.

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