Suffering the loss: Tax exemptions wipe Rs477b off country’s revenues

First in-depth study reveals actual cost of tax concessions given to industrialists.

ISLAMABAD:

The country suffered a loss of Rs477 billion in the outgoing fiscal year as a result of the grant of duty and tax exemptions to affluent segments of society, which is almost 100% more than the previous year.

Prodded by the International Monetary Fund, the first thorough study of tax exemptions showed the actual cost of concessions the industrialists had been enjoying over the years, which the Federal Board of Revenue (FBR) never disclosed earlier.

The findings of the study were unveiled in the Economic Survey of Pakistan 2013-14. Previously, the FBR used to give little details of sales tax exemptions, which have now been disclosed to a large extent.

Released every year a day before the federal budget, the Economic Survey is a flagship document of the finance ministry that reviews annual economic development of the country.



According to the survey, tax exemptions given in the outgoing fiscal year 2013-14 stood at Rs237.5 billion or 99.3% higher than the preceding year. In the last fiscal year, the government had estimated the cost of exemptions at Rs239.5 billion.

More than half of the exemptions were given in sales tax compared to only 15.7% of exemptions in the previous fiscal year, showed the Economic Survey.

Discussions with a cross-section of stakeholders had been concluded and the government was going to withdraw a significant part of concessions in the new budget, said Finance Minister Ishaq Dar while speaking to the media at the launch of the Economic Survey.

To a question about resistance from the influential textile industry, he said the government was trying to take the sector on board.

Hefty exemptions coupled with rampant corruption in the FBR kept the country’s tax-to-gross domestic product (GDP) ratio at almost last year’s level at 8.8%.



Sales tax

Sales tax exemptions that stood at Rs37.5 billion last year, rose by 564% to Rs249 billion this time around after the FBR for the first time revealed the tax breaks enjoyed by many well-connected sectors of the economy.

Of the Rs249 billion, an amount of Rs94 billion was lost due to exemptions given to industries under the Statutory Regulatory Order 549 of 2008. Another Rs65 billion was lost following offer of concessionary sales tax rates for raw material, intermediary goods and finished goods relating to textile, carpet, leather, sports and surgical industries. These exemptions are protected under SRO 1125.

Tax exemptions for machinery, equipment, apparatus and capital goods under SRO 575 caused a revenue loss of Rs30 billion. Another Rs26 billion was lost due to tax exemptions for import and supply of items governed under SRO 551. Some Rs19 billion worth of exemptions were given on account of export facilitation schemes under three SROs.

Income tax

The FBR exempted incomes from Rs96.6 billion worth of income tax, 17.2% or Rs14.2 billion higher than the previous fiscal year, according to the survey.

Tax exemptions offered to independent power producers ate up Rs52.1 billion while the second largest revenue amount, Rs18 billion, was waived in favour of enterprises.

While people were making fortunes by investing in the surging stock market, the state suffered losses of Rs5 billion in the wake of lower tax on capital gains, revealed the survey.

Furthermore, Rs11 billion worth of tax was waived on income of various funds and educational institutions that were collecting a hefty fee from students.

Customs duties

Exemptions from customs duties were calculated at Rs131.5 billion, an increase of Rs12 billion or 10%. Most of the tax breaks were given to oil, automobile and textile sectors.

The largest concession, Rs32.5 billion, was given under the head of general and conditional exemptions that raised questions of transparency as there was no explanation pertaining to these exemptions.

The automotive sector got Rs17.8 billion worth of duty exemptions while auto vendors received concessions of Rs11.5 billion.

Duties worth Rs10.7 billion were waived on account of raw material imports. The government also scrapped duties amounting to Rs21.5 billion on imports from China. Apart from this, the national exchequer suffered a loss of Rs2.9 billion because of imports at concessionary rates of duties from Malaysia.

Published in The Express Tribune, June 3^rd, 2014.

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