Creative accounting: Cost of tax exemptions goes down by Rs253b

Govt cuts cost of SROs’ number after lenders claimed Islamabad was not serious about tax reform

ISLAMABAD: In what appears to be a blatant case of creative accounting, the government claims the cost of tax exemptions to politically well-connected industries for the outgoing fiscal year is Rs412 billion, insisting the Rs665 billion figure it released earlier this month was a ‘printing error’.

The government has hastily revised the figure downwards after foreign lenders, particularly the International Monetary Fund, began questioning Islamabad’s sincerity in its efforts to end the practice of issuing executive Statutory Regulatory Orders (SROs) that bypass parliament to make changes to the tax code for the benefit of the politically well-connected industries or companies, often with little transparency.



The government has lowered its estimates of tax exemptions at a time when the Federal Board of Revenue (FBR) is set to miss its thrice downward revised tax collection target of Rs2,605 billion despite, levying an unprecedented Rs360 billion in additional taxes in a single year.

In the fiscal year 2014-15 that is ending today (Tuesday), the government claimed it had withdrawn Rs105 billion in tax exemptions. Had the claim been true, the cost of tax exemptions, which stood at Rs477 billion in June 2014, would have come down to Rs372 billion by June this year. However, the 2015 Economic Survey of Pakistan, released by Finance Minister Ishaq Dar on June 4, revealed that far from coming down, the cost of SROs had gone up to Rs665 billion.

The high cost of tax exemptions during the second year of the Nawaz administration had set off alarm bells for international financial institutions. In informal discussions, foreign lenders say they suspected that Islamabad is deceiving them by claiming the government was in process of withdrawing tax exemptions.

This led to yet another case of creative accounting: within three weeks, the government claimed the cost of SROs has come down to Rs412 billion – a whopping Rs253 billion less than the number printed in the Economic Survey.  In a separate document titled “Errata Tax Expenditures” released by the government, the cost of income tax and custom duties exemptions were kept unchanged at Rs83.6 billion and Rs103 billion respectively, effectively ignoring the effects of economic growth and inflation.

This is not for the first time the government has claimed that inconvenient numbers are the result of a ‘typing error’. The government earlier claimed that the economic growth rate of 3.2% for fiscal 2014-15 was such an error.

In less than three weeks, the cost of sales tax exemptions has gone down to Rs225 billion from Rs478 billion, claimed the Errata Tax Expenditures. On June 4, the government had shown cost of tax exemption at the import stage under the Sixth Schedule of the Sales Tax Act at Rs103 billion, which it has now lowered to Rs57 billion. Similarly, the cost of tax exemptions on domestic supplies was also reduced from Rs286 billion to just Rs85billion. It also lowered the exemption cost under the Eighth Schedule of the Act from Rs15 billion to Rs9 billion.

While defending the revised cost, FBR Chairman Tariq Bajwa said the higher figure was reported due to what he called an ‘erroneous change’ in the baseline.  He said the cost of statute exemptions was also included in the cost of SROs. Bajwa stood by the Rs412 billion figure as the true cost of SROs. In fact, he said the government may launch an inquiry into the origins of the Rs665 billion number.

Tax collection

Despite slapping Rs360 billion in additional taxes and blocking over Rs220 billion in tax refunds during the outgoing fiscal year, the FBR will miss its thrice downward revised collection target. By evening of June 29, the FBR had collected only Rs2,480 billion, well shy of the revised goal of Rs2,605 billion. To meet its target, the FBR would have to collect Rs125 billion in next 24 hours, which is next to impossible.

In June 2014, the National Assembly had set a Rs2,810 billion tax collection target that the government said it could not achieve due to lower than expected inflation.

Published in The Express Tribune, June 30^th, 2015.