Islamabad: Despite a massive cut in tax exemptions this year, the total amount of foregone revenue on account of these exemptions jumped rapidly this year.
The Pakistan Economic Survey 2014-15 shows total tax exemptions granted under the income tax, sales tax and customs duties rose by almost Rs188bn this year, a walloping 39pc increase from last year. This is the fastest rate of increase recorded in many years, with the exception of 2013 which was an election year.
The increase comes during a year when the government withdrew tax exemptions totalling Rs104bn as the first phase of total withdrawal of SROs. The second phase in the withdrawal of exemptions will be announced in the budget to be unveiled today.
How did foregone revenue through tax exemptions rise during a year when the government was busy withdrawing SROs to cut down on these exemptions? “This question should be posed to the IMF” says Dr Ashfaque Hasan Khan, former economic adviser to the government. “Withdrawal of all SROs and tax exemptions is a commitment given to the IMF”.
Last year the government announced that all SROs will be withdrawn in three years and the power to grant exemptions will be taken out of the hands of the tax bureaucracy.
During the presentation of the economic survey, the finance minister reiterated this promise.
“These power are misused by the lower levels of the tax machinery” he said. “And let’s face it, these powers fuel corruption as well. They need to be taken out of the hands of the tax bureaucracy.”
An SRO, an executive order which grants tax exemptions to an individual, industry or sector, is issued on the directive of the finance minister, the Cabinet’s Economic Coordination Committee or on FBR’s proposal.
Independent Power Producers (IPPs) remain the largest beneficiaries of exemption from income tax totalling Rs51.5bn, down marginally by Rs500m from last year. It wasn’t always like this. In 2009, the IPPs were the smallest beneficiary of income tax exemptions when they received less than Rs1bn benefit.INCOME TAX EXEMPTIONS: The fall in income tax exemptions came in two specific areas. Exemption on capital gains fell to Rs2.5bn in fiscal year 2015 from Rs5bn last year. And the sector and enterprise specific exemptions also dropped to Rs9.5bn this year from Rs18bn over the corresponding period of last year
No major changes were seen in the exemptions for the other sectors like export of information technology, education, donations and contribution etc
SALES TAX EXEMPTIONS: Two major changes have taken place in the sales tax exemptions. In the first phase, the government has shifted the SRO-based exemptions into the schedules of the Sales Tax Act of 1990.
Secondly, sales tax exemptions have surged by a robust 92.12 per cent to Rs478.4bn in 2014-15. However, this amount does not include those exemptions which cannot be calculated, for example, exemption on raw vegetables, tandoori roti, etc.
Two SROs based-sales tax exemptions stood at Rs55.37bn in 2015. Of these alone Rs55bn exemption was mentioned because of five export sectors — leather, textile, carpets, surgical and sports goods. The cost of agriculture exemption is Rs37m only in 2014-15.
The cost of sales tax exemptions because of import and local supply placed under the 5th schedule of the income tax stood at Rs19bn in 2014-15. And the cost of exemptions on import and local supply of items placed under the 6th schedule arrived at Rs389bn while cost of exemption on import of products under 8th schedule stood at Rs15bn.
The partial exemption on sugar, which mostly benefits a handful of political families and ranges between Rs12bn and Rs20bn, was not disclosed in the survey this year.
CUSTOMS EXEMPTIONS: The exemptions fell to Rs103bn in 2014-15 from Rs131bn in the last year, showing a decline of 22pc. These exemptions grew out of the preferential trade agreements that Pakistan signed in the recent past and other duty exemptions.
The break-up showed that maximum exemptions in customs duties available on imports from China under the Free Trade Agreement, which reached Rs26.6bn in the outgoing fiscal year from Rs21bn last year, increased by 27pc.
The cost of exemption on imports from Saarc and ECO countries stood at Rs352m , the FTA with Sri Lanka at Rs1.014bn, PTA with Iran Rs2m, Safta agreement Rs1.021bn, from Mauritius Rs11m, from Malaysia Rs1.878bn; and Indonesia at Rs3.183bn in the fiscal year 2015.
Other major beneficiaries of these exemptions were the original equipment manufacturers (OEMs) of the automotive sector and vendors who availed Rs34.675bn exemptions in 2014-15 and general and conditional exemption of customs duty (non-survey) under SRO567(I)2006 costs Rs8.588bn; followed by Rs7.288bn because of exemption from customs duty and sales tax on import of specified machinery, equipment, apparatus and items under SRO575 (I)2006.
