THE National Assembly passed the federal budget 2015-16 last Tuesday. But it does not reflect the changes secretly made by the Federal Board of Revenue while the budget was still being debated.

The tax officials converted a 33pc increase in tax exemptions to a decline while the budgetary proposals were being debated.

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They did the trick by changing figures in the tax expenditure chapter in the Pakistan Economic Survey 2014-15. The figures put on the finance ministry’s website differ from those given in the Survey, which was released on June 4.

There is no explanation by the tax authorities for making the changes in the total volume of exemptions to show a feel-good figure. One tax official said the raise in tax exemption figure was a typographical error.

However, the changes introduced in the survey were under three heads of sales tax rates. So it was actually a subtraction of Rs253bn from the total projected amount of Rs478.4bn in sales tax exemptions.

The survey shows that the exemptions amounted to Rs665bn — nearly 25pc of the FBR’s total collection in fiscal year 2014-15 — against Rs477.1bn in the previous year, depicting an increase of Rs187.9bn. This is the fastest rate of increase in many years, with the exception of 2013 which was an election year.

The FBR has witnessed a collection shortfall of Rs205bn in the first 11 months of this fiscal, against the revised estimate of Rs2,605bn, much below the original budgetary target of Rs2,810bn.

The government withdrew tax exemptions worth Rs104bn in the first phase of SRO withdrawals. Under the second phase, the withdrawal of concessionary regimes under various SROs and schedules are worth Rs132bn, as announced in the FY16 budget.

How did the quantum of the overall revenue lost through tax exemptions rise during a year when the government was busy withdrawing SROs to cut down on these exemptions?

An analysis of the statistics shows that the total amount of tax exemptions should have fallen to Rs373bn in 2014-15 after the withdrawal of Rs104bn worth of exemptions. But the overall amount of forgone revenue is still higher by Rs39bn.

How did the quantum of the overall lost revenue through tax exemptions rise during a year when the government was busy withdrawing SROs to cut down on these exemptions?

Last year, the government announced that all SROs will be withdrawn in three years and the power to grant exemptions will be taken out of the hands of the tax bureaucracy. Through the finance bill 2015, SROs will now be issued with the approval of the parliament, except in some cases where the Economic Coordination Committee of the federal cabinet will be empowered to issue them.

Some variations have been observed in the income tax exemptions. The overall income tax exemptions fell 13.4pc to Rs83.6bn in 2014-15. This was the result of a decline in two specific exemptions.

The income tax exemption on capital gains fell to Rs2.5bn in fiscal year 2015 from Rs5bn in the previous year. And the sector- and enterprise-specific exemptions also dropped to Rs9.5bn from Rs18bn.

Meanwhile, the independent power producers (IPPs) continue to be a major beneficiary of income tax exemptions (worth Rs51.5bn in FY15, down from Rs52.03bn last year). In 2010-11, they received income tax exemptions worth Rs0.870bn; reflecting a substantial increase in the past four years.

There are limited exemptions in the income tax. Therefore, the specific exemptions are included in the second schedule of the income tax ordinance 2001.

Meanwhile, there are several exemptions that are less in value but symbolic. They are available to the president, prime minister, cabinet ministers, judges and generals. On the withdrawal of these tax exemptions under schedule II of the income tax ordinance, the finance minister said in his post-budget press conference: “We will consider this next year. You create the atmosphere and I’ll do the needful.”

In the first phase, the government shifted the SRO-based exemptions into the schedules of the Sales Tax Act 1990. And the sales tax exemptions have dipped by 9.48pc to Rs225.4bn in 2014-15 from Rs249bn last year. .

The Pakistan Economic Survey 2014-15 showed a robust 92.12pc increase in sales tax exemptions to Rs478.4bn from Rs249bn in 2013-14.

Two SRO-based sales tax exemptions stood at Rs55.37bn in 2015. Of these, Rs55bn were granted to five export industries — leather, textiles, carpets, surgical and sports goods. The cost of agriculture exemptions was Rs0.37bn in 2014-15.

The sales tax exemptions on the import and local supply (placed under the fifth schedule of the income tax ordinance) stood at Rs18bn in 2014-15. And the exemptions on the import and local supply of items placed under the sixth schedule amounted to Rs142bn, while those in the eighth schedule stood at Rs9bn.

The customs exemptions, mostly under preferential trade agreements, fell to Rs103.046bn in 2014-15 from Rs131.451bn in the previous year.

In case of the Pakistan-Malaysia free trade agreement (FTA), the revenue cost of exemptions to Pakistan is estimated at $240m, while Malaysia has forgone only $2m.

In the case of the Pakistan-China FTA, this disparity is in the range of 93pc for Pakistan (revenue loss because of the tax waiver on imports) and 7pc for China. In absolute terms, the revenue loss for Pakistan is estimated at around Rs20bn in case of the Pakistan-China FTA alone.

And no tangible growth was witnessed in exports to these countries. In case of the FTA with Malaysia, Pakistan got a market of only $26m, while it waived off duty worth more than $35m.

Numerous SROs have been issued to specific industries and individuals in the last five years. The tax exemptions are also being enjoyed by influential departments such as the National Logistic Cell, Fauji Foundation, CSD and others.

Published in Dawn, Economic & Business, June 29th, 2015

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