ISLAMABAD: Tax exemptions dropped 4.22 per cent to Rs394.6 billion in the outgoing fiscal year from Rs412bn in the last year.

Finance Minister Ishaq Dar announced last year that Rs120bn worth of statutory regulatory orders (SROs) and exemptions would be withdrawn in the outgoing fiscal year. But decline in various tax categories painted a different picture.

Former economic advisor Dr Ashfaq H Khan said if the government had eliminated those SROs, the reduction would have reflected in the FY16 economic survey in the tax expenditure chapter.

“It appears that the IMF (International Monetary Fund) is more interested in eliminating SROs while the government is imposing new taxation measures through SROs,” he said, adding the Fund had dual approach towards Pakistan’s taxation regime.

The government started a three-year programme to phase out exemptions given through SROs. In the first year (ie 2014-15), exemptions worth Rs105bn given through SROs were withdrawn.

The third phase of the tax exemptions, believed to be of a similar quantum, is to be announced in today’s budget speech.

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.

Income tax exemptions

Some decline has been observed in the income tax exemptions. The overall income tax exemptions fell to Rs67.3bn in 2015-16 from Rs83.6bn in the previous year, a decline of Rs16.3bn, 4pc.

This fall comes from a few specific areas. The largest declines in income tax exemptions came from income funds, board of education, universities and computer training institutes which fell to Rs5.5bn from Rs10.5bn last year. Exemptions on profit on debt/interest from government securities and certain foreign currency accounts/books profits on debt declined to Rs1.8bn from Rs3.9bn last year.

Exemption from specified sectors and enterprises fell to Rs4.5bn this year from Rs9.5bn last years. And capital gains exemption fell to Rs1.7bn in fiscal year 2015-16 from Rs2.5bn last year.

Independent power producers (IPPs) are still the top beneficiary of income tax exemption of Rs50.2bn, a decline of R1.3bn over last year when exemptions stood at Rs51.5bn. In 2010-11, income tax exemptions were Rs0.87bn for IPPs, reflecting a substantial increase in the past five years.

All other categories, such as export of information technology, education, donations and contribution saw very nominal changes in the amount given to them through income tax exemptions.

Sales tax exemptions

Last year, the government has shifted the SRO-based exemptions into the schedules of the Sales Tax Act of 1990.

As a result of this decision, sales tax exemptions dropped 8pc to Rs207.3bn in 2015-16 from Rs225.4bn over the corresponding period of last year.

One SRO-based sales tax exemption stood at Rs43.4bn in 2015-16 compared to Rs55bn last year. This exemption was mentioned because of five export sectors — leather, textile, carpets, surgical and sports goods. This is the only area which saw a fall in its sales tax exemptions.

In contrast, exemptions available under the schedules of the sales tax act witnessed upward growth in 2015-16 from the previous year.

The cost of sales tax exemptions because of import and local supply placed under the 5th schedule of the income tax stood at Rs23.6bn in 2015-16 as against Rs19bn last year. And the cost of exemptions on import and local supply of items placed under the 6th schedule arrived at Rs128.9bn this year as against Rs142bn last year.

The cost of exemption on the import of products under 8th schedule stood at Rs11.4bn this year as against Rs9bn last year.

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 customs exemptions surged to Rs120bn in 2015-16 from Rs103bn in the preceding year, an increase of 16pc.

The increase was mostly on account of preferential trade agreements (PTAs), especially with China, that Pakistan signed in the recent past and other duty exemptions.

The break-up of the customs losses showed that maximum exemptions in customs duties available on imports from China under free trade agreement (FTA), which climbed to Rs30.577bn in the outgoing fiscal year from Rs26.603bn last year, an increase of 15pc.

Trade with other countries showed very nominal value of exemptions was enjoyed. Duty exemptions on imports from South Asian Association for Regional Cooperation and Economic Cooperation Organisation countries stood at Rs247mn this year as against Rs352mn last year, FTA with Sri Lanka at Rs1.2bn this year against Rs1bn last year.

The PTA with Iran cost an amount of Rs4 million, South Asian Free Trade Area agreement Rs1.1bn, Mauritius Rs19m, Malaysia Rs1.674bn, and Indonesia Rs3.9bn in FY16.

Other major beneficiaries of these exemptions were the original equipment manufacturers (OEMs) of the automotive sector and vendors who availed Rs41.985bn exemptions in 2015-16.

The conditional exemption of customs duty on import of raw materials and components for manufacturing of certain goods (survey based) stood at Rs2.002bn, exemption of customs duty and sales tax to exploration and production companies on import of machinery equipment and vehicle at Rs5.081bn, exemption of machinery and equipment (if imported by textile industrial units) cost Rs1.510bn, and concessions under 5th schedule at Rs30.640bn.

Published in Dawn, June 3rd, 2016

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