Tax exemptions hit alarming Rs972bn

Updated June 11, 2019

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Soon after coming into power, PTI through two finance bills reversed some of the exemptions. — AFP/File
Soon after coming into power, PTI through two finance bills reversed some of the exemptions. — AFP/File

ISLAMABAD: The Federal Board of Revenue tax exemptions widened by nearly 80 per cent to Rs972.4 billion in the outgoing fiscal year from Rs540.98bn the preceding year, noted the Economic Survey 2018-19.

In its last budget in April 2018 just before the elections, the PML-N government had doled out tax concessions to almost all sectors including individuals, which led to whopping increase in the cost of tax exemptions by reversing its earlier stance of doing away with selective exemptions.

Soon after the announcement of budget and coming into power, PTI through two finance bills reversed some of the exemptions.

As part of the last International Monetary Fund bailout, the overall tax exemptions were reduced substantially but the trend was reversed after the completion of the programme and the government offered several concessions to certain industries and individuals.

The increase in tax exemptions comes in spite of three rounds of SRO removals carried out by the PML-N government that ran from 2013-16. The PML-N jacked up this figure to Rs477.1bn in 2013-14 while exemptions worth Rs105bn given through SROs were withdrawn in 2014-15.

The exemption cost fell to Rs394.59bn by end of 2015-16 before rising again to Rs415.75bn in FY17.

Tax exemptions are the revenue foregone by the state by granting exemptions under different categories to various industries and other groups.

The income tax exemptions jumped to Rs141.645bn in 2018-19 from Rs61.77bn a year ago, a whooping increase of 129.3pc year-on-year. This was primarily driven by a benefit of Rs90.95bn extended for balancing, modernisation and replacement of plant and machinery.

An upward trend was seen in tax exemption costs due to rising preferential imports under the FTA with China as it rose nearly to R31.62bn in FY19

The revenue loss due to exempt business income claimed by independent power producers is estimated at Rs18.03bn while the amount approximated due to tax credits to non-profit organisations is Rs14bn.

A tax credit of Rs5.48bn has been extended on the establishment of new industrial undertakings and another Rs6.45bn for industrial undertakings established before July 2011.

Rest of the exemptions are shared by relief on charitable donations, education expenses, export of information technology services and investment in shares and insurance.

Sales tax exemptions surged to Rs597.7bn in 2018-19 from Rs281.05bn a year ago, reflecting an increase of 112.66pc.

In 2014-15, the PML-N government shifted the exemptions based on SROs to the schedules of the Sales Tax Act of 1990.

One SRO1125-based sales tax exemption, extended to five export sectors — leather, textile, carpets, surgical and sports goods — surged to Rs86.7bn, from Rs61.3bn in 2017-18, an increase of 41.4pc. This revenue loss is a nine-month projection and is expected to be nearly Rs100bn for the full year.

The budgetary proposal of removing exemptions from these zero-rated industries in the upcoming 2019-20 budget has drawn the ire of concerned exporters, who have threatened to call a strike in case their benefits are taken back.

Exemptions on the import and local supply of items placed under the sixth schedule of Sales Tax Act have been recorded at Rs301bn this year, up 74.89pc from Rs172.1bn a year ago. The sixth schedule is a list of exempted products, mostly consumer items.

The cost of exemption on the import of products under Eighth schedule stood at Rs156bn this year as against Rs19.3bn last year — higher by Rs136.7bn. The schedule applies to items imported under specified conditions.

Meanwhile, cost of exemption on the import of products and local supply under fifth schedule clocked in at Rs107.2bn, from Rs27.6bn — showing a jump of Rs79.6bn.

The customs exemptions grew 17.65pc to Rs233.134bn, from Rs198.15bn a year ago.

The single highest tax concession amounting to Rs99.558bn was due to imports of items placed in the fifth schedule of the Customs Act.

An upward trend was seen in tax exemption costs due to rising preferential imports under the Free Trade Agree­ment with China as it rose nearly to R31.62bn in 2018-19, from Rs22bn in 2012-13. These are the nine-month projections.

FTAs with Malaysia and Sri Lanka also witnessed growth in terms of tax expenditure as cost of revenue came out at Rs2.4bn and Rs3.162bn, respectively. Under Preferential Trade Agreement with Indonesia, the revenue cost was estimated at Rs3.95bn while that for South Asian FTA stood at Rs1.614bn.

No exemption cost was reported on trade with Iran while in the case of Economic Cooperation Organisation countries, the tax expenditure rose to Rs348.8 million, from Rs274m a year ago.

The Economic Survey also reports Rs1.009bn worth of duty exemptions on account of CPEC-related imports. Mean­while, expenditure for vendors of automotive sector was estimated at Rs26.6bn, and another Rs38.8bn for original equipment manufacturers.

Published in Dawn, June 11th, 2019