ISLAMABAD: Tax exemptions grew by 33.71 per cent to Rs1.757 trillion during the outgoing fiscal year (FY22) from Rs1.314tr a year ago, showed the Pakistan Economic Survey 2021-22 released by Finance Minister Miftah Ismail on Thursday.

The cost of tax exemptions continued their upward trend for the fourth consecutive year mainly because of exemptions on raw materials and semi-finished products in order to reduce the input cost of export-oriented industries.

The FBR withdrew exemptions of nearly Rs350 billion, mostly in sales tax in January this year, while allowing partial exemptions on fertilisers and machinery as part of the IMF conditions. The government imported $2.59bn worth of duty-free Covid-19 vaccines between July and March (FY22).

In FY18, the value of tax exemptions was Rs540.98bn, which rose to Rs972.4bn in FY19, Rs1.49tr in FY20 and Rs1.314tr in FY21. This is mainly because of tax concessions allowed to all sectors to promote industrialisation.

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

In the outgoing fiscal year, the government has given massive relief to industries and agriculture to follow a growth-led strategy to create employment. The PTI government’s focus in the first three years was on stabilisation of the economy.

As a result of this strategy, the agriculture growth crossed its projected target, while the overall economic growth will be nearly 6pc by end June 2022.

The income tax exemptions fell to Rs399.662bn in FY22 from Rs448.046bn in FY21, a decline of 11pc. The bulk of this exemption is linked to a reduction in income tax rates in FY22. The exemption cost from total income alone fell by 13pc to Rs232.852bn from Rs267.115bn the previous year.

The cost of tax credit extended to businesspersons in income tax went down to Rs65.465bn from Rs105.342bn last year. The exemption cost of allowances is estimated at Rs10.625bn against Rs37.318bn the previous year, a decline of 72pc.

Another bulk exemption of Rs26.164bn is bracketed as others/miscellaneous against Rs32.621bn last year, a decline of 20pc.

Sales tax exemptions rose by 75pc to Rs1.014bn from Rs578.456bn in FY21, mainly due to exemption under sixth schedule on imports. The cost of exemption of zero-rating under fifth schedule reduced to Rs11.36bn from Rs12.88bn, a decline of 12pc.

The persistent decline is due to the fact that the government did away with zero-rated regimes of five export-oriented sectors. In 2018-19, the revenue loss from these five sectors was projected at Rs87bn.

Exemptions on import and local supply of items placed under sixth schedule of Sales Tax Act were Rs760.54bn in FY22 against Rs329.94bn last year, an increase of 130.5pc. The cost of exemptions at import stage is 203pc, while that on local supplies is 50pc. The sixth schedule is a list of exempted products, mostly consumer items.

The cost of exemption of lower rates on import of products under eighth schedule has also posted a growth. The reduced rate of 1pc GST on imports costs the government kitty Rs0.06m, 2pc rate leads to a revenue dent of Rs95.46bn, 5pc rate to Rs24.09bn, 7pc rate to Rs0.049m, 7.5pc to 0.613m, 8pc to Rs0.972m, 10pc to Rs53.40bn and 12pc rate to Rs17.67bn.

The eighth schedule applies to items imported under specified conditions.

A decline was noted in the reduced rates of 5pc, 7pc, 8pc, 10pc and 12pc owing to withdrawal of items from these concessions in the last budget.

The exemptions on cellular mobile phone stood at Rs49.89bn this year against Rs27.09bn.

Customs exemptions grew by 19pc to Rs342.89bn this year against Rs287.77bn a year ago. The single highest cost is due to exemptions and concessions on import items under fifth schedule. It rose to Rs168.75bn this year from Rs137.41bn last year, an increase of 23pc.

The second highest tax concessions mainly on account of CPEC-related imports, expenditure by vendors of the automotive sector and original equipment manufacturers were Rs60.98bn this year against Rs55.87bn last year, an increase of 7pc.

The FTA/PTA tax exemptions cost increased by 35pc to Rs46.10bn from Rs34.21bn, and that of export-related exemptions to Rs51.08bn from Rs47.63bn, an increase of 7pc.

Tax-to-GDP ratio

The Economic Survey showed that tax-to-GDP ratio would reach 10.8pc in FY22 from 8.5pc in FY21. Since FY07, tax-to-GDP ratio has been hovering around 9pc with a few exceptions when it touches 10pc. In FY18, the ratio was reported at 11.1pc.

The FBR expects to collect Rs5.82 trillion by the end of June this year. However, it has informally revised upward its revenue target to Rs6.1tr for the current fiscal year. Currently, sales tax constitutes 42pc of the total collection, followed by direct taxes 36.5pc, customs 16pc and federal excise duty 6pc.

Published in Dawn, June 10th, 2022

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