ISLAMABAD: Federal Board of Revenue’s (FBR) tax exemptions reached an all-time high of Rs2.239 trillion in the outgoing fiscal year, up 51 per cent from Rs1.482tr in FY22, showed the Pakistan Economic Survey 2022-23 released by Finance Minister Ishaq Dar on Thursday.

The government claims that it has met all conditions set out by the International Monetary Fund to unlock the stuck-up funding under the $7bn programme, but the surging tax exemptions have been a key area of concern for the fund.

The cost of tax exemptions has risen for the fifth year in a row. This is mainly due to exemptions on raw materials and semi-finished products, as well as specific sectors aimed at reducing input costs for export-oriented industries. Additionally, certain individuals receive tax exemptions on particular perks and privileges.

The value of tax exemptions has been increasing over the years. In FY18 it was Rs540.98bn, rising to Rs972.4bn in FY19, Rs1.49tr in FY20, Rs1.314tr in FY21 and Rs1.757tr in FY22. This increase is largely due to tax concessions given to all sectors to promote industrialisation.

IMF has always been critical of ‘massive’ exemptions

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

Income tax exemptions rose to Rs423.894 billion in FY23 from Rs399.662bn in FY22, an increase of 6.06pc mainly due to tax reductions under Part 1 of the Second Schedule of the Income Tax Ordinance, costing the exchequer Rs232.398bn.

The increase in exemption cost from the previous year is mainly attributed to a reduction in tax rates in part II of the Second Schedule, which amounted to Rs24.444bn in FY23.

The cost of tax credit extended to businesspersons in income tax went down by 20.36pc to Rs52.13bn from Rs65.465bn last year. The exemption cost of allowances is estimated at Rs14.50bn in FY23 against Rs10.625bn the previous year, an increase of 36.53pc.

Sales tax exemptions increased by 75pc to Rs1.294tr from Rs739.76bn in FY22, primarily due to exemptions on imports under the sixth schedule. However, the government has raised the general sales tax rate from 17pc to 18pc to generate additional revenue from consumers and has also withdrawn exemptions on other products since March 1, 2023.

The cost of zero-rated exemptions under the fifth schedule rose to Rs139.44bn in FY23 from Rs33.42bn in FY22, an increase of 317pc. This is because the government relaxed the zero-rated regimes for five export-oriented sectors and some other sectors. In 2018-19, the projected revenue loss from these five sectors was Rs87bn.

The government has stated that it granted tax exemptions on petroleum products in FY23, costing around Rs632.950bn. This exemption is based on the application of lower sales tax rates on petroleum products during the year under review.

Exemptions on the import and local supply of items listed under the sixth schedule of the Sales Tax Act have decreased by 16.28pc to Rs390.715bn in FY23 from Rs466.702bn in FY22. The sixth schedule contains a list of exempted products, mostly consumer items. However, the cost of exemptions has declined due to the withdrawal exemption on many consumer goods such as juices.

The cost of reduced rates on imported products under the eighth schedule has also decreased by 32.94pc to Rs129.906bn in FY23 from Rs193.722bn last year. The eighth schedule applies to items imported under specified conditions.

The exemptions on cellular mobile phones stood at Rs1.021bn in FY23 against Rs45.919bn last year.

Customs exemptions grew by 52pc to Rs521.704bn this year against Rs342.890bn a year ago. The single highest cost is due to exemptions and concessions on import items under the fifth schedule. It rose to Rs172.978bn this year from Rs168.754bn last year, an increase of 2.50pc.

The second highest tax concessions mainly on account of CPEC-related imports, expenditure by vendors of the automotive sector and original equipment manufacturers were Rs192.950bn this year against Rs60.987bn last year, an increase of 216pc.

The FTA/PTA tax exemptions cost rose by 122.66pc to Rs102.658bn in FY23 from Rs46.105bn, and that of export-related exemptions to Rs30.878bn from Rs51.08bn, an increase of 39.55pc.

Tax-to-GDP ratio

The Economic Survey showed that the tax-to-GDP ratio would reach 9.6pc in FY23 from 9.3pc in FY22. Since FY07, the 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 Rs7.470 trillion by the end of June this year. However, it has revised upward its revenue target to Rs7.470tr for the current fiscal year. Currently, sales tax constitutes 69.4pc of the total collection, followed by direct taxes 40.7pc, customs 21.5pc and federal excise duty 9.1pc.

Published in Dawn, June 9th, 2023

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