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Of waivers and exemptions

December 13, 2012

IF you like big numbers, you’ll love this. On Monday our finance minister told us all that more than Rs650 billion worth of tax exemptions have been granted to various entities over the last four years.

To get some perspective on the scale of that number consider this: the total amount of money that Pakistan has received from the IMF over the same time period is a little over $5bn, which converts to less than Rs500bn, for now anyway.

Get it? The amount that has been given away through exemptions and waivers on taxes to a whole galaxy of domestic stakeholders is larger than the amount that Pakistan has sought as a bailout from foreign creditors over the last four years.

Quietly and rather matter of factly, our finance minister has informed us that we go around the world asking for aid in all shapes and varieties, and this is what we essentially do with the aid money when it arrives. We give it away to large stakeholders in the form of waivers and exemptions on taxes.

The math gets truly infernal. Just annualise the amount given to us by the IMF, for instance, and you get a figure of about Rs125bn per year as the amount we’ve received from the facility that began in November 2008.

And if you look at the revenue amounts waived during the same years, they average out to above Rs150bn each year, meaning that our own revenues are being used to cover the revenue loss from these waivers and exemptions after all aid money has been consumed.

I could cut this any number of ways and it gets worse and worse. Not only are we asking foreign creditors to help us pay for these exemptions and waivers, we’re leaning on the generosity and philanthropic instincts of our friends and allies, we’re invoking the blood and sacrifice of our war dead, we’re parading the plight of our flood victims on the world stage to buttress our demands.

And all the while, the waivers and exemptions have continued unabated. In the year of the great flood, to take one example, while the country went to every forum in the world to ask for financial assistance in the name of the flood victims, while the government hosted a donors’ conference of sorts in the comfort of the Serena Hotel in Islamabad, the total amount given away through waivers and exemptions was just over Rs150bn, larger than the amount of money we got in aid in the name of the floods.

There are four separate categories under which these waivers and exemptions are typically granted. The Customs Act of 1969, and the respective statutes that govern the operation of the sales tax, income tax and federal excise duties. Each statute contains specific clauses that give the power to grant exemptions.

“There are two types of waive-offs,” the finance minister’s statement says. There are those which are “claimed by the taxpayers at the time of filing tax returns” and those that are allowed by the government “any time during the year keeping in view the economic realities”. The latter variety of exemptions are granted through what are known as a statutory regulatory order, or SRO, and other miscellaneous notifications that the tax bureaucracy is empowered to issue on its own.

And only a day after the finance minister’s statement before the National Assembly, the Public Accounts Committee was informed that more than 4,500 SROs have been granted in the last four years. “It seems the country is running on the SROs,” the committee’s chairman reportedly said upon hearing this.

This power to grant waivers and exemptions is not new, nor is this the only government to have used it so widely. In fact, it’s decades old, with some of the legislation dating back to 1969, and the last modifications to the statutory authority of the tax bureaucracy to grant waivers and exemptions having been made in 2001.

Every government for as far as our memory is allowed to travel has used these powers extensively to play a complex game of give and take with the country’s business elite.

Sometimes this complex game of give and take has operated through minor adjustments to the administered prices, like in the case of sugar, and other times through legislation that skews the pitch in favour of one player or category of players, like in the refusal to impose a proper capital gains tax on stock brokers.

But fine-tuning of this game, this political economy of the rentier state, works through the ad hoc grants of waiver and exemptions that are often designed for the benefit of a single party.

The finance minister’s statement is accompanied by a list of those entities that have availed of a waiver of customs duty larger than Rs1 million, and the list contains names of NGOs, lots of government departments, as well as private companies.

But the real list we need to see is the one that contains names of parties that have had amounts waived under the sales tax, where the large trade-offs are applied. Unfortunately, the minister’s statement says that such a list is “not maintained by the FBR/field formations”.

This is the real reason behind the failure to bring about a value-added tax in this country, in spite of efforts for over a decade. VAT shuts down this power to issue SROs and grant waivers and exemptions, and as a result closes the back door through which successive governments have gamed their fortunes.

Closing down this window of opportunity, if one may play with a metaphor, is critical to placing the country on a sustainable footing, to ending our constant search for a walk-on role in a great powers war.

The writer is a Karachi-based journalist covering business and economic policy.