Cash-strapped Pakistan witnessed the highest-ever single-year increase in tax exemptions or concessions, surging by 73.24 per cent or Rs1.64 trillion in the outgoing fiscal year.
The Pakistan Economic Survey 2023-24, released by Finance Minister Muhammad Aurangzeb on Tuesday, showed that the Federal Board of Revenue (FBR) doled out a record Rs3.879tr in FY24 compared to Rs2.239tr in FY23. The cost of tax exemptions has climbed for the sixth consecutive year despite the government’s claim that exemptions will gradually decrease.
The significant rise in tax exemption costs is mainly due to the Rs1.338tr waiver on domestically supplied and imported petroleum, oil, and lubricant (POL) products. It’s important to note that this isn’t an exemption as the federal government has already collected the maximum amount through the petroleum development levy (PDL).
As a result, the federal government incurs negligible costs
The International Monetary Fund (IMF) is concerned about these tax waivers and has asked the government to abolish them. The budget 2024-25 will show the actual number of exemptions that will be eliminated to meet the FBR’s ambitious revenue targets.
The value of tax exemptions has been increasing over the years. In FY18, it was Rs540.98bn, rising to Rs972.4bn in FY19, to Rs1.49tr in FY20 and then slightly eased to Rs1.314tr in FY21 and then again surged to Rs1.757tr in FY22. These tax concessions were extended to all sectors to promote industrialisation. Tax exemptions are the revenues foregone by the state under different categories to various industries and other groups.
Waivers on petroleum products
The sales tax exemption on petroleum goods resulted in a loss of Rs1.257tr to the national exchequer in the outgoing FY24. To compensate for this loss, the government has raised approximately the same amount through the PDL. The net loss is for provinces because PDL is not available for distribution under the divisible pool and is retained by the centre.
The cost of exempting sales tax at the import stage on POL products was reported at Rs81.22bn in FY24.
Another option the government will seek to reduce exemption costs is to hike the sales tax on cellular phones. The cost of mobile phone exemptions was reported as Rs33.057bn in FY24. The import of mobile phones in the first 10 months of FY24 was $1.462bn, up from $473.28m in the same period last year, representing a 209pc increase.
Income tax exemptions rose to Rs476.96bn in FY24 from Rs423.894bn in FY23, an increase of 12.51pc. This rose mainly because of total exemption on income under Part 1 of the Second Schedule of the Income Tax Ordinance, costing the exchequer Rs293.46bn in FY24 from Rs232.39bn over the previous year, an increase of 26.27pc.
At the same time, the increase was due to the exemption on government income, which cost Rs57.52bn in FY24. The tax credit cost extended to businesspersons in income tax went down by 53.24pc to Rs24.374bn in FY24 from Rs52.13bn last year.
Overall sales tax exemptions increased by 120.86pc to Rs2.858tr in FY24 from Rs1.294tr in FY23. 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.
Costs of zero-rating
The cost of zero-rated exemptions under the fifth schedule rose to Rs206.05bn in FY24 from Rs139.44bn in FY23, an increase of 47.76pc. 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.
