“Tax expenditure is revenue foregone because of selective provisions in the tax code…. During FY2021-22, the total tax collection was Rs. 6,148.5 billion and GDP was Rs. 66,624 billion…total Federal Taxes’ expenditure based on the data relating to FY2021-22 is estimated at Rs. 2,239.63 billion… 36.43 % of total FBR collection….approximately 3.36% of total GDP in FY2021-22 as against 2.69% in FY2020-21”—FBR’s Tax Expenditure Report 2023
Successive governments in Pakistan—civil and military alike—have always been very keen to enhance tax revenues, especially collection by Federal Board of Revenue (FBR) mainly through oppressive indirect taxes, even in the garb of income taxation through withholding tax provisions, but never talk about the real maladies – the colossal tax expenditure and the monstrous size of unproductive expenses. If these two are curtailed even by 30%, our fiscal deficit can decrease substantially, nearly 40 to 50%.
The enormous cost of unprecedented tax-free perquisites and benefits available to high-ranking state functionaries cost loss of billions of rupees to the national exchequer. Tax exemptions and concessions of billion of rupees were given to the top civil and military officers and judges of superior courts on perks and benefits in the tax year 2023. In the face of this reality, we keep on hearing from every government that it is cutting “unproductive” expenditure, and withdrawing tax concessions to improve fiscal management.
The FBR in ‘Executive Summary’ of Tax Expenditure Report 2023 [“the report”] says: “Tax expenditure is revenue foregone because of selective provisions in the tax code. Tax expenditure reports are prepared worldwide as a future guideline for tax policy formulation. This report uses the standard “Revenue Forgone” methodology to estimate the tax expenditure under the Income Tax, Sales Tax and Customs laws in Pakistan. This approach quantifies the direct ex-post revenue loss associated with the provisions relative to the statutory tax rates. This report is based on data relevant to FY2021-22 with a few exceptions.”
The enormous cost of unprecedented tax-free perquisites and benefits available to high-ranking state functionaries cost loss of billions of rupees to the national exchequer.
The report reveals that out of total tax expenditure of Rs. 2.24 trillion in tax year 2022 [36.43 % of FBR’s total collection in fiscal year (FY) 2022], sales tax remained the highest at Rs. 1,294 billion (57.8% of total expenditure and 1.94% of GDP). Customs was the second highest at Rs. 522 billion (23.29% of total expenditure and 0.78% of GDP) and income tax was Rs. 424 billion (18.93% of total expenditure and 0.64% of GDP).
As per Tax Expenditure Report 2022, out of total tax expenditure of Rs. 1482 billion in tax year 2021 [31.2 % of total collection in fiscal year (FY) 2021], sales tax was the highest at Rs. 740 billion (49.9% of total expenditure and 1.3% of GDP). The income tax was Rs. 400 billion (27% of total expenditure and 0.7% of GDP). Customs was Rs. 343 billion (23.1% of total expenditure and 0.6% of GDP).
As evident from data of last two fiscal years, the total tax expenditure for tax year 2022 of Rs. 2.24 trillion (it exceeded the two trillion rupees mark for the first time) was 28 percent higher than the tax year 2021. This comes to 43 percent of the total tax expenditure incurred by the Pakistan Tehreek-e-Insaf (PTI) government during its less than four-year tenure [August 18, 2018 to April 9, 2022].
According to Tax Expenditure Report 2021, total tax expenditure in FY 2020-21 was Rs. 1,315 billion. Out of it, sales tax was the highest at Rs. 578 billion (44% of the total), followed by income tax at Rs. 448 billion (34%), and customs was Rs. 288 billion (22%). Tax expenditure in FY 2021 was about 33% of total tax collection of FBR. It was 3.2 of GDP.
Tax Expenditure Report 2020 for FY 2020 showed total tax expenditure of Rs. 1,150 billion (30% of total collection and 3% of GDP). Out of it, sales tax was Rs. 519 billion (45% of the total), income tax Rs. 378 billion (33%), and customs at Rs. 253 billion (22%).
The FBR in ‘Executive Summary’ of Tax Expenditure Report 2023 [“the report”] says: “Tax expenditure is revenue foregone because of selective provisions in the tax code."
Somebody has rightly raised an extremely vital question: Why do we debate the tax target of FBR and its collection in media and elsewhere, especially in the wake of fresh bailout package of 9-month US$ 3 billion Standby Arrangement (SBA), approved by the executive board of International Monetary Fund (IMF) on July 12, 2023, without any mention of the tax forgone of the rich and mighty sections of society enjoying tax-free facilities such as resorts, golf clubs, rest houses, palatial bungalows and other unprecedented perks and benefits?
The term “tax expenditure” has been defined in various ways, including the following: Atshuler and Dietz in Tax Expenditure Estimation and Reporting: A Critical Review, Rutgers University, New Brunswick/Piscataway, Department of Economics, defined it as “revenue losses attributed to tax laws which provide for a special exclusion, exemption, deduction, tax credit, preferential rate of tax or a deferral of tax liability.” Dr. Hafiz A. Pasha and Aisha Ghaus in The Future Path of Tax Reforms in Pakistan way back in 2013 showed that total tax expenditure was at Rs 560 billion that was “contributing to around 30-40% of fiscal deficit each year.”
This trend continued as one brilliant journalist covering economy noted: “Cumulatively, the PTI government has given Rs. 2.12 trillion in tax exemptions during its first two years in power—an amount that is sufficient to build two Mainline One (ML-I) projects of the China-Pakistan Economic Corridor (CPEC). The estimated cost of the ML-1 project is Rs1.1 trillion or $7.2 billion and the government has given Rs2.2 trillion in tax concessions.”
FBR in Tax Expenditure Report 2023 relied on the following: “The Organization for Economic Cooperation and Development (OECD) defines tax expenditure as “the estimated costs to the tax revenue of preferential treatment for specific activities.” The International Monetary Fund (IMF) defines tax expenditure as revenue foregone “as a result of selective provisions in the tax code.” The US Department of the Treasury defines tax expenditure as “revenue losses attributable to provisions of Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability.”
The Tax Expenditure Report 2023 rightly points outs that “tax expenditures can take different forms. They are usually in the form of allowances (amounts deducted from the tax base before applying the tax rate), credits (amounts deducted from tax liability), exemptions (exclusion from the tax base), or rate relief (reduced tax rates), etc. They are sometimes referred to as tax incentives or tax subsidies. Negative tax expenditures are tax sanctions. A tax sanction means levying tax at a higher rate than the norm.” The negative tax expenditures, however, have not been discussed in Tax Expenditure Report 2023.
It is worth mentioning that in fiscal years 2022-23, 2021-22, 2020-21, 2019-20, and 2018-19 on average, tax expenditure was around 7-8% of GDP. Had tax expenditure been curtailed by 50% and wasteful expenses at 40%, the fiscal deficit for all these years would have been around 6% of GDP. The fiscal deficit was 6.5% in fiscal year 2017-18.
The coalition government of Pakistan Tehreek-e-Insaf (PTI) during its rule, August 18, 2018 to April 9, 2022, burdened millions below the taxable limit with oppressive and exorbitant taxes. The details of tax expenditure for tax year 2019 present some startling facts. The total cost of exemption on perquisites, benefits and allowances received by judges of Supreme Court of Pakistan and High Court was at Rs. 283 million. Value of tax-free superior judicial allowance was at Rs. 526.507 million for in-service judges and for the retired judges it was Rs. 605.280 million.
The total amount of tax-free pension was Rs. 276.4 billion across Pakistan; the highest was of Punjab at Rs. 87.39 billion or 31.6% of the total, followed by the military at Rs. 81.17 billion (29.36%), Sindh Rs. 56.56 billion (20.4%), Khyber Pakhtunkhwa Rs. 22.71 billion (8.2%), federal government Rs. 11.18 billion (4.04%), Balochistan Rs. 9.17billlion (3.31%), Pakistan Railways Rs. 6.74 billion (2.43%) and Pakistan Post Rs. 1.47 billion (0.53%)]. The tax cost on civilian pension was Rs. 9.2 billion and for military Rs. 4.5 billion.
Details regarding payments of tax-free commutation pension showed that early retirement payment was higher in the military compared to civilian institutions. The highest payment of commutation was made in the military at Rs. 54.6 billion or 32.7%, followed by Punjab at Rs. 33.9 billion (20.3%), Sindh at Rs. 30.7 billion (18.4%), Khyber Pakhtunkhwa at Rs. 19.8 billion (11.89%), Balochistan Rs. 8.8 billion (5.28%), federal government at Rs. 13 billion (7.8%), Pakistan Railways at Rs. 3.8 billion (2.4%) and Pakistan Post Rs.1.7 billion (1.02%). Tax concessions on the payment of commutation pension were around Rs. 16.65 billion.
Relief worth Rs 270 million was granted to Lahore University of Management Sciences (LUMS) and Rs. 680 million to Shaukat Khanum Memorial Trust Lahore.
The federal government wrote off Rs. 90 billion worth of income tax in favor of charitable organizations benefitting rich people who donated money in charity and institutions engaged in commercial activities in the name of philanthropy. Rs. 64.2 billion worth of income tax was forgone for just 37 enterprises, including the State Bank of Pakistan. Out of the 44 entities listed to receive tax-free donations, about half of these received donations and the government waived Rs. 4.6 billion in favor of their donors. The Supreme Court of Pakistan’s Diamer-Bhasha and Mohmand Dam donations cost Rs. 2.13 billion in income tax. Donations to Al-Akhuwat cost Rs134 million of tax loss to the exchequer.
Out of total General Sales Tax (GST) exemptions, 255.8 billion were given to industries on imports. Rs. 54.8 billion on local supplies, Rs. 13.6 billion on products which were protected under Fifth Schedule of the Sales Tax Act, 1990 [“the Act”]. This Schedule relates to the zero-rated items.
Rs. 82.7 billion exemptions given under Eighth Schedule of the Act, which allows imposition of lower than standard 17% sales tax. Rs. 53 billion relief was given by reducing GST rates under the Act and Rs. 23.1 billion to low GST rates on mobile phones sales.
The cost of customs duty expenditure was Rs. 253.1 billion against Rs. 233 billion in the previous year (8.5% increase). Maximum losses of Rs. 95.4 billion were booked on account of concessions to automobile sectors, oil and gas exploration sectors and China Pakistan Economic Corridor (CPEC).
Rs. 88 billion was doled out in concessions under Fifth Schedule of the Customs Act, 1969 dealing with exemptions. Exemptions worth Rs. 45 billion were on account of low rates applicable to various bilateral free trade agreements and Rs. 10.6 billion was given in concessions for certain items contained under Chapter 99 of the Customs Act. Rs. 4.8 billion in exemptions was related to additional custom duties and Rs. 9.4 billion in respect of regulatory duty.
Instead of blaming FBR’s officials alone for inefficiency, governments must admit lack of will to reduce exemptions, concessions, waivers and amnesties to powerful segments of society. If only 50% of taxes waived and forgone for fiscal year 2022-23 were recouped in Finance Act 2023, there would have been a fiscal space of Rs. 1200 billion to reduce taxes.
The claim of exceeding target by FBR for fiscal year 2019-20 and celebrated as great success by the then PTI Government was later exposed as refunds worth Rs. 710 billion were admittedly outstanding. If from total collection of Rs. 3.9 trillion, this amount was deducted, the actual collection came to Rs. 3.2 trillion (7.9% of GDP).
Instead of blaming FBR’s officials alone for inefficiency, governments must admit lack of will to reduce exemptions, concessions, waivers and amnesties to powerful segments of society. If only 50% of taxes waived and forgone for fiscal year 2022-23 were recouped in Finance Act 2023, there would have been a fiscal space of Rs. 1200 billion to reduce taxes. But the Pakistan Democratic Movement (PDM), like its predecessors, showed apathy towards the weaker sections of society, salaried class, and small and medium enterprises (SMEs) by not reducing exorbitant rates of income tax and sales tax, withholding taxes, advance tax, and high cost of utilities as well as oppressive 15% advance income tax from mobile users, no matter whatever their quantum of income.
Taxes are the backbone of a country’s economy as these help to meet day to day expenses for running the government’s machinery, which in our case needs rightsizing and reforms to be efficient, for developmental projects, for maintaining the profitability equilibrium of commercial enterprises to discourage monopolies and create a level playing field for all types of entrepreneurs, to enable equitable distribution of wealth so that the rich do not get richer and the poor, poorer. The generous tax exemptions, concessions, waivers and amnesties, especially to privileged ones and tax evaders and avoiders must end as these are destroying the entire fiscal system and retarding business growth and investment.