At a time when Pakistan is under pressure to improve its low tax-to-GDP ratio, the government is giving away billions of rupees in tax exemptions to influential lobbies.
Almost 84 per cent of tariff and duty rates have either been exempted or reduced for the benefit of special interests through statutory regulatory orders (SROs).
On such counts, the revenue loss adds up to Rs656 billion over the past four-and-a-half years.
Tax-wise breakup showed that the total amount of custom duty waived off in the last four years stood at Rs361 billion. And the exempted income and sales taxes amounted to Rs295 billion.
Federal Board of Revenue Chairman Ali Arshad Hakeem says these whopping exemptions extended over the past few years have only benefited the selected influential people. “The SROs are a ‘financial NRO’ for the elite. We will approach the finance minister soon to remove these anomalies and enact a fair and equitable taxation system for all.”
He argued that there was no economic justification for these concessions because favours were mostly given to friends, political cronies and powerful inefficient producers.
In the year 2008-09, the customs exemptions were to the tune of Rs61.28 billion, when PPP-led coalition took over the government. The figure touched Rs91.59 billion in 2011-12. Similarly, the income tax exemptions were Rs40.86 billion in 2008-09, now up to Rs70 billion for 2011-12; sales tax exemptions jumped from Rs17 billion to Rs24.3 billion despite withdrawal of exemption on fertilisers etc.
Senior member, Inland Revenue Service Israr Rauf said the tax machinery had tasked senior tax officials to work out the details of the tax exemptions given through SROs. “We will finalise the study next month”, he added. FBR will then be in a clear position to take action against the exemptions given to influential local lobbies.
Apart from the local beneficiaries, Mr Rauf said exemptions were also given under international agreements. He said FBR cannot issue an SRO on its own without the approval of finance minister, the blessing of the finance ministry and vetting from the law division.
Billions in tax revenue are also lost owing to preferential trade agreements with various countries especially China that allows import of goods either duty-free or at reduced customs rates, but exports to these countries have not increased significantly. As a result of these agreements, the revenue loss is rising and increased to Rs16.915 billion for the year 2011-12 from Rs14.134 billion in the previous year.
Imports from China witnessed a substantial increase, leading to revenue loss owing to exemptions granted under Free Trade Agreement of Rs13.763 billion in 2011-12 as against Rs10.898 billion in 2010-11, an increase of 26 per cent. The Pakistan-China FTA came into operation in 2006 .
The FTA that Pakistan signed with Malaysia, under implementation since 2007, caused a revenue loss of Rs2.750 billion in 2011-12.
Aside from this, under the policy of giving relief to the certain sectors, the Independent Power Producers (IPPs) were given income tax exemptions worth a whopping Rs46.939 billion in 2011-12 — up from the previous year’s Rs0.870 billion.
Organisations like boards of education, universities and computer training institutes were also beneficiary of income tax exemptions of Rs6.077 billion in 2011-12, followed by another Rs11.201 billion to various enterprises, which were not disclosed.
With only 0.5 per cent of the population paying taxes, it is time that government reviews its tax exemption policy that is frequently manipulated. It may be recalled that former Prime Minister Shukat Aziz has also promised to do away with SRO culture but only succeeded partially.