By Abdul Wajid Khan

ISLAMABAD, July 25: The economists have urged the government to revisit its fiscal policy and withdraw all unproductive tax exemptions to bring down tax expenditures.

Noted economist and the director general of the International Institute of Islamic Economics at International Islamic University Islamabad, Dr. Abdul Rashid said that the government needed to review its policy regarding the unnecessary tax exemptions and incentives.

The tax expenditure is basically the tax revenue that is forgone due to specific provisions of tax laws relating to exemptions, exclusions, preferential rates, tax credits and deferral of tax. It is identified and measured against a benchmark system that accounts for tax revenues receivable in the normal course.

Dr. Abdul Rashid said governments always gave tax exemptions to different sectors but the practice could not produce useful results. He told WealthPK that government should review its policy regarding tax exemptions. He said that a detailed study should be conducted to identify the products and services, which required tax exemptions, and all other unproductive tax exemptions and incentives should be withdrawn.

Other economists also said that the government needed to decrease its tax expenditure to strengthen the economy. In the prevailing circumstances, Pakistan direly needs to increase tax revenue because the low tax-to-GDP ratio is creating fiscal imbalances and leading to the widening of the fiscal deficit.

According to the latest tax expenditure report of the Federal Board of Revenue (FBR), the total federal tax expenditure has increased by 12.8 percent and reached Rs1,482.3 billion in the financial year 2022 as compared to Rs1,314 billion in the financial year 2021.

The breakup of the data shows that the income tax expenditures decreased to Rs399 billion in the previous fiscal as compared to Rs488 billion in the financial year 2021. The sales tax expenditures increased to Rs739.8 billion as compared to Rs578 billion in the financial year 2021 while tax expenditures on custom duty increased to Rs342.8 billion from Rs287.8 billion.

The report notes that the tax expenditures accounted for 31.2 percent of the total collection in the financial year 2021. The income tax expenditures remained at 27.0 percent of the total expenditures and 0.7 percent of the Gross Domestic Product (GDP). The sales tax expenditures stood at 49.9 of total expenditures and 1.3 percent of GDP while the expenditures on custom duty were 23.1 percent of the total expenditures and 0.6 percent of GDP in the financial year 2021.

The FBR said that tax expenditures arising caused by exemption from withholding income tax at the import stage were included for the first time in the report. The sales tax expenditures were based on returns for the financial year 2020-21 and the 17 percent difference between the paid and payable sales tax was calculated as the sales tax expenditures.

The custom duty expenditures were calculated on the basis of legal provisions under the Customs Act 1969 and statutory instruments through which exemptions/concessions were granted to imported goods. Statutory rates of custom duty relevant to the financial year 2020-21 were taken as the benchmark rates while provisions relating to exemption from regulatory duty and additional customs duty were excluded.

The report says that the global comparison of 21 countries’ tax expenditures during 2019 and 2020 showed that most of the advanced countries have higher estimates of forgone tax revenues. Within the sample set of countries, the Russian Federation tops the list with an estimated 14.8 percent of GDP as tax expenditures while India is at the other extreme with only 0.4 percent of GDP as tax expenditures.

Pakistan is ranked 19th in the list with its tax expenditures accounting for 2.8 percent of its GDP, according to the report available with WealthPK.

Credits: INP-WealthPk