Fiscal deficit and tax expenditure

The generous tax exemptions, especially to the privileged and tax evaders must end

Successive governments in Pakistan have been very keen to enhance tax revenues, especially collection by the Federal Board of Revenue (FBR). However, they never talk about the real problem: the huge tax expenditure and the monstrous unproductive expenses [Budget and wasteful expenses, TNS, Political Economy, The News, July 26, 2020].

If these two are reduced even by 30 percent, Pakistan can substantially decrease its fiscal deficit—by 40-50 percent. The tax-free perquisites and benefits available to high-ranking state functionaries cost billions of rupees to the national exchequer [tax exemptions and concessions of Rs 30 billion were given to the top civil and military officers and judges of superior courts on perks and benefits in the tax year 2019]. In the face of this reality, we keep hearing from every government that it is cutting “unproductive” expenses and withdrawing tax concessions to improve fiscal management.

The Federal Board of Revenue (FBR) has admitted in its Statement of Estimated Tax Expenditure of Federal Government that out of a total tax expenditure of Rs 1,150 billion in tax year 2019, sales tax was the highest at Rs 519 billion (45 percent), followed by income tax at Rs 378 billion (33 percent) and customs at Rs 253 billion (22 percent). It was 30 percent of FBR’s total tax collection of Rs 3828 billion and 3 percent of the GDP.

Tax expenditure is defined by Atshuler and Dietz in a study [Tax Expenditure Estimation and Reporting: A Critical Review, Rutgers University, New Brunswick/Piscataway, Department of Economics] 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 a study, The Future Path of Tax Reforms in Pakistan, conducted way back in 2013 showed that total tax expenditure stood at Rs 560 billion that was “contributing to around 30-40 percent of fiscal deficit each year”. This trend has continued.

It is pertinent to mention that in the fiscal year 2018-19, fiscal deficit was 8.9 percent of GDP (Rs 3.45 trillion); for the fiscal year 2019-20, it was 8.1 percent of GDP (Rs 3.37 trillion). Had tax expenditure been curtailed by 50 percent (Rs 500 billion) and wasteful expenses by 40 percent (Rs 400 billion), the fiscal deficit of GDP for both the years would have been around 6 percent of GDP. It was 6.5 percent in fiscal year 2017-18.

The government of Pakistan Tehreek-i-Insaf (PTI) burdened millions below the taxable limit with oppressive and exorbitant taxes. Details of tax expenditure for tax year 2019, given by FBR, 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 is estimated at Rs 283 million. Value of tax-free superior judicial allowance was at Rs 526.507 million for in-service judges; 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 amount was for the Punjab at Rs 87.39 billion or 31.6 percent of the total, followed by military Rs 81.17 billion (29.36 percent), Sindh Rs 56.56 billion (20.4 percent), Khyber Pakhtunkhwa Rs 22.71 billion (8.2 percent), federal government Rs 11.18 billion (4.04 percent), Balochistan Rs 9.17billlion (3.31 percent), Pakistan Railways Rs 6.74 billion (2.43 percent) and Pakistan Post Rs 1.47 billion (0.53 percent)]. The tax cost on civilian pensions is Rs 9.2 billion and for military Rs 4.5 billion.

Details regarding payments of tax-free commutation pension show 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 percent, followed by the Punjab at Rs 33.9 billion (20.3 percent), Sindh at Rs 30.7 billion (18.4 percent), Khyber Pakhtunkhwa at Rs 19.8 billion (11.89 percent), Balochistan Rs 8.8 billion (5.28 percent), federal government at Rs 13 billion (7.8 percent), Pakistan Railways at Rs 3.8 billion (2.4 percent) and Pakistan Post Rs 1.7 billion (1.02 percent). Tax concessions on the payment of commutation pension were around Rs 16.65 billion.

Relief of 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 has written off Rs 90 billion worth of income tax in favour of charitable organisations benefitting the 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 received donations and the government waived Rs 4.6 billion in favour 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 Rs 134 million in tax loss to the exchequer.

Out of total General Sales Tax (GST) exemptions, 255.8 billion was 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 were given under Eighth Schedule of the Act, which allows imposition of lower than standard 17 percent 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 percent 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 concessions under Fifth Schedule of the Customs Act, 1969 that deals with exemptions. Rs 45 billion exemptions were given on account of low rates applicable to various bilateral free trade agreements and Rs 10.6 billion concessions for certain items contained under Chapter 99 of the Customs Act. Rs 4.8 billion exemptions was related to additional custom duties and Rs 9.4 billion in respect of regulatory duty.

The claim of exceeding target by FBR for fiscal year 2019-20 and celebrated as great success by the PTI government is now exposed as refunds of Rs 710 billion are admittedly outstanding. If from collection of Rs 3.9 trillion, this amount is deducted, the actual collection comes to Rs 3.2 trillion (7.9 percent of GDP).

Instead of blaming FBR’s officials alone for inefficiency, the PTI government must admit lack of will to reduce exemptions, concessions, waivers and amnesties to powerful segments of society.

But the PTI government, like its predecessors, showed apathy towards the weaker sections of society and small and medium enterprises (SMEs), facing the unbearable toll of Covid-19 outbreak/lockdown, by not reducing exorbitant sales tax, withholding taxes, advance tax, and high cost of utilities as well as oppressive 12.5 percent advance income tax from mobile users without regard to their incomes.

The total number of cellular phone subscribers as on July 31, 2020 was 167 million. This included 81 million 3G/4G subscribers and 83 million broadband subscribers. They are all paying 19.5 percent sales tax on services to provinces and 17 percent federal excise duty, if based in Islamabad Capital Territory (ICT).

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, especially to the privileged and tax evaders must end as these are destroying the entire fiscal system and retarding business growth/investment.

The writers, lawyers and authors, are Advocates of Supreme Court and adjunct Faculty at Lahore   University of Management   Sciences (LUMS) 

Fiscal deficit and tax expenditure