The trillion rupee concessions

Two mini-budgets, industrialists and corporate bigwigs running the government affairs – exemptions and concessions were always going to be high under the PTI government. Well, that is one expectation they have met. And how the cost of all tax concessions and exemptions in FY10 is estimated to be Rs972 billion?

Now, that is higher than the exemption cost in the last two years combined, of which FY18 was a record high. It is easily the highest ever, across all three categories of income tax, sales tax and custom duties.

Recall that Pakistan was supposed to phase out SROs and other measures that grant special rates and tax exemptions, under the previous IMF programme. Now with a fresh IMF programme, one wonders if the IMF will have to say more on “phasing out” of the SROs. Not that the IMF ever sounded too strict on imposing the condition.

Tax expenditure had averaged Rs178 billion during PPP tenure (FY09-13), and jumped to Rs448 billion in PML-N’s (FY14-FY-18). As a percentage of total tax collection, it stayed around 8 percent. Recall that multiple concessions were granted to export oriented industries on import of machinery and raw materials in the two mini budgets. There were more for local supplies as well, especially the automobile industry.

While all SROs are not bad, they still do raise the question of transparency and more importantly that of effectiveness. The government is reportedly thinking to do away with most exemptions in the budget to be announced today, and one hopes the cost of SROs never soar to these levels. One would not be guessing in the dark, had the process been more transparent and with a detailed impact assessment of the SROs, instead of a very simplistic estimation of the cost.

Granted that the impact of some SROs on the broader economy in terms of value, volume, employment generation or import substitution is greater than the tax loss, but that needs to be substantiated with a study. The impact of all SROs may not be immediate, but this decade has seen the lowest industrial growth in the country’s history, and the highest tax exemptions. Surely, a decade is good enough time for the impact to be seen. One hopes, the rent seeking masked behind the SROs gets discouraged from here on. The start is not an encouraging one.