The growth in tax collections is at a decent 17 percent so far this year; yet its no way close to the governments initial and IMFs revised targets. The Finance Minister is finding it hard to tame down the fiscal deficit as circular debt has re-emerged, the privatization process is moving at a snails pace (which means it probably won materialise this year), and other foreign avenues may also remain elusive.
The pressure is mounting as regards how to raise the tax revenues, and somehow all roads are leading to the withdrawal of SROs. However, tax experts and economists think that the issue of SROs is hyped up and the provisions in income tax laws are underrated.
Since most of the concessions and exemptions are embodied in the second schedule of the income tax law, the legislators first need to fix these in the upcoming budget. Then the issue of SROs has to be dealt with care and caution as there are close to 2000 SROs, a large number of which deal with sales tax exemption.
Contrary to general perception, the exemptions on customs duty do not constitute the major portion of revenue loss. The major chunk of revenue loss comes from the exceptions made to the sales tax on imported goods and income tax.
One needs to differentiate the exemptions in sales tax and customs duties which are through SROs, whereas those in the income tax are embodied in the law. For making tax system more progressive and to generate more revenues, its imperative to focus on exemptions embodied in the law of direct taxes.
These concessions are given to the rich and the powerful, including tax exemptions in the shape of fringe benefits and post-retirement allocations extended to the military core commanders and Supreme Court judges.
Similarly, take the case of monetization of car vehicles of high ranking government officers: it has been marked in law that the monetization amount will be taxed at 5 percent instead of the rate applicable on high income brackets.
Then the pensions of corporate executives are not taxed and these guys enjoy double benefits; first, when they contribute to the provident fund, and second, when they receive their pensions. Mind you, the president of a commercial bank or a CEO of an FMCG draws his/her pension in millions of rupees.
Another loophole exists by way of not having a limit on salary advanced to individuals, which is taxed at a maximum of 25 percent, whereas the corporate tax rate is 34 percent. So, many companies pay hefty salaries to executive owners or relatives and enjoy more income by paying low taxes.
Apart from these individual examples, the corporations are benefiting from a few exemptions as well, including accelerated depreciation allowance of 50 percent in the first year. Then the business incomes of trusts and foundations are totally exempted from income tax.
For example, University of Central Punjab is minting a fortune but paying no taxes, and there are numerous instances where businesses are disguised as trusts or foundations, evading loads of money in potential taxes. Then there are other exemptions upon investing in a particular area, tax holidays and so and so forth.
Experts suggest that in total, the government can raise as much as Rs250 billion by bringing necessary changes in the income tax laws, and 70 percent of it can be raised from the corporations.
In a nutshell, this SRO myth is exaggerated. Yes, there are lots of exemptions and concessions in SROs but they are mostly for sales tax on imported goods and customs duty. On the flip side, most of the concessions that facilitate the rich are found in income tax laws, especially in the second schedule. There are thousands of such concessions and their impact is likely double of what can be done by withdrawing the customs duties.
And if indeed some SROs have to be removed, then they have to be those which were created in 2006 as umbrella SROs by putting a few hundred tariffs lines into them. Hence, out of 1920 SROs, there are less than ten which have a major impact. The bottom line is that the government should stop beating about the bush, and start targeting its efforts towards the income tax lacunas and the umbrella SROs.
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