Tax expenditures: More potholes!

Perhaps it is as difficult for the government to sift through its mammoth database of Statutory Regulatory Orders (SROs) - a creation unique to Pakistan, circa 1991- as it is for the uninitiated. The tax expenditure annexure from the Economic Survey 2015-16 announced yesterday that is meant to show costs of exemptions and concessions leaves one scratching head. The sitting PLM-N government promised that all SROs will be phased out by 2017 which means after the outgoing year, we should be left with only one-third of SROs, and a significant reduction in tax expenditure. Apparently, not.

Tax expenditure for 2015-16 was Rs 395 billion, a decrease of only 4 percent from last year's Rs 412 billion, and only a 21 percent decrease from 2013-14.

Tax expenditure from direct taxes fell from Rs 83.6 billion to Rs 67.3 driven mainly by an Rs10 billion cut from the income to Board of Education, educational institutes and sectors and enterprise specific exemptions. The exemptions to Independent Power Producers (IPPs) that constitute 75 percent of direct tax exemptions - Rs51.5 billion in 2014-15 to Rs 50.2 billion in 2015-16 - prevailed and will continue to do given increasing investments in the sector.

Exemptions from sales tax that has the highest share in the total tax expenditure came down to Rs 207.3 billion in 2015-16 from Rs225 billion. This fall is associated to a relief from taxes at the imports and local supply stages under the 6th Schedule of Sales Tax Act, plus a decrease in tax exemptions to the five export sectors. The government increased sales tax rate from 2 to 3 percent in the previous budget for these sectors. The latter exemption figure will likely rise next year since the government announced it would reinstate zero-rated regime for these export oriented sectors.

Perhaps one should note here that when the Economic Survey was released last year, the sales tax exemptions- to what some would call creative accounting and what the government called a printing error- was Rs 478.4 billion (as opposed to the later corrected Rs 225 billion). This expenditure was supposedly driven by the exemptions worth of Rs 289 billion under the 6th Schedule of sales tax at import stage.

The then total tax exemptions stood at a whopping Rs 665 billion. Within a month of the release of these figures however, the government revised the numbers down alarmingly. While it could've been an error, it is more likely that it was the pressure from the IMF- which was not happy with the sheer number of SROs and the cost associated to them - that led the government to revise the numbers. But bygones!

Exemptions from customs increased in 2015-16; going from Rs103 billion in 2014-15 to Rs 119.9 billion with an increase in exemptions due to imports from Sri Lanka under the FTA; imports for the automotive and auto part sectors; machinery import for the textile sector and of course, imports from China under the Pakistan-China FTA (amounting to Rs 30 billion in 2015-16 up from Rs 26 billion in 2014-15).

Interestingly, a new line item has appeared in the survey this time: Concessions under 5th Schedule of the Customs Act, now shown with total exemptions amounting to Rs 30.6 billion. This is a result of the two SROs 567 (I)/2006 and 575 (I)/2006 that were rescinded in Budget 2014-15 and the remaining concessions were shifted to the 5th Schedule. These supposed remaining concessions were not shown in Economy Survey 2014-15, but the government seems to have included them this time.

While an audit of these numbers is out of the scope (or reach) of this column, two things are evident: one; that discrepancies in reported figures exist because the government sometimes reveals and sometimes cops out on presenting accurate numbers, perhaps at will, and two; that the era of SROs is not over just yet. And even if SROs go away come FY17, the burden of exemptions will continue to stay.