FBR: cost of GST exemption 49.9pc of tax expenditure

ISLAMABAD: The cost of sales tax exemption is 49.9 percent of the total tax expenditure during 2021-22, according to the Tax Expenditure Report-2022 issued by the Federal Board of Revenue (FBR).

According to the report, the tax expenditure in sales tax is 49.9 per cent of the total expenditure in 2021-22.

The larger share of exemptions is granted at the import stage, which is nearly 44 per cent of the total sales tax expenditure.

The tax expenditure in sales tax increased by 27.9 per cent compared to the preceding year. Several factors played role in the surge of sales tax expenditure. The sales tax revenue increased by 20 per cent in the same fiscal year contributing toward an increase in tax expenditure as well.

Due to Covid-19, the exemptions in the pharmaceutical sector were increased. New exemptions were introduced for energy technology, health, and pharmaceutical sectors.

In sales tax, approximately 44 per cent of the tax expenditure is at the import stage under the 6th schedule of the Sales Tax Act.

FBR unveils Tax Expenditure Report: Cost of tax exemptions ‘much higher’

Around 26 per cent tax expenditure in sales tax is in the form of reduced rates under the 8th schedule of the Sales Tax Act. The tax expenditure under customs duty is estimated to be around Rs343 billion which is largely granted under the Fifth Schedule and Chapter 99 of the Customs Act, 1969.

A large part of the tax expenditure in income tax is in the form of exemptions from total income and special provisions; Profits and gains from power generation projects (Rs37 billion), income of collective investment scheme or a REIT scheme (Rs26 billion), tax credit (Rs65 billion), and pension (Rs16 billion), provident funds (Rs14 billion) are the major heads of tax expenditure in income tax.

Tax expenditures are classified according to the type of tax measure, i.e., allowances, credits, exemptions, reduced rates, etc. Overall income tax expenditure accounted for 27.0 per cent of the total expenditure in 2021-22.

The larger share of exemptions was received in the form of exemptions from total income taxes, and exemptions from specific provisions and allowances. The tax expenditures estimation for 2021-22 includes the tax expenditures under Clause 56, Part IV of the Second Schedule for Income Tax. This tax expenditure was not part of the previous reports. The inclusion of exemption from specific provisions at the import stage increases the total expenditure in income tax by Rs46.7 billion which is two per cent of the total tax expenditure.

The large portion of expenditure (49 per cent of customs duty expenditure) is on account of the Fifth Schedule of the Customs Act, 1969, which provides concessions in the form of a reduced rate, zero rate, and exemptions to specific sectors/items. It applies to plant, machinery and equipment, chemicals, parts, and renewable energy sources equipment.

The customs duty expenditure cost 0.6 percent of the GDP in 2021-22 and contributed 22.2% in the total tax expenditure in the same fiscal year, the report added.

Copyright Business Recorder, 2022