ISLAMABAD: Pakistan has a tax expenditure (cost of tax exemptions) equal to 2.8 percent of the Gross Domestic Product (GDP) and India has an expenditure of 0.4 percent of their GDP, according to the new ‘Tax Expenditure Report 2022’ released by the Federal Board of Revenue (FBR) on Saturday.

According to the Tax Expenditure Report-2022, the FBR has said that the federal and provincial tax systems interact with each other, but the FBR’s tax expenditure does not include estimates of provincial tax exemptions.

The report revealed that the 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 percent 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 Rs. 46.7 billion which is 2 percent of total tax expenditure. This revenue foregone in income tax constitutes approximately 0.7 percent of GDP in 2021-22.

The report revealed that the tax expenditure in sales tax is 49.9 percent of the total expenditure in FY 2021- 22. The larger share of exemptions is granted at the import stage which is nearly 44 percent of the total sales tax expenditure. The tax expenditure on sales tax increased by 27.9 percent compared to that in the preceding year. Several factors played role in the surge in sales tax expenditure.

FBR releases Tax Expenditure Report 2022

The sales tax revenue increased by 20 percent in the same fiscal year contributing to an increase in tax expenditure as well. o Due to COVID-19, the exemptions in the pharmaceutical sector were increased. The new exemptions were introduced for the energy technology, health, and pharmaceutical sectors. On local scales, the cost of exemption due to the exempt local supplies is Rs. 139.0 billion and on the import stage Rs. 327.6 billion. This cost of sales tax expenditure constitutes approximately 1.33% of the GDP in 2021-22.

The large portion of expenditure (49 percent of customs duty expenditure) is on account of the Fifth Schedule of the Customs Act, 1969, which provides concessions in the form of the 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 FBR report added.

Copyright Business Recorder, 2022