The Federal Board of Revenue has said that the taxation measures such as withdrawal of sales tax exemption from defence stores and tax rate increase on the value addition of commercial importers in budget 2011-12 have vastly increased the collection of sales tax which has neutralised the negative impact of relief measures.
According to an ex-post budget analysis of budgetary measures of fiscal year 2011-12 issued by the FBR here on Thursday, to broaden the base of sales tax and improve revenue, exemption from sales tax was withdrawn from import and local supply of defence stores during Budget 2011-12. The projection for additional revenues was Rs 10 billion at the time of budget. In fact, Rs 7 billion has been realised during 2011-12.
The sales tax standard rate on all goods and services was reduced from 17 percent in 2010-11 to 16 percent in 2011-12 to provide relief to the taxpayers and general public. A loss of Rs 35 billion was estimated from this measure at the time of Budget 2011-12. The impact of change in tax rates, however, has been worked out at around Rs 36 billion.
The FBR's analysis said that the tax @2 percent was levied on commercial importer in term of value addition. In the Budget 2011-12, the rate of 2 percent was enhanced to 3 percent. The collection from value addition by commercial importers has vastly increased from Rs 2.3 billion to Rs 9.8 billion during 2011-12. This increase is exceedingly higher as compared to the projection of Rs 3 billion in the budget 2011-12.
An adjustable advance tax @ 0.3 percent was withheld on cash withdrawals from a bank where such cash withdrawal exceeds Rs 25,000 in a day during 2010-11. In order to facilitate taxpayers and to improve their liquidity position, rate of tax deductible on cash withdrawal from bank was reduced to 0.2 percent in the Budget 2011-12. It was expected that around Rs 3 billion will be foregone from this relief at the time of Budget. The collection from cash withdrawals has increased from Rs 10.6 billion to Rs 12.5 billion during 2011-12 entailing an increase of Rs 1.9 billion, the FBR added.
The tax measures announced in the Budget 2011-12 were mainly intended to provide relief to taxpayers and general public. A loss of around Rs 27 billion was projected from budgetary tax measures during 2011-12. Loss was projected in all the taxes ie Rs 21 billion in case of sales tax & federal excise, Rs 3.8 billion in direct taxes and Rs 2.1 billion in customs. This reflects the resolve of the government in providing relief to the taxpayers and public at large, in all the taxes. In case of customs and income tax, the projection at the time of Budget 2011-12 was accurate to a great extent when compared with the ex post impact. However, in case of sales tax and federal excise duties, the impact of abolition of special excise duties has been quite higher than the projected amount. Measures like withdrawal of sales tax from defence stores and rate increase on the value addition of commercial importers have vastly increased the collection of sales tax which has neutralized the negative impact of relief measures to a great extent.
The FBR said that the introduction of discretionary tax measures is a common feature of almost every tax system. In case of Pakistan, bulk of the tax measures announced at the time of Budget every year. A host of budgetary measures were announced in the Federal Budget 2011-12. Among other objectives, these budgetary measures were undertaken to reduce the cost of doing business and providing relief to the taxpayers and general public, promoting investment, reducing distortions and accelerating economic activity. Finally, the simplification of laws and procedures was also undertaken for the benefit of taxpayers. Specifically, major initiatives included abolition of special excise duty, reduction of standard sales tax rate by 1%, withdrawal of exemption of sale tax from defence stores, reduction of FED rates on cement & beverages, abolition of most of non-essential regularity duties, reduction of income tax rate of withdrawal of cash, etc.
The projected impacts of the budgetary measures are taken into accounts while allocating targets to different taxes in the Budget every year, the FBR said. In order to generate additional tax revenues, Special Excise Duty (SED) was levied at domestic and import stages vide SRO 655(I)/2007 dated 29th June, 2007. This arrangement continued till March, 2011 when rate of the SED was enhanced from 1 percent to 2.5 percent to raise additional receipts of FED to provide resources for floods victims. It was difficult to continue extra excise taxation measures creating distortion in the tax structure. Hence, the special excise duty both at import and domestic stages was withdrawn in the Budget 2011-12. A loss of Rs 12 billion was projected due to withdrawal of special excise duty. As is evident from Table 1, a huge loss of around Rs 20 billion in the collection of SED was recorded which is exceedingly higher than the projection. This has vastly affected the overall collection of federal excise duty, FBR said.
Aerated waters were subject to federal excise duty @ 12 percent of retail price during 2010-11.The rate of federal excise duty levied on aerated water was reduced from 12 percent to 6 percent of the retail price in the Budget 2011-12. A loss of Rs 2.6 billion was recorded due to this measure against projection of Rs 1.5 billion at the time of Budget 2011-12.
During 2010-11, cement was subject to FED @Rs 700 per Metric ton which was reduced to Rs 500 per Metric ton during the Budget 2011-12. A loss of Rs 2.8 billion was recorded against target of Rs 3 billion as loss during 2011-12. The estimate for revenue decline in the Budget 2011-12 were in line with the actual impact to a great extent. Despite relief in the form of reduction of tax rates, the production of cement grew only around 2 percent.
The FBR said that the federal excise duty was levied on services provided by property developers or promoters @ Rs 100 per square yard on development of purchased or leased land for conversion into residential or commercial plots and Rs 50/- per square foot of covered area in case of construction of residential or commercial units. Since CVT was earlier transferred earlier to the provincial governments, therefore, federal excise duty on services provided by property developers and promoter was withdrawn during the Budget 2011-12 to reduce the quantum of taxation. A loss of Rs 50 million was estimated at the time of Budget as compared to actual loss of Rs 63 million at the end of 2011-12.
The FBR analysis said that the cigarette industry is the top revenue generation source of tax revenues in federal excise duty. In order to raise tax revenues from cigarettes, the rate of FED was increased in the Budget 2011-12. The collection of federal excise duty from cigarettes has yielded a growth of 13.6% and increased from Rs 47.1 billion in 2010-11 to Rs 53.5 billion in 2011-12. In absolute, Rs 6.4 billion higher collection has been realised during 2011-12 as compared to previous fiscal year. The projection for increased revenues from cigarettes was Rs 9 billion in the Budget 2011-12. In the face of upward revision of FED rates of cigarettes, the production has dropped by around 3 percent.
The un-manufactured tobacco is the main raw material used by the cigarette industry. During 2010-11, FED @ Rs 5 per kg was levied on un-manufactured tobacco which was adjustable by a registered manufacturer. During Budget 2011-12, the levy of excise duty was enhanced from Rs 5 per kg to Rs 10 per kg. At the time of Budget, it was expected that additional collection of Rs 50 million will be realised but actually Rs 123 million was realised in 2011-12 against Rs 315 million collected during 2010-11.
The FBR stated that the FED is a fading tax and its base has shrunk over time. In the Budget 2011-12, federal excise duty was removed from 15 items such as oil and subsidiary products, viscose staple fibre, motorcars, air conditioners and deep freezers. At the time of Budget, it was projected a loss of Rs 800 million but actually only Rs 404 million has been foregone during 2011-12.
The FED on filter rods during 2010-11 was Rs 1 per filter rod which was converted to ad valorem 20 percent of the value of the filter rod to bring down its cost. It was expected at the time of Budget 2011-12 that Rs 200 million as additional collections will be realised but actually only Rs 35 million has been collected during 2011-12 against Rs 65 million in 2010-11, the FBR added.
In order to save foreign exchange, regulatory duty (RD) was imposed on 397 luxury/non-essential items in August, 2008. Considering the improved status of foreign exchange reserves and to remove the distortion created by this levy in the tariff, regulatory duty was removed on all the items except betel nuts, cigarettes, luxury tiles & bathroom fittings, luxury vehicles (1800 CC & above except electric hybrids) and arms & ammunition. It was anticipated at the time of Budget that a loss of Rs 2 billion will be incurred due to this measure. Actually, Rs 2 billion was foregone due to abolition of regulatory duty which reflects the accuracy of estimates at the time of Budget 2011-12, tax analysis revealed.
A large number of pharmaceutical raw materials, medicines, diagnostic kits and packing materials are already either duty free or importable at concessionary rates. In continuation of this government's policy to provide relief to common man, 22 pharmaceutical raw materials were added to the existing concessionary regime for this sector. A projection of Rs 100 million loss from these concessions was made at the time of Budget. Actual loss due to concessionary rates of these items has been only Rs 29 million during 2011-12, the FBR analysis added.