ISLAMABAD: The tax exemptions cost continued its upward trend for the third consecutive year as it grew by 14.36 per cent in the outgoing fiscal year to Rs1.314 trillion from Rs1.149tr in the preceding year, showed the Pakistan Economic Survey 2020-21 released by Finance Minister Shaukat Tarin on Thursday.

In the year 2017-18, the value of tax exemptions was reported at Rs540.98 billion, but these jacked up to Rs972.4bn in 2018-19 mainly because of tax concessions allowed to all sectors just before the last election.

Since then a whopping increase in the tax exemptions were noted in the following two years as well. Tax exemptions are the revenues foregone by the state by granting exemptions under different categories to various industries and other groups.

In the outgoing fiscal year, the government is all set to give massive relief to industries and agriculture sectors to follow a growth-led strategy to create employment. The PTI government’s focus in first three years was on stabilisation of the economy.

The income tax exemptions jumped to Rs448.046bn in 2020-21 from Rs378.026bn in 2019-20, an increase of 18.5pc. The bulk of this exemption is linked with the reduction in income tax rates in FY21. The exemption cost alone from this reduction rates edged up to Rs267.115bn from just Rs128 million in the previous year.

The cost of tax credit extended to businesspersons in the income tax slightly went up to Rs105.342bn against Rs104.498bn last year. The exemption cost of allowances is estimated at Rs37.318bn against Rs36.435bn over the last year. Another bulk exemption of Rs32.621bn is bracketed as others/miscellaneous against Rs18.934bn last year.

Sales tax exemptions rose 11.49pc to Rs578.456bn against Rs518.8bn in 2019-20 mainly due to prevailing lower rates on various products placed under 8th schedule.

The cost of exemption of zero-rating under 5th schedule reduced to Rs12.887bn against Rs13.671bn over last year. The persistent decline is due to the fact that government did away with zero-rated regimes of five export-oriented sectors. In the year 2018-19, the revenue loss from these five sectors was projected at Rs87bn.

Exemptions on the import and the local supply of items placed under the sixth schedule of Sales Tax Act were Rs329.942bn in FY21 against Rs310.714bn last year, an increase of 6.18pc. The sixth schedule is a list of exempted products, mostly consumer items.

The cost of exemption of lower rates on import of products under the eighth schedule has also posted a growth. The reduced rate of 1pc GST on imports cost government kitty a loss of Rs330m, 2pc rate leads to a revenue dent of Rs90.288bn, 5pc rate to Rs27.108bn, 7pc rate to Rs496m, 8pc to 1.396bn, 10pc to Rs69.592bn and 12pc to Rs19.321bn. The 8th schedule applies to items imported under specified conditions.

The exemptions available on cellular mobile phone is Rs27.096bn this year against Rs23.154bn. For the first time, it was noted in the survey in the year 2019-20.

Duty concessions

The customs exemptions grew 13.69pc to Rs287.771bn this year against Rs253.111bn a year ago.

The single highest cost is due to exemptions and concessions on import of items under 5th schedule is Rs137.418bn this year against Rs87.859bn over the last year, an increase of 56.4pc.

The second highest general tax concessions mainly on account of the CPEC-related imports, expenditure for vendors of the automotive sector and original equipment manufacturers were reported at Rs55.877bn this year against Rs95.420bn last year, a decline of 41.4pc.

Tax ratio increases

The Economic Survey shows that the tax-to-GDP ratio will reach to 10pc this year from 9.6pc last year. Since FY07, the tax to GDP ratio hovers around 9pc with few exceptions when it touches 10pc. In FY18, the tax to GDP ratio was reported at 11.1pc. FBR expects to receive Rs4.7 trillion by end June 2021 against the original target of Rs4.963trn.

Historically, the tax revenue collection mainly depended on indirect taxes especially customs. With the passage of time, the share of direct taxes has started to improve. Currently, the sales tax constitutes 39.9pc of the total collection followed by direct taxes with 38.1pc share and customs 15.7pc and FED 6.3pc.

The share of customs duty declined in FY20 while the contribution of direct tax, FED and sales tax has witnessed a slight increase during the same period.

Published in Dawn, June 11th, 2021