ISLAMABAD: The cost of tax exemptions to the national economy has almost doubled to more than Rs1.8 trillion from Rs972 billion as reported in the federal budget 2019-20.

The figures were revealed to the Senate’s Standing Committee on Finance and Revenue on Thursday by Federal Board of Revenue (FBR) Member Hamid Ateeq Sarwar.

During the course of discussions on present policy and incentives for developing cottage industry and small and medium enterprises (SMEs), Ateeq said the FBR had reported the cost of tax exemptions at Rs972bn in the budget but this amount had crossed the Rs1.8tr mark, as per a joint study conducted by the FBR and World Bank.

He said the report would be shared with the standing committee along with full details as to who and who of the economy was actually benefiting from these tax exemptions. He lamented that on one hand, it had become very difficult for the government to provide Rs50bn subsidy to its citizens but at the same time huge amounts were being wasted through tax exemptions simply because of the government’s inability to collect taxes.

He said the government was left with no funds to invest in welfare and development of people after meeting compulsory expenditures like debt servicing, pensions and defense. “We need to have more taxes to meet the requirements of the state and its people should not treat tax policy for philanthropy or other purposes”, he said.

Exceeds the budgeted amount of Rs972bn

He was responding to suggestions from senators for increasing the threshold of tax exemption for cottage industry and SMEs keeping in view the currency depreciation, inflation and similar other indicators as large businesses and small businesses were currently being charged same tax rate and in some cases, the large businesses had even lower tax rates.

FBR Chairman Shabbar Zaidi conceded there was currently no difference in tax laws for large and small taxpayers, particularly those relating to income tax and turnover tax. He said the threshold for sales tax registration used to be Rs10 million which had been reduced to Rs3m and then increased again to Rs6m in the budget for the ongoing fiscal year. Likewise, the threshold of minimum tax for start-ups had also been reduced from Rs2m to Rs1m.

He said the FBR would be ready to consider if senate members propose some changes to tax thresholds.

Commenting on the application of CNIC condition for sales and negotiation with traders, he said there was no complaint from consumers but it was the wholesalers and retailers who had opposed this move. He said the CNIC requirement was necessitated for documentation of the economy but the FBR had clarified that no adverse action will be taken against registered person for providing a wrong NIC in good faith if the transaction is received in bank account of a supplier.

State Bank of Pakistan (SBP) Deputy Governor Jameel Ahmad told the committee that on a year-one-year basis, the local private banks (LPBs) had performed satisfactorily as of end September. There has been a rise in total assets along with decent growth in deposits, while earnings and solvency had improved.

He said although there was an uptick in non-performing loans (NPLs) but they were adequately provided for as the net-non performing ratio (NPLR) stood at only 1.1 per cent. Asset size of the LPBs has expanded by 18.7pc as of September, significantly higher than the recorded growth of 2.5pc in the corresponding period of last year.

Expansion in LPB assets was higher than the growth observed in total banking sector assets, which meant private banks were better placed than public sector banks.

The advances of the local private banks had grown by 7.6pc year-on-year by end September compared to 21.8pc a year earlier. Among the category of advances, private sector saw a growth of 8.9pc by September compared to 18.2pc a year earlier.

In terms of sectors, net retirements were seen in the sugar sector, while energy, cement, and textile witnessed deceleration in growth. This slow growth in advances was an industry-wide phenomenon very much aligned with macro financial environment. Contrary to advances, investments of LPBs have rose by 39.9pc as of end September compared to 21.9pc decline in the previous year, mainly due to rise in investments in government securities.

The LPBs deposits expanded by 10.7pc as of September compared to industry average growth of 9.9pc. The stock of NPLs in local private banks stood at Rs45.1bn as of end September. With growth in NPLs over the year, gross NPL ratio has increased to 6.8pc by end September from 6.1pc as of end September, 2018. However, due to high provisions coverage of 85pc (prevision to NPLs), net NPLs to Net Loans Ratio stood at 1.1pc indicating low level of credit risk.

The profit-after-tax of LPBs for first nine months of the calendar year 2019 increased to Rs98.9bn showing a 15pc growth over the corresponding period last year. As a result, return on assets (before tax) has marginally risen to 0.86pc (September) from 0.83pc (September). Rise in LPBs profitability is due to increased net interest income.

The solvency of LPBs has further strengthened as Capital Adequacy Ratio inched up to 16.47pc by end September from 15.5pc in September, 2018. The current level is well above the SBP’s minimum local requirements of 11.9pc and that of global requirement of 10.5pc.

Published in Dawn, December 13th, 2019