ISLAMABAD: Pakistan’s top tax machinery is working on several proposals to eliminate tax exemptions worth billions of rupees in the Budget 2024-25 as prerequisites to secure an agreement with the International Monetary Fund on a new bailout package, Dawn learnt from official sources on Thursday.

The Federal Board of Revenue (FBR) has prepared a document for tax exemption withdrawal based on internal workings. It focuses on sales tax exemptions and tax exemptions available to people in former federally administered tribal areas and provincially administered tribal areas while paying little attention to immovable properties, undocumented non-corporate businesses, the transportation sector, and construction businesses.

Well-placed sources in the FBR told Dawn the tax exemption withdrawal is primarily focused on sales tax. The overall amount of sales tax exemption anticipated by the FBR is more than Rs1.3 trillion. Most tax exemptions are for petroleum, food, pharmaceutical, and milk products.

The IMF has suggested imposing a sales tax on petroleum items, which the federal government is unwilling to do. The National Finance Commission’s (NFC) spirit was tarnished by the federal government’s decision to impose a petroleum development levy (PDL) while ceasing to collect sales taxes on petroleum products since 2022.

Mulls reducing income slabs with rate hikes for salaried class

According to the FBR, the exemption cost on petroleum products through various SROs was calculated at Rs633bn in FY23. This cost will rise significantly once the calculations for the current fiscal year are finalised.

In FY24, PDL collection totalled Rs729 billion in the first nine months, against the full-year target of Rs869bn. Provinces were denied this significant collection under the NFC award since PDL is non-transferable.

The federal cabinet will decide whether to impose a sales tax on petroleum products or to continue with the exemptions while raising the PDL limit further to generate additional revenue for the federal budget.

In the sales tax, FBR has also estimated an exemption cost of Rs8bn on pulse imports and another Rs20bn on rice, wheat, and wheat flour imports. The cabinet will decide whether to withdraw these exemptions.

There is also another Rs60bn in food supply exemption costs, and the FBR is striving to decrease this exemption cost by hiking tax rates on certain products. Pesticide sales tax exemption costs total more than Rs17bn. The cost of sales tax exemption on second-hand clothing and footwear imports is projected to be Rs5bn, and CBU automobiles at Rs4bn.

Since 2018, the 7th NFC Award has been violated by depriving the FATA of their rights. Instead of providing the promised development money of Rs100 billion per year, the FBR has proposed to the finance minister that income tax be imposed on individuals residing in tribal areas of KP and Balochistan.

Income tax waivers

According to FBR estimates, income tax exemptions for tribal areas in KP and Balochistan totalled Rs10bn, while sales tax exemptions for importing machinery and other parts for industrial installation in tribal areas totaled Rs17bn in FY23.

On Thursday, Finance Minister Muhammad Aurangzeb informed the National Assembly that income tax would be imposed on tribal areas. However, opposition members from KP and Balochistan warned of larger protests than those in Azad Jammu and Kashmir.

The minister agreed to engage with opposition members to discuss the proposed extension of income tax law to the tribal areas.

Under the Income Tax Law, the FBR seeks to reduce at least one tax slab for salaried individuals while increasing tax rates. If the cabinet approves the FBR’s plan, this proposed action will increase the tax burden on the salaried class.

Donations/charities

Individuals who earn from energy power generation projects benefit the most from income tax exemptions. This amount is estimated to be Rs57bn in the tax year 2023. The tax credit for charitable donations is anticipated to be more than Rs5bn, and the deductible allowance for zakat is almost Rs2bn. Most charities are owned and operated by politicians and corporate leaders who benefit from tax breaks.

The cost of a lower income tax rate for distributors of cigarettes and pharmaceutical products is estimated to be Rs15bn in tax year 2023, with an additional Rs7 billion due to a lower rate for distributors, dealers, sub-dealers, wholesalers, and retailers of fast-moving consumer goods, fertilisers, and electronics.

Published in Dawn, May 17th, 2024