Government Grants Record Rs2.2 Trillion in Tax Exemptions

Introduction:

The coalition government in Pakistan has granted an unprecedented amount of Rs2.24 trillion in tax exemptions during the current fiscal year, a significant increase of 28% compared to the previous year. The staggering figure of tax exemptions, which accounts for 43% of all exemptions granted during the tenure of the Pakistan Tehreek-e-Insaf (PTI) government, may adversely affect Pakistan’s credibility with international financial institutions and foreign nations.

Rising Tax Exemptions:

According to the Pakistan Economic Survey 2022-23 presented by Finance Minister Ishaq Dar, the cost of tax exemptions has surged by Rs483 billion, or 28%, in just one year. Despite the annual withdrawal of tax exemptions, the government has continued to grant them, resulting in the massive figure of Rs2.24 trillion for the current fiscal year. This amount surpasses the cost of constructing the Diamer-Basha dam. In total, the previous government granted Rs5.2 trillion in tax exemptions over four years.

Impact on Loan Negotiations:

Tax exemptions have consistently been part of agreements signed between Pakistan and the International Monetary Fund (IMF). However, successive governments have failed to curtail these exemptions and have even added more beneficiaries to the list. The significant value of tax exemptions, amounting to Rs2.24 trillion, can pose a challenge during loan negotiations with the IMF and when seeking budget support loans from the World Bank under the pretext of tax reforms.

Breakdown of Exemptions:

Income Tax:

The estimated cost of income tax exemptions for the current fiscal year is nearly Rs424 billion, accounting for 19% of the total exemptions. Notably, Rs14.5 billion in exemptions were granted for various allowances, while Rs52 billion was given as tax credits.

Sales Tax:

Sales tax exemptions increased by 28%, reaching Rs1.3 trillion in the current fiscal year. The rise is primarily attributed to exemptions on petroleum products, resulting in a loss of Rs633 billion. Exemptions on products protected under the Fifth Schedule of the Sales Tax Act also significantly increased.

Customs Duty:

The cost of customs duty exemptions rose to Rs522 billion, a 52% increase from the previous year. The concessions granted to the automobile sector, oil and gas exploration sector, and the China-Pakistan Economic Corridor contributed to a tax loss of Rs193 billion.

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Concerns and Implications:

The rising tax exemptions pose concerns over Pakistan’s financial position and its ability to attract external loans. The substantial amount of tax breaks granted may weaken Pakistan’s case and credibility with international financial institutions and foreign nations. These exemptions, protected by tax laws, have been challenging to curtail in the past.

Conclusion:

The government of Pakistan’s decision to grant record tax exemptions, amounting to Rs2.2 trillion, raises concerns about the country’s financial stability and its position in loan negotiations with international financial institutions. Despite the withdrawal of tax exemptions each year, the government has been unable to curtail them effectively. The Economic Survey’s findings highlight the need for a closer examination of tax policies and the implications of excessive exemptions on Pakistan’s economic health and credibility with global financial institutions.