Fiscal deficit & ‘tax expenditure’

Huzaima Bukhari & Dr. Ikramul Haq

In Pakistan, the successive governments have been always very keen to enhance tax revenues, especially collection by Federal Board of Revenue (FBR), but never talk about the real problem that is huge tax expenditure and monstrous size of unproductive expenses [Budget and wasteful expenses, TNS, Political Economy, The News, July 26, 2020]. If these two are reduced even by 30%, Pakistan can substantially decrease fiscal deficit—nearly 40-50%. The cost of unprecedented tax-free perquisites and benefits available to high-ranking state functionaries cost loss of billions of rupees to the national exchequer [tax exemptions and concessions of Rs. 30 billion were given to the top civil and military officers and judges of superior courts on perks and benefits in the tax year 2019]. In the face of this reality, we keep on hearing from every government that it is cutting “unproductive” expenses and withdrawing tax concessions to improve fiscal management.

The Federal Board of Revenue (FBR) in Statement of Estimated Tax Expenditure of Federal Government has admitted that out of total tax expenditure of Rs. 1150 billion in tax year 2019, sales tax was highest at Rs. 519 billion (45%), followed by income tax at  Rs. 378 billion (33%) and customs at Rs. 253 billion (22%). It was 30% of FBR’s total tax collection of Rs. 3828 billion and 3% of the GDP.

‘Tax expenditure” is defined by Atshuler and Dietz in a study [‘Tax Expenditure Estimation and Reporting: A Critical Review’, Rutgers University, New Brunswick/Piscataway, Department of Economics] as “revenue losses attributed to tax laws which provide for a special exclusion, exemption, deduction, tax credit, preferential rate of tax or a deferral of tax liability”.

Dr. Hafiz A. Pasha and Aisha Ghaus in a study [The Future Path of Tax Reforms in Pakistan], conducted way back in 2013 showed that total tax expenditure was at Rs.560 billion that was “contributing to around 30-40% of fiscal deficit each year”. This trend continued as one commentator noted:

“Cumulatively, the PTI government has given Rs. 2.12 trillion in tax exemptions during its first two years in power—an amount that is sufficient to build two Mainline One (ML-I) projects of the China-Pakistan Economic Corridor (CPEC). The estimated cost of the ML-1 project is Rs1.1 trillion or $7.2 billion and the government has given Rs2.2 trillion in tax concessions”.

It is pertinent to mention that in fiscal year 2018-19, fiscal deficit was 8.9% of GDP (Rs. 3.45 trillion) and for fiscal year 2019-20, it was  8.1% of GDP (Rs. 3.37 trillion). Had tax expenditure been curtailed by 50% (Rs 500 billion) and wasteful expenses at 40% (Rs. 400 billion), the fiscal deficit of GDP for both the years would have been around 6% of GDP. It was 6.5% in fiscal year 2017-18.

The coalition government of Pakistan Tehreek-i-Insaf (PTI) while burdened millions below the taxable limit with oppressive and exorbitant taxes, details of tax expenditure for tax year 2019, given by FBR, present some startling facts:

• the total cost of exemption on perquisites, benefits and allowances received by judges of Supreme Court of Pakistan and High Court is estimated at Rs. 283 million. Value of tax-free superior judicial allowance was at Rs. 526.507 million for in-service judges and for the retired judges it was Rs. 605.280 million.
• total amount of tax-free pension was Rs. 276.4 billion across Pakistan [the highest is of Punjab at Rs. 87.39 billion or 31.6% of the total, followed by military Rs. 81.17 billion (29.36%), Sindh Rs. 56.56 billion (20.4%), Khyber Pakhtunkhwa Rs. 22.71 billion (8.2%), federal government Rs. 11.18 billion (4.04%), Balochistan Rs. 9.17billlion (3.31%), Pakistan Railways Rs. 6.74 billion (2.43%) and Pakistan Post Rs. 1.47billion (0.53%)]. The tax cost on civilian pension is Rs. 9.2 billion and for military Rs. 4.5 billion.
• details regarding payments of tax-free commutation pension show that early retirement payment was higher in the military compared to civilian institutions. The highest payment of commutation was made in the military at Rs. 54.6 billion or 32.7%, followed by Punjab at Rs. 33.9 billion (20.3%), Sindh at Rs. 30.7 billion (18.4%), Khyber Pakhtunkhwa at Rs. 19.8 billion (11.89%), Balochistan Rs. 8.8 billion (5.28%), federal government at Rs. 13 billion (7.8%), Pakistan Railways at Rs. 3.8 billion (2.4%) and Pakistan Post Rs.1.7 billion (1.02%). Tax concessions on the payment of commutation pension were around Rs. 16.65 billion.
• relief of Rs 270 million for Lahore University of Management Sciences (LUMS) and Rs. 680 million to Shaukat Khanum Memorial Trust Lahore.
• The federal government has written off Rs. 90 billion worth of income tax in favour of charitable organisations benefitting the rich people who donated money in charity and institutions engaged in commercial activities in the name of philanthropy. 
• Rs. 64.2 billion worth of income tax was forgone for just 37 enterprises including the State Bank of Pakistan.
• Out of the 44 entities listed to receive tax-free donations, about half of these received donations and the government waived Rs. 4.6 billion in favour of their donors.
• The Supreme Court of Pakistan’s Diamer-Bhasha and Mohmand Dam donations cost Rs. 2.13 billion in income tax.
• Donations to Al-Akhuwat cost Rs134 million of tax loss to the exchequer.
• Out of total General Sales Tax (GST) exemptions, 255.8 billion were given to industries on imports. Rs. 54.8 billion on local supplies, Rs. 13.6 billion on products which were protected under Fifth Schedule of the Sales Tax Act, 1990 [“the Act”]. This Schedule relates to the zero-rated items. Rs. 82.7 billion exemptions given under Eighth Schedule of the Act, which allows imposition of lower than standard 17% sales tax. Rs. 53 billion relief was given by reducing GST rates under the Act and Rs. 23.1 billion to low GST rates on mobile phones sales.
• The cost of customs duty expenditure was Rs. 253.1 billion against Rs. 233 billion in the previous year (8.5% increase). Maximum losses of Rs. 95.4 billion were booked on account of concessions to automobile sectors, oil and gas exploration sectors and China Pakistan Economic Corridor (CPEC). Rs. 88 billion concessions under Fifth Schedule of the Customs Act, 1969 that deals with exemptions. Rs. 45 billion exemptions were on account of low rates applicable to various bilateral free trade agreements and Rs. 10.6 billion concessions for certain items contained under Chapter 99 of the Customs Act. Rs. 4.8 billion exemptions was related to additional custom duties and Rs. 9.4 billion in respect of regulatory duty.

The claim of exceeding target by FBR for fiscal year 2019-20 and celebrated as great success by the PTI Government is now exposed as refunds of Rs. 710 billion are admittedly outstanding. If from collection of Rs. 3.9 trillion, this amount is deducted, the actual collection comes to Rs. 3.2 trillion (7.9% of GDP).

Instead of blaming FBR’s officials alone for inefficiency, the PTI Government must admit lack of will to reduce exemptions, concessions, waivers and amnesties to powerful segments of society. If only 40% of taxes waived/forgone in fiscal year 2019-20 were recouped in Finance Act 2020, there would have been a fiscal space of Rs. 600 billion to reduce taxes. But the PTI Government, like its predecessors, showed apathy towards the weaker sections of society and small and medium enterprises (SMEs), facing the unbearable toll of Covid-19 outbreak/lockdown, by not reducing exorbitant sales tax, withholding taxes, advance tax, and high cost of utilities as well as oppressive 12.5% advance income tax from mobile users, no matter whatever their quantum of income. The total number of cellular subscribers as on July 31, 2020 was 167 million that include 81 million 3G/4G subscribers and 83 million broadband subscribers. They all are also paying 19.5% sales tax on services to provinces and 17% federal excise duty, if based in Islamabad Capital Territory (ICT).

Taxes are the backbone of a country’s economy as these help to meet day to day expenses for running the government’s machinery (which in our case needs rightsizing and reforms to be efficient), for developmental projects, for maintaining the profitability equilibrium of commercial enterprises to discourage monopolies and create a level playing field for all types of entrepreneurs, to enable equitable distribution of wealth so that the rich do not get richer and the poor, poorer. The generous tax exemptions, concessions, waivers and amnesties, especially to privileged ones and tax evaders/avoiders must end as these are destroying the entire fiscal system and retarding business growth/investment. 

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About Authors

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https://www.thefridaytimes.com/author/huzaima-bukhari/

https://surkhiyan.pk/author/huzaima-bukhari-dr-ikramul-haq/

https://surkhiyan.pk/author/dr-ikramul-haq/

https://dunya.com.pk/index.php/columnist/doctor-ikram-ul-haq/114

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Ms. Huzaima Bukhari, Advocate High Court and Visiting Faculty at Lahore University of Management Sciences (LUMS), is author of numerous books and articles on Pakistani tax laws. She is editor of Taxation and partner of Huzaima & Ikram, a leading law firm of Pakistan. From 1984 to 2003, she was associated with Civil Services of Pakistan. Since 1989, she has been teaching tax laws at various institutions including government-run training institutes in Lahore. She specialises in the areas of international tax laws, corporate and commercial laws. She is review editor for many publications of Amsterdam-based International Bureau of Fiscal Documentation (IBFD) and contributes regularly to their journals. She has to her credit over 1500 articles on issues of public importance, printed in various journals, magazines and newspapers at home and abroad. She has also coauthored with Dr. Ikramul Haq many books that include Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes, Law & Practice of Income Tax, Law , Practice of Sales Tax, Law and Practice of Corporate Law, Law & Practice of Federal Excise, Law & Practice of Sales Tax on Services, Federal Tax Laws of Pakistan, Provincial Tax Laws, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary and Master Tax Guide, Income Tax Digest 1886-2011 (with judicial analysis). She regularly writes columns for Pakistani newspapers and has contributed over 1500 articles on issues of public finance, taxation, economy and on various social issues in various journals, magazines and newspapers at home and abroad.

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Dr. Ikramul Haq, Advocate Supreme Court, specialises in constitutional, corporate and tax laws. He established Huzaima & Ikram in 1996 and is presently its chief partner as well as partner in Huzaima Ikram & Ijaz. He studied journalism, English literature and law. He is Chief Editor of Taxation and Visiting Faculty at Lahore University of Management Sciences (LUMS).

He has also coauthored with Huzaima Bukhari many books that include Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes, Law & Practice of Income Tax, Law , Practice of Sales Tax, Law and Practice of Corporate Law, Law & Practice of Federal Excise, Law & Practice of Sales Tax on Services, Federal Tax Laws of Pakistan, Provincial Tax Laws, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary and Master Tax Guide, Income Tax Digest 1886-2011 (with judicial analysis). He is author of Commentary on Avoidance of Double Taxation Agreements signed by Pakistan, Pakistan: From Hash to Heroin, its sequel Pakistan: Drug-trap to Debt-trap and Practical Handbook of Income Tax. He regularly writes columns for many Pakistani newspapers and international journals and has contributed over 2500 articles on a variety of issues of public interest, printed in various journals, magazines and newspapers at home and abroad.