SOHAIL SARFRAZ

ISLAMABAD: The Tax Reform Commission (TRC) has said that the estimates of the Economic Survey on tax expenditure appeared to be unreliable when compared with the Federal Board of Revenue (FBR) strategy paper estimates of tax exemptions/concessions for 2013-14 and 2012-13.

According to the final report of the TRC, the FBR strategy paper estimates the tax expenditure for fiscal 2012-13 Rs. 478 billion as against the estimates of Pakistan Economic Survey 2012-13 Rs. 239.5 billion and for the fiscal 2013-14 the Economic Survey of Pakistan has estimated the tax expenditure Rs. 477 Billion. The estimates of the Economic survey therefore appeared to be un-reliable and as such over all estimate for the FY 2013-14 could be much higher.

TRC stated that Tax Expenditure is being routinely estimated by FBR and reported in the Pakistan Economic Survey since last few years. However, these estimates are considered as incomplete and only a second-best approximation as they do not include the definition of tax expenditure adopted and the methodology used in producing them. In an effort to overcome this shortcoming, a study is conducted to have a more detailed assessment of tax expenditures in Pakistan for Financial Year 2011-12, reviewing the definition, coverage and methodology. The year 2011-12 has been chosen due to availability of completed year data on tax collection.

It may be recollected that reduction in tax liabilities resulting from various tax preferences such as preferential tax rates, exemptions, deductions, rebates, deferrals, credits etc are often used by governments as part of an efficient tax policy in order to achieve certain fiscal and social objectives. However, these incentives are also viewed as subsidy payments or government spending towards preferred taxpayers besides direct expenditures of the government. Tax expenditures are therefore, generally reported by countries as part of the budget process. Serious effort is involved to develop and establish frameworks to identify, measure, and critically assess the merits of tax expenditures annually. It is encouraging that Pakistan has also finally boarded this bandwagon, it said.

There is no legally stated definition of tax expenditure in Pakistan. Technically tax expenditure is the gap between potential tax revenue, which does not contain tax provisions, and the net tax revenue or the tax revenue received. In the present study tax expenditure is defined as, “the tax revenue loss resulting from those preferential provisions of the law that provide certain taxpayers/class of taxpayers or certain sectors with concessions that are not available to other taxpayers or sectors and that results in the collection of fewer tax revenues than would be collected under the basic tax structure”. The basic tax structure or so-called ‘the benchmark tax’ is the one that normally applies to all taxpayers and comprises the main revenue raising components of the tax system. The benchmark tax includes, “the rate structure, accounting conventions, the deductibility of compulsory payments, and provisions to facilitate administration and provisions related to international fiscal obligations.” Certain provisions included in the benchmark tax intend to keep the tax structure more equitable, fair and easy to administer. In the taxation structure of Pakistan, the exemptions/concessions are provided in three ways; through various provisions of the law or various Schedules attached to the law or through various SROs issued time to time, it maintained.

As an initial effort, the tax expenditures for fiscal years 2011-12 are estimated to be Rs. 402 billion, which should be regarded as partial estimates due to unavailability of data to undertake a comprehensive exercise and estimate all identified tax expenditures. Tax Expenditure for three major taxes, income & corporate tax, sales tax and customs duties have been estimated separately, the TRC said.

Using tax data from actual income and corporate tax returns, it has been estimated that tax expenditure worth Rs.126 billion has been granted during 2010-11. Nearly three forth of this has been attributed to the corporate sector and the rest originates from individuals and AOPs. The heads under which these expenditures are granted are identified in the study and the amount for each head has also been computed, TRC stated.

TRC final report said that estimates of tax expenditures in sales tax are carried out separately for sales tax imports and sales tax domestic as the exemption/concessional provisions differ in these two cases. According to these estimates tax expenditure worth Rs. 148 billion was granted to sales taxpayers during 2011-12. The details of tax expenditure estimated on the basis of data reported in GD (Goods Declaration) along with the relevant SRO are given in the study for import stage component of sales tax. For sales tax domestic the tax expenditures have been estimated for three sectors where reduced rate of sales tax is applied. Sales Tax Model based on Input-output tables and sales tax return data are used to compute these estimates. The sectors where tax expenditures have been found include local supply of five export-oriented sectors, retailers and steel sector. Tax expenditure under customs has been estimated to be Rs. 128 billion for 2011-12. Again GD (Goods Declaration) data has been used for these estimates, the TRC added.