Changes in FBR’s tax expenditure may affect provincial revenues

ISLAMABAD: The changes made in the cost of tax exemptions by the Federal Board of Revenue (FBR) may have an impact on provincial tax collections/ revenues.

The FBR’s tax expenditure report-2023 revealed that the factual tax expenditures may vary depending on a host of factors. The tax expenditure estimates presented in the report relate to FBR revenues only and do not account for the provincial revenue expenditure.

It is pertinent to mention that federal and provincial tax systems interact with each other to varying degrees on practical grounds. As a result, changes in FBR’s tax expenditure may have consequences for provincial revenues.

The amounts by which federal tax revenues are reduced due to existence of tax expenditures are estimated independently for each tax expenditure by assuming that all other tax provisions remain unchanged. However, elimination of tax expenditure would not necessarily yield the full amount of revenues shown since there may be interaction of multiple tax expenditure provisions.

The reduction in tax revenue reported is only due to the actual tax expenditure observed in the database. The FBR has assumed that all other factors remain unchanged. This measurement approach assumes that existence of tax expenditure does not affect taxpayers’ behaviour.

There is a strong probability that if a particular tax expenditure provision is eliminated, it may not result in an exactly proportionate increase in revenue. This methodology does not consider the potential impact of a particular tax expenditure on the overall level of economic activity and consequently increase or decrease in aggregate tax revenues.

For example, eliminating tax expenditure may affect the level of consumption or economic activity, which in turn could cause a further change in the amount of tax revenue collected.

Revenue forgone provides quantified amounts only; it ignores the potential transitional provisions and consequential government policy changes that may occur due to the elimination of a particular measure, FBR added.

Copyright Business Recorder, 2023