ISLAMABAD: The tax expenditures remained 36.43 percent of the total Federal Board of Revenue (FBR) tax collection in 2021-22. According to the new tax expenditure report-2023 prepared by the Federal Board of Revenue (FBR), the tax revenue foregone constitutes approximately 3.36 percent of total GDP in 2021-22 as against 2.69 percent in 2020-21.
The tax expenditure report-2023 is based on data relevant to 2021-22 with a few exceptions. Income tax expenditures are calculated using the tax returns data and taking the statutory rates available in First schedule of Income Tax ordinance (ITO-2001) as the benchmark rates.
The benchmarks for scope of income are taken as defined in Section 9 of ITO-2001 as the various heads of income and the origin-of-income concept for residents and non residents. Where exact data was not available, reliance is placed on third party data and calendar year data instead of financial year data.
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Tax expenditure arising from withholding income tax at import stage is also included. The Sales Tax expenditure is based on returns/ imports data and the difference of sales tax paid and the sales tax payable at 17% is calculated as the Sales Tax expenditure.
Certain adjustments on gross estimates have been made to allow for input tax adjustments in certain exempt items based on the counterfactual if such items were not exempt. Customs duty expenditure is calculated based on the legal provisions under the Customs Act 1969, and statutory instruments through which exemptions/ concessions are granted to imported goods.
Statutory rates of customs duty relevant to 2021- 22 are taken as the benchmark rates while provisions relating to exemptions from regulatory duty and additional customs duty have been excluded. The interpretation of estimates in this report is subject to certain caveats.
The expenditure amounts are calculated assuming that all other provisions of that tax type remained unchanged. It can by no means be construed that eliminating certain tax expenditure will necessarily increase revenue of the same amount. Actual receipts will depend on enforcement, taxpayer compliance, effective dates of legislation repealing the exemption, exact wording of any legislation, and taxpayers’ behaviour, the report said.
Moreover, the actual amount will also depend on the nature of economic activity, elasticity of goods and services, etc. Hence, the realization of actual revenue, consequent to removal of certain exemptions, may vary. The impact of FBR tax expenditure on provincial tax systems is not included in the report.
The total Federal Taxes’ expenditure based on the data relating to 2021-22 is estimated at Rs. 2,239.63 billion with a tax-wise breakdown as follows:
Income Tax: Rs. 423.89 billion (6.89% of total FBR tax collection, 18.93% of total expenditure and 0.64% of GDP)
Sales Tax: Rs. 1,294.04 billion (21.05% of the total FBR tax collection, 57.78% of total expenditure and 1.94% of GDP).
Customs Duty: Rs. 521.70 billion (8.49% of total FBR tax collection, 23.29% of total expenditure and 0.78% of GDP), the report added.
Copyright Business Recorder, 2023
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