Tax exemptions: Alternative measures helped bridge revenue gap, says FBR

ISLAMABAD: The Federal Board of Revenue (FBR) has admitted that the revenue shortfall on account of tax exemptions/concessions granted to different sectors/areas has been compensated through alternative revenue collection measures covering development levies, surcharges, cesses, and other similar charges.

According to the “Tax Expenditure Report-2025” issued by the Federal Board of Revenue (FBR) on Monday, tax expenditures may not fully reflect the actual revenue foregone by the government as a result of policy measures implemented through various tax laws. Governments have a range of tools and methods for collecting tax revenues and granting concessions. The revenue lost under a particular tax regime may not represent a complete loss, as the government could offset this shortfall through other forms of levies that may not fall strictly under the categories of tax or customs duty. Examples of such alternative revenue collection methods include development levies, surcharges, cesses, and other similar charges.

The report stated that eliminating a tax expenditure measure may not directly translate into the estimated revenue in the real world, as the relationship between tax expenditure and its cost estimate is often more “dynamic” than a simple, linear conversion into revenue. Removing a tax expenditure measure can have broader economic implications, particularly on the size of industries and the overall level of economic activity. In practice, people and businesses tend to take advantage of any discounts or exemptions offered to them. The withdrawal of a tax incentive in a particular industry might lead businesses to exit that sector or shift their operations to industries with more favorable tax conditions, ultimately resulting in a decline in revenue.

Additionally, the elimination of a specific tax expenditure could impact consumption levels, particularly if the good or service in question has “price-elastic demand.” If the removal of taxrelief increases the price of a good or service, consumers may reduce their consumption, leading to lower revenue collection than initially expected. In this way, the actual revenue outcome could be contrary to the anticipated increase, highlighting the complex and often unintended consequences of changing tax policies, the report added.

Copyright Business Recorder, 2025