The Auditor General of Pakistan (AGP) has strongly recommended rationalization of exemptions granted to charitable organizations and withdrawal of income tax exemptions granted under Second Schedule (Exemption Schedule) of the Income Tax Ordinance 2001, specifically exemptions available to independent power producers (IPPs) and export of information technology related services.
According to the special audit report of the AGP on tax exemptions (2018-19) released here on Monday, a large amount of tax expenditures poses a serious consideration and it is important that a comprehensive set of estimates of the identified tax expenditures is undertaken, especially in case of income tax, where due to non-availability of data of companies, AOPs and individual persons having exempt status, tax expenditure could not be estimated. There is urgent need to develop a tax expenditure limitation strategy and as a beginning, tax expenditure report should be published as part of the government's annual budget document.
In the long run, income earned by mutual funds, venture capitals or investment companies, electrical power companies and oil and mining companies, which enjoy unlimited income tax exemptions in terms of concessionary rates, accelerated depreciation allowances and expensing may also be brought under the normal tax regime. Similarly provisions related to initial allowance, accelerated depreciation allowance and pre-commencement expenditure allowance need to be revised.
The AGP has also recommended withdrawal of income tax exemptions (Second Schedule) of the Income Tax Ordinance as the exemptions and concessions under the Second Schedule are too many and too generous. The AGP has found misuse of exemptions under Second Schedule (Exemption Schedule) of the Income Tax Ordinance 2001, irregular credit of tax allowed, incorrect exemption/tax credit claimed by NPOs/trusts and non-realization of Super Tax. Tax expenditure management, of which reporting and costing are two major elements, should make up an integral part of government's budget process. There should be regular update of tax expenditure analysis which takes account of the social and legal changes over time. The government should periodically determine the cost and justification for its major tax expenditures in detail and justify it on distributional, efficiency or cost effectiveness basis, the AGP said. Audit mainly recommended rationalizing exemptions to charitable organizations. There is no record of religious, cultural, welfare, charitable, non-profit or medical and technology promoting organizations with FBR. Such organizations are registered with income tax department. They are required to be audited; however, no audit has ever been conducted. Many of these organizations also carry out commercial activities. All such organizations/trusts are required to be registered under Companies Ordinance or Trust Act or Societies Registration Act or Voluntary Social Welfare Organization Ordinance 1961.