Revenue impact: FBR to study tax expenditure, exemptions

ISLAMABAD: The Federal Board of Revenue is planning to conduct studies on tax expenditure, exemptions and size of black economy to figure out the revenue impact of these exemptions and size of informal economy operating in the country.

Sources told Business Recorder on Friday that the Board is preparing objectives for conducting such studies on tax expenditure and black economy. In case of study on tax expenditure, a paper has been drafted by the FBR. It says that while taxes are an essential source of revenue for all countries, the manner in which they are imposed varies widely from country to country. In its simplest form, a tax is an across-the-board levy on a base, such as income, to which a specific rate applies and for which no modifications exist. However, taxes are rarely levied in such simple manner. Instead, most tax codes incorporate a number of exemptions, deductions, credits, and deferrals designed to encourage certain taxpayers’ activities or to limit the tax burden on certain types of individuals or endeavours. Each of these exemptions, deductions, credits, and deferrals have a price-tag and financial implications for the national exchequer; and their total cost for the country in a given fiscal year is called the tax expenditure.

Sources said that the Government of Pakistan, under a conditionality committed with the IMF, is duty-bound to report and publish its annual Tax Expenditure figures on annual basis, which is done by adding an Appendix to the Economic Survey. This figure is not only generally under-dated, but is also based on unempirical, highly unscientific, and bald approximations. Such a situation warrants putting in place an effective corrective mechanism. Since the tax expenditure is a deviation from the generally agreed-upon, or basic, structure of a given tax, such deviations are found in all tax statutes. In the context ofPakistan’s federal tax system the Income Tax Ordinance 2001, Sales Tax Act 1990 and Federal Excise Act 2005 have provisions resulting in some kind of tax expenditure of the country.

Sources said that the FBR is also preparing a rationale behind the study on the black economy. Black economy is defined as “the sum total of all incomes remaining untaxed amount in the hands of economic persons minus the genuinely legislated exemptions and the non-taxable transfers of a given accounting period.” A lot of research has already been conducted in the area of black economy. Gutmann was the first economist to ignite debate in this area of covert economics and public policy by developing the first sophisticated monetary approach called ‘Currency Ratio Method’ (CRM), to measure the quantum of black economy in theUSin 1976. Vito Tanzi contributed to the research by refining Gutmann’s methodology, which is now known as the ‘Modified Currency Ratio Method’ (MCRM). Feige deviated from the established monetary approach to estimating the size of the black economy, and develop an alternative method known as “Transactions Method” (TM).

A substantial amount of research onPakistanwith reference to black economy has already taken place. However, all the four studies that have been conducted to-date to translate the black economy ofPakistanin to empirical measurements are purely academic in approach and methodology. However, keeping in view the size of the black economy which a few of the studies have suspected to be running around 100 % of the GDP, warrants that Government itself should officially define, set its parameters, chisel out the measurement methodology, and come out with results that are reliable and accurate so as to be able to fine-tune the fiscal policy in a more informed manner. For this purpose a consultancy study is required to be launched on the black economy, sources added.