Exemptions, concessions: FBR suffers Rs 361 billion annual loss
The Federal Board of Revenue (FBR) is suffering massive revenue loss of Rs 361 billion per annum on account of estimated tax expenditure in direct taxes, ie, equivalent to 1.6 percent of the Gross Domestic Product (GDP) as a result of exemptions and concessions to various sectors.
Former Finance Minister Dr Hafiz Pasha in a document on direct tax reforms for inclusive growth revealed that the revenue collection from direct taxes after a decline of 0.4 percent in 2013-14 stood at 3.4 percent of the GDP as compared to 3.8 percent in 2007-08.
The renowned economist also disclosed that the share of direct taxes in total tax revenues is low at 35.5 percent. The total cost of direct taxes exemptions or tax expenditure amounted to Rs 361 billion per annum. The implementation of reforms in the direct taxes as proposed by Dr Pasha would raise additional revenue to the tune of Rs 200 billion.
Major estimate of tax expenditure in direct taxes revealed that the tax holiday (lifetime) to Independent Power Producers (IPPs) stood at Rs 63 billion; under-recovery of capital gains on securities and property Rs 70 billion; accelerate depreciation allowance Rs 64 billion; tax deduction on provisioning by banks, Rs 24 billion; exemption of business income of trusts and foundations, Rs 12 billion; concessionary rates Rs 34 billion; tax deduction on WWF & WPPF payments,Rs 11 billion and low rates of AIT amounted to Rs 40 billion and other tax expenditure cause revenue loss of Rs 43 billion.
While highlighting the extent of tax evasion regarding direct taxes, Dr Hafiz Pasha was of the view that according to facts and figures from latest tax directory of FBR, total number of taxpayers is 791,123 as compared to 32 million in India, as the number of taxpayers has declined since 2008-09. Out of total returns, over 40 percent filed zero returns. The share of corporate income tax is 73 percent. Top one percent of companies account for 79 percent of the CIT and top one percent of individuals for 29 percent of personal income tax (PIT).
The fuel and power companies have highest share in CIT that is 28 percent, followed by banks with 15 percent. Less than half the companies registered in the SECP actually filed returns. The data reflected high corporate tax evasion too, along with individual tax evasion. Pasha recommended reforms in direct taxes including elimination of tax expenditures; introduction of inheritance tax and taxation of foreign income of residents (citizens) in Pakistan, in countries where Pakistan has inked avoidance of double taxation agreement.
He also suggested introduction of corporate assets tax at 0.25 percent to finance cost of IDPs/floods. Under the reforms, he also recommended to move from scheduled to comprehensive income taxation. Other recommended reforms included introduction of law on transfer pricing in Income Tax Ordinance 2001 and development of capital gains tax (levy of withholding transactions tax at 0.5 percent on securities). Reforms also cover rationalisation of tax rates and schedules; reduction in rates of withholding/advance taxes of indirect nature and enforcement of section 114 of the ITO on who must file returns.
