Anatomy Of “Tax Expenditure”

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We don’t do charity in Germany. We pay taxes. Charity is a failure of governments’ responsibilitiesHenning When, a German stand-up comedian

In Pakistan, the successive governments have always been very keen to enhance tax revenues, especially collection by Federal Board of Revenue (FBR), but never talk about the real problem that is huge tax expenditure and monstrous size of unproductive expenses. In case these two are reduced even by 30%, Pakistan can substantially decrease fiscal deficit—nearly 40-50%. 

The enormous cost of unprecedented tax-free perquisites and benefits available to high-ranking state functionaries cost loss of billions of rupees to the national exchequer. Tax exemptions and concessions of Rs. 120 billion were given to the top civil and military officers and judges of superior courts on perks and benefits in the tax year 2023 as revealed in Annexure II [Tax Expenditure Report-2024] of the Pakistan Economic Survey 2023-24, released on June 11, 2024. In the face of a bitter reality of total tax expenditure of Rs. 3879.202 billion in tax year 2023, we keep on hearing from our economic that the government is cutting “unproductive” expenses and withdrawing tax concessions to improve fiscal management

The FBR in ‘Executive Summary’ of Tax Expenditure Report 2022 [“the report”] says: 

Tax expenditure is basically the tax revenue that is forgone due to specific provisions of tax laws relating to exemptions, exclusions, preferential rates, tax credits, deferral of tax etc. It is identified and measured against a benchmark system that accounts for tax revenues receivable in the normal course. This report uses the standard “Revenue Forgone” methodology to estimate the tax expenditure under the Income Tax, Sales Tax and Customs Duty laws in Pakistan”. 

The report reveals that out of total tax expenditure of Rs. 1482 billion in tax year 2022 [31.2 % of total collection in fiscal year (FY) 2022], sales tax was the highest at Rs. 740 billion (49.9% of total expenditure and 1.3% of GDP). The income tax was Rs. 400 billion (27% of total expenditure and 0.7% of GDP). Customs was Rs. 343 billion (23.1% of total expenditure and 0.6% of GDP).

According to FBR’s Tax Expenditure Report 2021, total tax expenditure in FY 2020-21 (tax year 2021) was Rs. 1315 billion. Out of it, sales tax was the highest at Rs. 578 billion (44% of the total), followed by income tax at Rs. 448 billion (34%), and customs was Rs. 288 billion (22%). Tax expenditure in FY 2021 was about 33% of total tax collection of FBR. It was 3.2 of GDP.

Tax Expenditure Report 2020 issued by FBR showed for FY 2020, total tax expenditure of Rs. 1150 billion (30% of total collection and 3% of GDP). Out of it, sales tax was Rs. 519 billion (45% of the total), income tax Rs. 378 billion (33%), and customs at Rs. 253 billion (22%). 

Somebody has rightly raised a vital issue: “Why debate on tax target and collection alone in media and elsewhere, and not mention tax forgone of the rich and mighty enjoying facilities of resorts, golf clubs, rest houses, palatial bungalows and other unprecedented perks and benefits etc.? 

‘Tax expenditure” is defined by Atshuler and Dietz in a study [‘Tax Expenditure Estimation and Reporting: A Critical Review, Rutgers University, New Brunswick/Piscataway, Department of Economics] as “revenue losses attributed to tax laws which provide for a special exclusion, exemption, deduction, tax credit, preferential rate of tax or a deferral of tax liability”.

Dr. Hafiz A. Pasha and Aisha Ghaus in a study [The Future Path of Tax Reforms in Pakistan], conducted way back in 2013 showed that total tax expenditure was at Rs.560 billion that was “contributing to around 30-40% of fiscal deficit each year”. This trend continued as one brilliant journalist covering economy noted

Cumulatively, the PTI government has given Rs. 2.12 trillion in tax exemptions during its first two years in power—an amount that is sufficient to build two Mainline One (ML-I) projects of the China-Pakistan Economic Corridor (CPEC). The estimated cost of the ML-1 project is Rs1.1 trillion or $7.2 billion and the government has given Rs2.2 trillion in tax concessions”.

It is pertinent to mention that in fiscal year 2018-19, fiscal deficit was 8.9% of GDP (Rs. 3.45 trillion) and for fiscal year 2019-20, it was  8.1% of GDP (Rs. 3.37 trillion). Had tax expenditure been curtailed by 50% (Rs 500 billion) and wasteful expenses at 40% (Rs. 400 billion), the fiscal deficit of GDP for both the years would have been around 6% of GDP. It was 6.5% in fiscal year 2017-18.

The coalition government of Pakistan Tehreek-i-Insaf (PTI) burdened millions below the taxable limit with oppressive and exorbitant taxes. The details of tax expenditure for tax year 2019 present some startling facts: 

  • total cost of exemption on perquisites, benefits and allowances received by judges of Supreme Court of Pakistan and High Court was at Rs. 283 million. Value of tax-free superior judicial allowance was at Rs. 526.507 million for in-service judges and for the retired judges it was Rs. 605.280 million.
  • total amount of tax-free pension was Rs. 276.4 billion across Pakistan [the highest was of Punjab at Rs. 87.39 billion or 31.6% of the total, followed by military Rs. 81.17 billion (29.36%), Sindh Rs. 56.56 billion (20.4%), Khyber Pakhtunkhwa Rs. 22.71 billion (8.2%), federal government Rs. 11.18 billion (4.04%), Balochistan Rs. 9.17billlion (3.31%), Pakistan Railways Rs. 6.74 billion (2.43%) and Pakistan Post Rs. 1.47billion (0.53%)]. The tax cost on civilian pension is Rs. 9.2 billion and for military Rs. 4.5 billion.
  • details regarding payments of tax-free commutation pension show that early retirement payment was higher in the military compared to civilian institutions. The highest payment of commutation was made in the military at Rs. 54.6 billion or 32.7%, followed by Punjab at Rs. 33.9 billion (20.3%), Sindh at Rs. 30.7 billion (18.4%), Khyber Pakhtunkhwa at Rs. 19.8 billion (11.89%), Balochistan Rs. 8.8 billion (5.28%), federal government at Rs. 13 billion (7.8%), Pakistan Railways at Rs. 3.8 billion (2.4%) and Pakistan Post Rs.1.7 billion (1.02%). Tax concessions on the payment of commutation pension were around Rs. 16.65 billion. 
  • relief of Rs 270 million for Lahore University of Management Sciences (LUMS) and Rs. 680 million to Shaukat Khanum Memorial Trust Lahore. 
  • The federal government wrote off Rs. 90 billion worth of income tax in favour of charitable organisations benefitting the rich people who donated money in charity and institutions engaged in commercial activities in the name of philanthropy.  
  • Rs. 64.2 billion worth of income tax was forgone for just 37 enterprises including the State Bank of Pakistan. 
  • Out of the 44 entities listed to receive tax-free donations, about half of these received donations and the government waived Rs. 4.6 billion in favour of their donors. 
  • The Supreme Court of Pakistan’s Diamer-Bhasha and Mohmand Dam donations cost Rs. 2.13 billion in income tax. 
  • Donations to Al-Akhuwat cost Rs134 million of tax loss to the exchequer. 
  • Out of total General Sales Tax (GST) exemptions, 255.8 billion were given to industries on imports. Rs. 54.8 billion on local supplies, Rs. 13.6 billion on products which were protected under Fifth Schedule of the Sales Tax Act, 1990 [“the Act”]. This Schedule relates to the zero-rated items. Rs. 82.7 billion exemptions given under Eighth Schedule of the Act, which allows imposition of lower than standard 17% sales tax. Rs. 53 billion relief was given by reducing GST rates under the Act and Rs. 23.1 billion to low GST rates on mobile phones sales.
  • The cost of customs duty expenditure was Rs. 253.1 billion against Rs. 233 billion in the previous year (8.5% increase). Maximum losses of Rs. 95.4 billion were booked on account of concessions to automobile sectors, oil and gas exploration sectors and China Pakistan Economic Corridor (CPEC). Rs. 88 billion concessions under Fifth Schedule of the Customs Act, 1969 that deals with exemptions. Rs. 45 billion exemptions were on account of low rates applicable to various bilateral free trade agreements and Rs. 10.6 billion concessions for certain items contained under Chapter 99 of the Customs Act. Rs. 4.8 billion exemptions was related to additional custom duties and Rs. 9.4 billion in respect of regulatory duty.

The claim of exceeding target by FBR for fiscal year 2019-20 and celebrated as great success by the PTI Government was later exposed as refunds of Rs. 710 billion were admittedly outstanding. If from collection of Rs. 3.9 trillion, this amount was deducted, the actual collection came to Rs. 3.2 trillion (7.9% of GDP).

Instead of blaming FBR’s officials alone for inefficiency, the successive governments must admit lack of will to reduce exemptions, concessions, waivers and amnesties to powerful segments of society. If only 40% of taxes waived/forgone in fiscal year 2019-20 were recouped in Finance Act 2020, there would have been a fiscal space of Rs. 600 billion to reduce taxes. 

The PTI Government, like its predecessors, showed apathy towards the weaker sections of society and small and medium enterprises (SMEs), facing the unbearable toll of Covid-19 outbreak/lockdown, by not reducing exorbitant sales tax, withholding taxes, advance tax, and high cost of utilities as well as oppressive 12.5% advance income tax from mobile users, no matter whatever their quantum of income. 

The total number of cellular subscribers as on July 31, 2020 was 167 million that include 81 million 3G/4G subscribers and 83 million broadband subscribers. They all were also paying 19.5% sales tax on services to provinces and 17% federal excise duty, if based in Islamabad Capital Territory (ICT). 

The total SIMs (subscriber identity module) issued till April 31, 2024 were 192 million (79.55 mobile teledensity), but many individuals have multiple SIMs. It is pertinent to mention that only 2,975,194 filed tax returns for tax year 2023 as per Active Taxpayers’ List (ATL) as on June 10, 2024 though at least 120 million unique mobile users, both prepaid and postpaid, paid 15% as advance adjustable income tax. How many of these mobile users have taxable income? The Federal Board of Revenue (FBR) has never bothered to find out.  

Say 100 million have no income or income below taxable limit, yet they are paying 15% advance income tax. Out of twenty million having taxable income, not less than 3 million are ultra-rich—they are either not filing tax returns or showing much lower income than what they actually earn. This is evident from the fact that one million persons possess sprawling bungalows, two million expensive cars and about 600,000 go for holidays to attractive places every year

In another report, it is highlighted:

  • “The federal government has written off Rs. 90 billion worth of income tax in the current fiscal year in favour of charitable organisations, rich people who donated money in charity and institutions engaged in commercial activities in the name of philanthropy.  
  • The Rs. 90-billion income tax exemption in favour of a handful of organisations is more than the Rs. 70 billion that the PTI government has allocated in the federal development programme to fight the Covid-19 pandemic across the country.
  • The official data showed that Rs. 21.2 billion had been waived in favour of non-profit organisations. Another Rs. 4.6 billion was waived in favour of people who gave donations to various charitable organisations and Rs. 64.2 billion worth of income tax was exempted for just 37 enterprises including the State Bank of Pakistan (SBP). 
  • A debate has begun after the government proposed to completely exempt the income of Lahore University of Management Sciences (LUMS)—a leading and credible educational institution in Pakistan—from taxes. Earlier, LUMS was getting conditional income tax credit under Section 100C of the Income Tax Ordinance, 2001. 
  • The official record of the Federal Board of Revenue (FBR) showed that the income tax credit and exemption from total income tax payments was given under section 100C that deals with non-profit organisations, section 61 (tax exemption on charity) and section 66 (income tax exemption for certain institutions) but now the government has brought it under clause (66), Part I of the Second Schedule to Income Tax Ordinance where it has been given complete immunity. 
  • Under clause (66), Part I of the Second Schedule of the Income Tax Ordinance, the income of about 67 entities has been exempted from income tax. Out of these, 37 availed cumulative income tax exemption of Rs. 64.2 billion in the outgoing fiscal year, showed the official documents. Some of these entities, like Abdul Sattar Edhi Foundation and Shaukat Khanum Memorial Hospital, are serving the humanity and deserve tax exemptions. However, there are many entities that are in the list because of their connections to the top offices and FBR headquarters.
  • The SBP got the maximum Rs. 50.2 billion in income tax exemption and the Water and Power Development Authority got Rs. 8.4 billion in tax exemption. The Abdul Sattar Edhi Foundation, Karachi availed Rs. 689 million in income tax exemption and Bilquis Edhi Foundation, Karachi got Rs. 395 million worth of exemption. 
  • The Pakistan Engineering Council, a commercial entity, got Rs.184 million worth of income tax exemption. The Institution of Engineers Pakistan, Lahore also availed Rs. 11 million worth of exemption. The Liaquat National Hospital Association, Karachi got Rs. 224 million in income tax exemption. The Sindh Institute of Urology and Transplantation, SIUT Trust and Society for the Welfare of SIUT, which is serving the humanity, got Rs. 840 million in income tax exemption. 
  • Pakistan Poverty Alleviation Fund got Rs. 312 million worth of income tax exemption, but it is a commercial entity. 
  • The National Rural Support Programme, another commercial entity, got Rs. 510 million in income tax exemption. Saylani Welfare International Trust got Rs. 34 million exemption, Layton Rahmatullah Benevolent Trust secured Rs. 47-million income tax exemption, Kidney Centre Post Graduate Training Institute got Rs. 75 million exemption, Forman Christian College Rs. 30 million, Habib University Foundation Rs. 25 million, Begum Akhtar Rukhsana Memorial Trust Hospital Rs21 million, Al-Khidmat Foundation Rs. 18 million, Dawat-e-Islami Trust Rs. 512 million and Akhuwat Rs. 148 million. 
  • Out of the 44 entities listed to receive tax-free donations, about half of these received donations and the government waived Rs. 4.6 billion in favour of their donors, according to FBR’s working. 
  • The Supreme Court of Pakistan Diamer-Bhasha and Mohmand Dam donations cost Rs. 2.13 billion in income tax. 
  • Donations to Al-Akhuwat cost Rs134 million worth of tax loss to the exchequer. 
  • The cost of donations to Layton Rahmatullah Benevolent Trust (LRBT) was Rs227 million. Similarly, FBR waived Rs. 13 million on donations to Sindh Institute of Urology and Transplantation, Rs. 41 million on donations to Aziz Tabba Foundation and Rs. 23 million on donations to Al-Shifa Trust Eye Hospital. The Indus Hospital, Karachi donations’ cost was Rs. 186 million, donations to Shaukat Khanum Memorial Trust, Lahore caused Rs. 681 million loss and Fatimid Foundation, Karachi donations’ cost was Rs19.2 million. 
  • Out of total tax losses in the outgoing fiscal year amounting to Rs1.15 trillion and 7.8% were on account of charitable work and institutions involved in commercial activities, according to the Economic Survey 2019-20”.

Taxes are the backbone of a country’s economy as these help to meet day to day expenses for running the government’s machinery (which in our case needs rightsizing and reforms to be efficient), for developmental projects, for maintaining the profitability equilibrium of commercial enterprises to discourage monopolies and create a level playing field for all types of entrepreneurs, to enable equitable distribution of wealth so that the rich do not get richer and the poor, poorer. The generous tax exemptions, concessions, waivers and amnesties, especially to privileged ones and tax evaders/avoiders must end as these are destroying the entire fiscal system and retarding business growth/investment.  

Democratic governments are not supposed to snatch or steal from the citizens nor are they supposed to intervene in their private/commercial affairs. Governments facilitate and regulate, of course with the help of their people to improve their lot and contribute towards national prosperity by paying taxes. The idea that charity can help alleviate suffering and relieve the poor is quite preposterous since it relies on the whims and discretion of the donor. 

Take the case of micro-financing. A little amount of money is given as loan to run a very small business that barely allows a person to make his ends meet. This implies that a few hundred thousand will always remain at a marginal low level of income with hardly any chance of reaching a bigger scale. Contrary to that, setting up an industrial unit and taking on board as shareholders those very borrowers can not only enrich their lives but even those who would be associated with that concern and this would also mean better growth as well as more revenue in the form of taxes for the country.

A quote from the biography of Britain’s one time prime minister (1945-1951) Clement Attlee is quite thought provoking. He says: “Charity is a cold, grey, loveless thing. If a man wants to help the poor, he should pay his taxes gladly, not dole out money at a whim”. 

In Pakistan, while the government pleads its people to pay their taxes honestly, there is no dearth of philanthropists. As a consequence, during the periods of economic crises, our successive governments have resorted to beseeching the super-rich to donate towards a special relief funds established for this purpose. This is the height of any irresponsible government that persistently fails in performing its functions efficiently! Wryly, most of the proud donors in the past who appeared publically promising heavy amounts of money were ones who engaged expensive consultants to ‘legally’ arrange their financial matters in such a way that they were subjected to minimum possible taxes

According to Owen Jones, a Guardian columnist,Philanthropy is a dangerous substitution for progressive taxation.” Rather than adding billions to the funds of a few non-governmental organizations that could be addressing problems of a miniscule percentage of people, the government treasury needs to be filled up substantially to be used for the vast majority and more specifically during emergency situations. This would, however, mean that those who want to cultivate close relations with the men in power by making their presence conspicuous through donations would become lost in the multitude of taxpayers.

There is a need to understand that charity, despite being a noble act has limited value. We may have been indoctrinated to believe that by giving alms we will earn a high place in heaven but this must come after absolving ourselves of our national duty. The former cannot take precedence over the latter. 

A dishonest citizen who cheats the authorities but doles out large sums of money in charity cannot be forgiven in the same way as the government that fails to efficiently utilize taxes paid by the honest. 

Time and again, people justify tax evasion as a means to avoid enriching a corrupt and incompetent government taking the plea that what authorities cannot do, they could do in the name of charity. This mindset has to change! 

Empower the government, to such a degree that it is able to reach every nook and cranny of the country and ably fulfill its obligations to the people. Make the government transparent and responsible through participatory democracy [known in political economy as ‘open government’]. Only this transformed attitude can turn around the destiny of any country, let alone Pakistan.

_______________________________________________________________________

Dr. Ikramul Haq, Advocate Supreme Court, specialises in constitutional, corporate, media and cyber laws, ML/CFT, IT, intellectual property, arbitration and international taxation. He holds LLD in tax laws with specialization in transfer pricing. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He served Civil Services of Pakistan from 1984 to 1996. He established Huzaima & Ikram in 1996 and is presently its chief partner as well as partner in Huzaima Ikram & Ijaz. He studied journalism, English literature and law. He is Chief Editor of TaxationHe is country editor and correspondent of International Bureau of Fiscal Documentation (IBFD) and member of International Fiscal Association (IFA). He is Visiting Faculty at Lahore University of Management Sciences (LUMS) and member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE)

He has coauthored with Huzaima Bukhari many books that include Tax Reforms in Pakistan: Historic & Critical Review, Towards Flat, Low-rate, Broad and Predictable Taxes (revised & Expanded Edition,  Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes (revised/enlarged edition of December 2020), Law & Practice of Income Tax, Law , Practice of Sales Tax, Law and Practice of Corporate Law, Law & Practice of Federal Excise, Law & Practice of Sales Tax on Services, Federal Tax Laws of Pakistan, Provincial Tax Laws, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary and Master Tax Guide, Income Tax Digest 1886-2011 (with judicial analysis)

The recent publication, coauthored with Abdul Rauf Shakoori and Huzaima Bukhari is Pakistan Tackling FATF: Challenges & Solutions 

available at:  https://www.amazon.com/dp/B08RXH8W46  and https://aacp.com.pk/

He is author of Commentary on Avoidance of Double Taxation Agreements signed by Pakistan, Pakistan: From Hash to Heroin, its sequel Pakistan: Drug-trap to Debt-trap and Practical Handbook of Income Tax. He regularly writes columns for many Pakistani newspapers and international journals and has contributed over 2500 articles on a variety of issues of public interest, printed in various journals, magazines and newspapers at home and abroad.

 

Dr. Ikramul Haq
Dr. Ikramul Haqhttp://www.thescoop.pk
Dr. Ikramul Haq, Advocate Supreme Court, specialises in constitutional, corporate, media and cyber laws, ML/CFT, IT, intellectual property, arbitration and international taxation. He holds LLD in tax laws with specialisation in transfer pricing. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He served in the Civil Services of Pakistan from 1984 to 1996. He established Huzaima & Ikram in 1996 and is presently its chief partner as well as partner in Huzaima Ikram & Ijaz. He studied journalism, English literature and law. He is Chief Editor of Taxation. He is country editor and correspondent of International Bureau of Fiscal Documentation (IBFD) and member of International Fiscal Association (IFA). He is Visiting Faculty at Lahore University of Management Sciences (LUMS) and member of Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE). He has co authored with Huzaima Bukhari many books that include Tax Reforms in Pakistan: Historic & Critical Review, Towards Flat, Low-rate, Broad and Predictable Taxes (revised & Expanded Edition, Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes (revised/enlarged edition of December 2020), Law & Practice of Income Tax, Law , Practice of Sales Tax, Law and Practice of Corporate Law, Law & Practice of Federal Excise, Law & Practice of Sales Tax on Services, Federal Tax Laws of Pakistan, Provincial Tax Laws, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary and Master Tax Guide, Income Tax Digest 1886-2011 (with judicial analysis). The recent publication, coauthored with Abdul Rauf Shakoori and Huzaima Bukhari is Pakistan Tackling FATF: Challenges & Solutions available at: https://www.amazon.com/dp/B08RXH8W46 and https://aacp.com.pk/product/pakistan-tackling-fatf-challenges-solutions/ He is author of Commentary on Avoidance of Double Taxation Agreements, Pakistan: From Hash to Heroin, its sequel Pakistan: Drug-trap to Debt-trap and Practical Handbook of Income Tax. Two books of poetry are Phull Kikkaran De (Punjabi poetry 2023) and Nai Ufaq (Urdu 1979 with Siraj Munir and Shahid Jamal). He regularly writes columns for many Pakistani newspapers and international journals and has contributed over 2500 articles on a variety of issues of public interest, printed in various journals, magazines and newspapers at home and abroad. X: (formerly Twitter): DrIkramulHaq

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