Tax Exemptions Cost Pakistan Rs3.8 Trillion in 2023-24

In the fiscal year 2023-24, Pakistan's tax exemptions have reached a staggering cost of Rs3.8 trillion, as reported by the Federal Board of Revenue (FBR). This significant figure highlights the ongoing challenges the country faces in balancing its budget and ensuring adequate revenue generation. Tax exemptions are financial benefits that allow certain individuals or businesses to pay less tax or no tax at all. These exemptions can include various forms of exclusions, deductions, deferrals, credits, and reduced tax rates, all aimed at supporting specific activities or groups of taxpayers.

The FBR's report for the tax year 2024 provides a comprehensive breakdown of these exemptions, revealing their substantial impact on government revenue. Total federal tax expenditures amounted to Rs3,879.20 billion, which constitutes 54.15% of the FBR's total tax collection. This is a notable increase from the previous fiscal year's figure of 36.43%. Furthermore, this expenditure represents 4.61% of Pakistan's Gross Domestic Product (GDP), up from 3.36% the prior year, indicating a growing reliance on tax exemptions.

Among the various types of tax expenditures, income tax exemptions accounted for Rs476.96 billion, which is 6.66% of the FBR's collection and 12.30% of total tax expenditures. However, the most significant portion came from sales tax exemptions, totaling Rs2,858.72 billion. This figure represents 39.91% of the FBR's collection and a staggering 73.69% of the total exemptions. Customs duty exemptions also played a role, contributing Rs543.52 billion, or 7.59% of the FBR's collection.

Interestingly, the Tax-to-GDP ratio has seen a drastic decrease, falling from 9.22% in 2021-22 to 8.77% during 2023-24. This decline raises concerns about the sustainability of the country's fiscal policies. Additionally, the FBR reported a 21.5% drop in income tax collected through Collection on Demand (CoD) efforts during the fiscal year 2023-24, with CoD revenue totaling Rs127 billion, down from Rs162 billion in the previous year.

On a more positive note, advance tax collection saw a significant increase of 57%, rising to Rs1,530 billion from Rs975 billion in 2022-23. Payments submitted with annual income tax returns also rose by 35.8%, reaching Rs162 billion in 2023-24. The report attributes the increase in tax expenditures to several factors, including zero-rating sales tax on specific petroleum products, export relief measures, and economic stabilization policies.

The findings from the FBR's report underscore the complexities of Pakistan's tax system and the need for a balanced approach to taxation. While tax exemptions can stimulate certain sectors of the economy, they also pose significant challenges to revenue generation. As the government navigates these fiscal waters, it is crucial to strike a balance that fosters economic growth while ensuring that the country can meet its financial obligations. The ongoing dialogue around tax policy will be vital in shaping a sustainable economic future for Pakistan.