The Concessions and Waivers, also called the tax expenditure cost the government over 2 trillion rupees in a single fiscal year 2023-24
This amount is more than what is spent on education, development, and health combined in some cases.
Ayesha Tabassum
We are often concerned with defense spending, development spending and all those that are visible to us. But what if I tell you that there are uncollected Tax Revenues that are termed Tax Expenditure, that decreases our tax revenue significantly. Tax Expenditure refers to tax that is not collected by firms, industries or could be any other entity as a sign to subsidize those entities, or to provide them with relief in difficult situations. For example, the government provides tax cuts to the agricultural sector to promote agricultural activities in the country. Now the question arises, are tax expenditure and subsidy two different phenomena?
The answer to this question is yes, and the key difference lies in tax expenditure’s invisibility in the budget. While subsidies are mentioned in the budget, Tax expenditures are not shown in the budget, even though it affects the tax revenue. There are further types of tax expenditures, through which the policy makers give tax holidays to certain sectors.
Tax Concessions, which refer to tax cuts given to specific sectors for their economic promotion. Like the government lowers the tax on importers of certain goods. Similarly, the textile industry enjoys various tax concessions, with a purpose to encourage export of textiles.
Read: Exemptions hit record as tax revenue falls short
Tax Waivers are short term or situation-based tax reliefs granted to taxpayers in difficult circumstances, such as during natural disasters, economic crises, and during other tough times. These can include partial or full cancellation of outstanding tax during mishaps but can be misused if not kept under observation.
The combined effect of Tax Concessions and waivers can be enormous, as according to some reports, Pakistan forgoes hundreds of billions of Rupees through tax expenditures. The economic survey reported that in fiscal year 2023-24, the tax expenditure cost the government over 2 trillion rupees in a single fiscal year, which is more than what is spent on education, development, and health combined in some cases.
Another major concern associated with this is equity. Despite the policy makers aiming to stimulate the economy, some of the large groups and corporations’ benefit from tax waivers. For example, tax amnesty schemes — a form of waiver — often reward those who have evaded taxes for years. Similarly, concessions to large export houses may crowd out smaller businesses resulting in more inequity.
Fiscal inefficiency is another problem. The tax cuts and reliefs continue to be applied to taxpayers even after the purpose is achieved. This is because such policies are not easy to roll back due to certain issues.
With these problems ahead, quick reforms are needed. First and foremost, tax expenditures must be added in the budget for transparency and clearly show which sectors are enjoying the perks. Secondly, the tax expenditure must come with clear clauses, where it should be stated that if a sector fails to deliver the objectives, the tax expenditures would be lifted as soon as possible.
To conclude, I would say that tax expenditures in the form of concessions and waivers are useful fiscal tools to promote investment and boost economic activity. Also, they prove helpful for the taxpayers in hard times. But, keeping it transparent reduces the chances of it getting exploited and misused. If ignored, it can become a huge fiscal burden, eroding the revenue significantly. For a country like Pakistan, having little fiscal space, bringing hidden fiscal costs under the light can improve the situation a lot!
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Ayesha Tabassum is student of School of Economics, Quaid-e-Azam University Islamabad
