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CBR reviewing tax exemptions distorting trade

ISLAMABAD (December 08 2005): The Central Board of Revenue (CBR) has started reviewing tax exemptions, which are creating trade distortions, for abolishing the same in budget 2006-07.

The CBR suffered a loss of Rs 24.851 billion in lieu of tax exemptions given to various sectors during 2004-05 against Rs 19.802 billion in 2003-04, reflecting an increase of 25.5 percent.

Official sources told Business Recorder on Wednesday that the CBR has started analysing income tax, sales tax and customs exemptions to propose amendments in the Sales Tax Act, 1990, Income Tax Ordinance 2001 and concessionary notifications of customs. The exercise is basically aimed at identifying those exemptions and concessions due to which the level playing field is not provided to all players within the same industry/sector. For example, if a specific item is exempted from sales tax and customs duty at the import stage, but is liable to sales tax on the local supply, it creates distortion in the taxation system within the same industry.

In the past, various irrelevant exemptions were withdrawn. Income tax exemptions having no significance were taken away in past budgets.

Sources said that the CBR Members of Customs, Sales Tax and Income Tax would submit the names of the proposed exemption to be withdrawn from next financial year as a result of ongoing exercise.

On the other hand, tax experts said that exemptions which create inequity in the society by giving concessions to a specific class of persons or specific sector needed to be taken away as such exemptions create distortions in the society.

The cost of sales tax exemption was Rs 7.850 billion in 2004-05 against Rs 9.250 billion in 2003-04; income tax, Rs 4.600 billion against Rs 6.150 billion; customs duty Rs 12.38 billion against Rs 4.400 billion and the cost of exemption of central excise was Rs 0.021 billion in 2004-05 against Rs 0.002 billion in 2003-04.

During 2004-05, the exemption to pharmaceutical industry caused a loss of Rs 4.60 billion; whereas general conditional exemption was Rs 7.429 billion. On tractors and other agriculture machinery Rs 1.75 billion; on import of machinery and equipment Rs 1.976 billion; on allowances Rs 1.10 billion; on capital gains, Rs 0.95 billion; on pension, Rs 0.70 billion; on sector and enterprise specific exemptions, Rs 0.70 billion and estimated revenue loss due to exemptions to the fertilisers has caused a loss of Rs 0.69 billion.

Seven customs SROs caused a loss of Rs 12,384 million in 2004-2005 against Rs 4,397 million in 2003-2004.

The income tax exemption to pensions resulted in loss of Rs 0.70 billion in 2004-05; allowances, Rs 1.10 billion; income from fund (NIT Units), Rs 0.60 billion; NSS interest income, Rs 0.50 billion; other income interest, Rs 0.05 billion; capital gains, Rs 0.95 billion and sector and enterprise specific exemption caused a loss of Rs 0.70 billion.

Key sales tax exemptions were on food items (wheat, grain, pulses, and edible oils excluding palm oil and soybean oil). In addition to food items, the exemptions also apply to phosphatic fertiliser, information technology equipment, and pharmaceutical products. As per international practices, the bulk of such items cannot be taxed. The cost of sales tax exemption was Rs 7.85 billion for 2004-2005 against Rs 9.25 billion for 2003-04.

On the income tax side, the exemption expenditure mainly relates to allowances, capital gains, pensions, provident funds and superannuation funds. Moreover, exemptions related to charitable activities and non-profit educational institutes are common in both developed and developing countries. The position with regard to the basic threshold of income for charging taxes is similar.

Tax expenditure on account of central excise is minimal compared to other taxes being administered by the CBR. The cost of CED exemptions in 2004-2005 is around Rs 19.5 million. This exemption was granted to the Agha Khan Development Network for the Agha Khan Hospital and Medical College, Karachi on the purchase of cement for the construction of the oncology block and laboratory building.

Customs exemptions are mainly given on raw materials and components; plant, machinery and equipment imported by the high-tech sector, priority and value added industries; imports for energy sector projects; exploration and production companies. Some of these exemptions are due to international contractual obligations.

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