expenditure by usmanjee123


									                             Annexure - 2.

                            TAX EXPENDITURE

A Note on Tax Expenditure

Tax expenditures are provisions in the tax code, such are exclusions, deductions, credits, and deferrals that are
designed to encourage certain kinds of activities or to aid taxpayers in special circumstances. When such provisions
are enacted into the tax code, they reduce the amount of tax revenues that may be collected. In this sense, the fiscal
effects of tax expenditure are just like those of direct government expenditure. Some tax expenditures involve a
permanent loss of revenue, and thus are comparable to a payment by the government; others cause a deferral of
revenue to the future, and thus are comparable to an interest-free loan to the taxpayer. Tax expenditures include
exemptions from the tax base, allowances deducted from gross income, tax credits deducted from tax liability, tax
rate reductions, and tax deferrals (such as accelerated depreciation). Since tax expenditures are designed to
accomplish certain public goals that otherwise might be met through direct expenditures, it seems reasonable to
apply to tax expenditures the same kind of analysis and review that the budget appropriation receives.
It is essential to distinguish between those provisions of the tax code that represent tax expenditures and those that
are part of the “basic structure” of a given tax. The basic structure is the set of rules that defines the tax; tax
expenditure is an exception to those rules. In general, most taxes have a series of features that define their basic
structure. These features are a base on which the tax is levied, such as net income or a particular class of
transactions; a taxable unit, such as a person or a corporation; a rate, to be applied to the base; a definition of the
geographic limits of the state’s exercise of its tax jurisdiction; and provisions for the administration of the tax.
The total expenditures for FY 2005-06 has been estimated to be around 24.9 billion, which is about 12% lower than
the previous year mainly due to withdrawal of exemption/ concessions by providing level playing field both to the
national and foreign investors/manufacturers. The details for the FY 2005-06 are discussed below:

Income Tax

Section 53 of the Income Tax Ordinance, 2001 empowers the Federal Government to exempt from tax any income or
classes of income, or persons. However, these powers are not being exercised by the Government as it is following
a conscious policy of phasing out the existing exemptions gradually and not to allow fresh ones. Categories of
exemption listed in Part-I of Second Schedule to the Income Tax Ordinance, 2001 are broadly as under:-
   i)    Exemption related to pensions, provident funds and superannuation fund;
  ii)    Exemption of interest on borrowings from external sources;
  iii)   Exemption to non-profit charitable, religious and welfare activities;
  iv)    Exemption to non-profit educational institutions;
  v)     Exemption relating to electric power generation; and
  vi)    Un-expired period to tax holidays for industrial undertaking.

Economic Survey 2005-06

The total number of exemptions under the aforesaid categories contained in Part-I of Second Schedule to the Ordinance
2001 is 100. The cost of these exemptions amounts to Rs.4.65 billion. It may be noted that exemption expenditure mainly
relates to allowances, capital gains, pensions, provident fund and superannuation fund. Furthermore, 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. The following is the estimated cost of
exemptions in fiscal year, 2005-06 as compared to fiscal year 2004-05:-

Table 1: Income Tax Expenditure                                                                           (Rs. in billion)
                                                                                          Estimated Revenue Loss
No.       Major Income Tax Expenditure Items
                                                                                        2005-06            2004-05
1.        Pensions                                                                        0.70               0.70
2.        Allowances                                                                      1.15               1.10
3.        Income from funds (e.g.NIT units)                                               0.60               0.60
4.        NSS interest income                                                             0.45               0.50
5.        Other interest income                                                           0.05               0.05
6.        Capital gains                                                                   0.95               0.95
7.        Sector and enterprise specific exemptions                                       0.75               0.70
          TOTAL:                                                                          4.65               4.60

Sales Tax
Key exemptions of Sales Tax are agricultural produce, pharmaceutical products, pulses and information technology
related items. The cost of Sales Tax exemptions is estimated to be Rs.8.65 billion for the fiscal year 2005-06, against
Rs.7.85 billion last year. The Following are the main exemptions in Sales Tax allowable in fiscal year 2005-06
compared to fiscal year 2004-05 [Table 2].

Table 2: Sales Tax Expenditure                                                                            (Rs. in billion)
                                                                                            Estimated Revenue Loss
No.       Major Sales Tax Expenditure Items
                                                                                           2005-06          2004-05
1.        Retailers (including those in turnover scheme)                                       0                0
2.        Pharmaceutical (excluding life saving drugs)                                       4.80             4.60
3.        Tractors and other agriculture machinery.                                          1.75             1.75
4.        Fertilizers                                                                         2.0             0.69
5.        Others (e.g. agri seeds, cattle feed)                                              0.10             0.10
          TOTAL:                                                                             8.65             7.85

Federal Excise

The major exemption in federal excise is data communication including the Internet services. There are few other
conditional excise exemptions mostly related to supplies of excisable products such as tobacco, POL products
supplied to the Armed Forces and UN agencies. The cost of excise exemption is around Rs.400 million.


Customs exemptions are mainly given on raw materials and components; plant, machinery and equipment imported
by high-tech, priority and value added industries; imports for energy sector projects; and exemptions to exploration
and production companies. Some of these exemptions are due to international contractual obligations. The following
is the break-up of main exemptions in customs duties allowable in fiscal year 2005-06 compared to fiscal year
2004-05 [Table 3].

                                                                                                              Tax Expenditure

Table 3: Exemptions in Customs Duties                                                                         (Rs. in Million)
                                                                                                       Estimated Revenue
S.No               SRO No. & Date                                   Description                                Loss
                                                                                                      2005-06      2004-05
                                                  Exemption of customs duty on machinery and
1.     438(I)/2001, dated 18.6.2001                                                                       0            158
                                                  equipment and construction materials.
                                                  Concession of customs duty for import of plant,
       439(I)/2001, dated 18.6.2001
                                                  machinery and equipment by the manufacturing
2.     Superseded by 455(I)/2004,                                                                         5           1,976
                                                  industry, tourism related projects, hotels and
       Dated 12-06-2004
                                                  relocated industrial plants.
       357(I)/2002, dated 15.6.2002               Conditional concession of customs duty on
3.     Superseded by 456(I)/2004,                 import of raw materials and components etc, for       2830           989
       Dated 12-06-2004                           manufacture of certain goods (Survey based)
       358(I)/2002, dated 15.6.2002
                                                  General and conditional concession of customs
4.     Superseded by 457(I)/2004,                                                                       3778          7,429
                                                  duty (non survey)
       Dated 12-06-2004
                                                  Concession of customs duty on goods imported
5.     558(I)/2004, dated 15.6.2004                                                                      217           222
                                                  from SAARC and ECO countries.
                                                  Concession of customs duty and sales tax to
6.     678(I)/2004, dated 12.6.2004               Exploration and Production (E&P) companies            1380          1,019
                                                  on import of machinery.
7.     46(I)/2005, dated 11.01.2005               Duty Free Import of Sugar                              0            591
                                                                                        Total :         8210         12,384
Following is the consolidated summary of tax expenditures showing percentage increase/decrease for the fiscal year
2005-06 compared to FY 2004-05 [Table-4]

                        Table 4: Summary of Tax Expenditures             (Rs. in billion)
                                                      Cost of Exemptions
                        Type of Tax                                                 % Change
                                                   2005-06         2004-05
                        1. Income Tax                4.65            4.60               1.1
                        2. Sales Tax                 8.65             7.85             10.7
                        3. Customs Duties            8.21            12.40             -33.8
                        4. Central Excise            0.40            0.02              100.0
                            Total                   21.91            24.87              11.9

A summary of the projected major tax expenditure items for the fiscal year 2005-06 is as under [Table 5]
                     Table 5: Summary of Major Tax Expenditures for 2005-06
                                                                                   (Rs. in billion)
                                                                               Estimated Revenue
                                  Major Tax expenditure items
                                                                                  Loss 2005-06
                     1. General Conditional exemption                                  6.2
                     2. Pharmaceutical (excluding life saving drugs)                  4.80
                     3. Import of Machinery, equipment materials etc.                  0.5
                     4. Tractors and other agriculture machinery                      1.75
                     5. Allowances                                                    1.15
                     6. Capital Gains                                                 0.95
                     7. Pensions                                                      0.70
                     8. Sector and Enterprise Specific Exemptions                     0.75
                     9. Fertilizers                                                   2.00
                        Total                                                         18.80


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