Tax expenditure reports, often overlooked in public discourse, shed light on a critical fiscal reality: the substantial revenue governments forgo through exemptions, deductions, and concessions. In Pakistan, these “hidden budgets” amounted to an estimated Rs. 650 billion in FY2022–23—equivalent to 1.5% of GDP—undermining efforts to broaden the tax base and fund essential services. While designed to stimulate sectors like agriculture, exports, and SMEs, poorly targeted tax expenditures often distort markets, benefit elites, and exacerbate fiscal deficits. As Pakistan navigates a debt crisis with tax revenues covering just 54% of expenditures, understanding and reforming these concessions is pivotal to sustainable fiscal health.
The Anatomy of Tax Expenditures
Tax expenditures encompass deviations from standard tax regimes, including:
- Exemptions: Agriculture income (taxed at <1% of potential).
- Reduced Rates: 1% turnover tax for traders vs. 29% corporate rate.
- Deferrals: Tax holidays for CPEC SEZs (5–10 years).
Major Tax Expenditures in Pakistan (FY2022–23)
| Category | Revenue Foregone (Rs. Billion) | Key Beneficiaries |
|---|---|---|
| Agriculture Income Tax | 150 | Landowners (>50 acres) |
| Export Sector Concessions | 120 | Textile mills, IT firms |
| Corporate Tax Breaks | 200 | Real estate, power producers |
| Sales Tax Exemptions | 180 | Pharmaceuticals, fertilizers |
Implications: Fiscal Leakages and Distortions
- Revenue Erosion: Foregone taxes could cover 45% of Pakistan’s PSDP (Rs. 1,450 billion in FY2023).
- Inequity: 65% of corporate tax breaks benefit the top 5% of firms by revenue.
- Market Distortions: Preferential rates for traders (1%) vs. manufacturers (29%) discourage industrialization.
A 2023 World Bank study found Pakistan’s tax incentives yield just Rs. 0.80 in economic activity per Rs. 1 foregone—compared to Rs. 2.10 for direct infrastructure spending.
Reforming the Framework: Precision Over Populism
To curb abuses and enhance efficacy, policymakers propose:
- Sunset Clauses: Automatically expire exemptions after 3–5 years unless reapproved by parliament.
- Beneficiary Disclosure: Mandate public listings of firms/individuals claiming large concessions.
- Cost-Benefit Audits: Evaluate each expenditure’s ROI, as done for Malaysia’s export rebates.
Progress & Resistance:
- Success: The 2021 phase-out of GST exemptions on textiles netted Rs. 40 billion annually.
- Setbacks: Attempts to tax retailers via a simplified scheme failed due to street protests in 2023.
The Path to Transparency and Equity
Pakistan’s first Tax Expenditure Report (2020) marked a transparency milestone, but irregular updates and vague methodologies limit utility. Adopting global standards—like India’s annual, sector-specific reports—could enhance accountability. Simultaneously, redirecting saved revenues toward high-impact areas (e.g., stunting reduction, currently funded at Rs. 50 billion vs. Rs. 350 billion needed) would demonstrate the human cost of status quo.
Tax expenditures, when misused, function as shadow budgets favoring the influential. For Pakistan, rationalizing these concessions isn’t just fiscal prudence—it’s a moral imperative to rebalance equity and growth.
This article was published on PublicFinance.pk.
