Tax exemption costs jump to Rs5.8tr

ISLAMABAD:

In a surprising development, the government on Monday reported that the cost of tax exemptions has surged to a record Rs5.8 trillion in the current fiscal year—a surge of nearly Rs2 trillion in the first year of the present government, despite the withdrawal of many tax exemptions.

In dollar terms, the cost of tax losses was $21 billion—substantially higher than the $17 billion Pakistan is required to repay this year against its maturing commercial and bilateral external debt owed to China, Saudi Arabia, the United Arab Emirates, and Kuwait.

The Economic Survey of Pakistan 2025, unveiled by Finance Minister Muhammad Aurangzeb on Monday, revealed that despite multiple rounds of withdrawing tax concessions and exemptions, the amount has continued to rise annually. These exemptions, approved over the years, are protected under three distinct tax laws.

The survey showed that compared to the previous fiscal year’s Rs3.9 trillion tax expenditure, the figure has jumped to Rs5.84 trillion this year—reflecting an increase of Rs1.96 trillion or 51%, despite the Pakistan Muslim League-Nawaz (PML-N) government removing several exemptions in its last budget.

The reported Rs5.8 trillion in “tax expenditures for 2025” casts doubt on the credibility of previously published losses. Tax expenditure has continued to grow steadily despite efforts by successive governments to scale back or eliminate tax exemptions each year.

This indicates either the introduction of numerous hidden tax exemptions during the fiscal year or that the prior year’s figures were understated. There has been no extraordinary increase in economic activity to justify such a sharp spike in tax exemption costs.

Finance Minister Muhammad Aurangzeb did not respond when asked about the reasons behind this sudden and substantial increase to Rs5.8 trillion in tax losses.

A senior Federal Board of Revenue (FBR) official admitted that the Rs5.8 trillion figure may have been erroneously reported in the survey. He said the government plans to revise the number online by excluding the losses on account of petroleum products. The official also acknowledged that some tax losses were double-counted due to confusion over calculation methodology.

However, he added that many of these exemptions were necessary or offset by other forms of taxation. For example, while the government incurred a cost of Rs1.8 trillion in forgone sales tax on petroleum products, it recovered more than Rs1 trillion by imposing a petroleum levy of Rs78 per litre.

Sales tax

The survey reported sales tax exemptions worth Rs4.3 trillion in the outgoing fiscal year, compared to Rs2.9 trillion in the previous year—a rise of nearly 50%. In absolute terms, the cost of sales tax exemptions jumped by Rs1.4 trillion, primarily due to exemptions on petroleum products, imported goods, and local supplies.

Sales tax exemptions accounted for nearly three-quarters of total tax expenditure.

During the outgoing fiscal year, the government maintained a 0% sales tax on petroleum products while charging a fixed petroleum levy of up to Rs78 per litre on petrol and diesel. According to the survey, the government forfeited Rs1.8 trillion in sales tax on petroleum products, up from Rs1.3 trillion last year.

Additionally, Rs683 billion was lost due to exemptions on products covered under the Fifth Schedule of the Sales Tax Act—representing a phenomenal 232% increase over last year’s Rs206 billion. The Fifth Schedule pertains to zero-rated items. The International Monetary Fund (IMF) has urged Pakistan to withdraw the remaining exemptions under this category.

Sales tax exemptions granted under the Sixth Schedule cost Rs986 billion this year, up from Rs676 billion last year. These include Rs613 billion on local supplies and Rs373 billion on imports.

The loss from local supplies rose by one-third despite the government imposing an 18% sales tax on various goods, including packaged milk, in the last budget.

Exemptions provided under the Eighth Schedule—which permits lower-than-standard 18% sales tax rates—cost the government Rs618 billion, an increase of Rs259 billion or 75% over the previous year. The IMF is now asking that these reduced rates be raised to standard levels, or in cases where the rate is 5%, doubled to 10%.

Sales tax exemptions on mobile phone sales cost Rs88 billion—an increase of 166%. Exemptions from additional sales tax accounted for another Rs49 billion in losses.

Income tax

Income tax exemptions totalled Rs801 billion in the outgoing fiscal year, up 68% from Rs477 billion last year, according to the FBR’s estimates. This increase came despite the government’s decision to shift more tax burdens onto salaried individuals while sparing other blue-eyed sectors like retailers.

The government itself benefited from Rs123 billion in income tax exemptions related to its income from various entities—up 112%, or Rs58 billion, over the previous year.

Income tax exemptions on allowances rose to Rs16.5 billion—more than double the previous year’s figure. Exemptions for tax credits cost Rs101 billion—up Rs75 billion over last year.

Under the Second Schedule of the Income Tax Ordinance, Rs444 billion worth of total income exemptions were granted, reflecting a Rs150 billion or 51% increase. The IMF is now pressuring the government to reconsider these exemptions.

Reductions in tax liabilities cost Rs65 billion—substantially more than the previous year. Another Rs52 billion was lost due to exemptions from “specific provisions”.

Customs duty

Customs duty exemptions increased to Rs786 billion this fiscal year—up Rs243 billion or 45% from Rs543 billion last year, the survey showed.

The government lost Rs133 billion in customs duties due to concessions granted to the automobile sector, oil and gas exploration industry, and China-Pakistan Economic Corridor (CPEC) projects.

Exemptions under the Fifth Schedule of the Customs Act—covering goods entirely exempted from customs duties—cost Rs380 billion, an increase of Rs189 billion over the prior year.

The cost of import-related exemptions for exporters rose from Rs127 billion to Rs179 billion. Exemptions linked to free trade agreements also saw an increase from Rs44 billion to Rs61 billion.