Committee to quantify impact of tax exemptions set up

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ISLAMABAD: The Federal Board of Revenue (FBR) has constituted a high-powered committee to quantify the financial impact of tax exemptions on all four major taxes including income tax, sales tax, federal excise duty and custom duty within one month, reveals an official document on Tuesday. “A high-powered committee has been constituted to quantify the financial impact of major tax exemptions available in all four major taxes, and given a deadline till January 14, 2013 to submit its detailed report,” said a communiqué sent by the Chairman FBR Ali Arshad Hakeem to all concerned authorities.

It is yet to see whether the FBR would dare to move ahead with withdrawal of tax exemptions being enjoyed by powerful and influential individuals such as president, federal ministers, four provincial governors, judges, army officers and others. By abolishing exemptions, the FBR could also get rid of tax evasions by, for example, people who mis-declare their income as that earned from the agriclture sector, which is under certain tax exemption.

In the communication, the chairman stated that the FBR recognises that the series of adhoc exemptions and other manipulations contributed to corrupt the culture of tax compliance.

“Apart from its effects in distorting incentives, a weak and porous system has been evolved, which is dissuading potential taxpayers,” said the official letter.

The income tax, sales tax, federal excise duty and custom are full of exemptions /concessions which continue to cause major distortions. While constituting the committee, the chairman has articulated that one of the objectives of any tax system is to raise revenues to finance government expenditure programmes.

The amount of revenue raised, to a large degree, is determined by tax base and tax/duty rates. It is also to some degree a function of a range of measures – special tax rates, exemptions, deductions, rebates and credits etc – that affect the quantum of taxes/duties raised, disclosed the letter.

These measures exert an impact on the government revenue. Such tacit payments are referred normally as “tax expenditures”, which are embedded in the tax statute. This is tax revenue lost. And it needs to be quantified closely, it noted. The chairman has given mandate to the committee to quantify the financial cost with minimum amount for each exemption /concession to be Rs10 million. A midpoint progress report has also been requested from the committee by January 2, 2013.

The FBR’s official sources explained that the estimates were intended to indicate the potential revenue gain that would be realised by removing exemptions, deductions, weighted deductions and similar measures. These estimates will provide the FBR with informed basis for rationalisation. The estimates will be done based on a short-term impact analysis.

The estimates will be developed assuming that the underlying tax base would not be affected by removal of such measures. The cost of each tax concession will be determined separately, assuming that all other tax provisions remain unchanged, they said.


Courtesy: The News

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