Pakistan's Economic Survey for the year 2023-24 stands out as a document exposing the important imbalance in the country's fiscal strategy. More than $21 billion-worth of tax exemptions were allowed by the government—this is Rs3.9 trillion, amounting to a 73% increase over Rs2.24 trillion in the previous year.
The figure has, thus far, eclipsed the country's external debt repayments of almost $17 billion within the same timeframe. This stands as a testimony to the stress in public finances and challenges Pakistan to its approach to economic management in the light of perpetual fiscal woes.
The majority portion of the tax exemptions was primarily attributed to sales tax waivers, costing the national exchequer to the tune of Rs2.86 trillion. A big chunk of this, Rs1.34 trillion, was sales tax exemption on petroleum products.
The government, however, partly attempted to offset such revenue losses [by] collecting nearly Rs1 trillion under the petroleum development levy (PDL), but the net fiscal effect of these exemptions still remains quite substantial.
Income tax exemptions also rose to Rs477 billion from Rs424 billion the year before; meanwhile, customs duty exemptions went up marginally to Rs543 billion, which signifies consistency.
This steep rise in tax concessions has sparked a lot of concerns among economic analysts and international financial institutions. The International Monetary Fund (IMF), with which Pakistan is engaged in bailout negotiations at present, might have strongly advised the government to reduce these exemptions for broadening the tax base and raising revenues.
Continued reliance on such generous exemptions has affected the financial health of the country more, especially while the economy is struggling with low tax-to-GDP ratios and high external financing needs.
Given the fiscal pressures and the IMF's recommendations, the government of Pakistan has signified its intent to tighten fiscal policy in the budget for 2024-25. The proposed steps include phasing out certain exemptions and increasing tax rates on profits of companies, particularly exporters, and personal income tax rates. It will also include raising fuel taxes as a revenue source without outright borrowing.
In most countries, tax exemptions are granted as policy measures to stimulate growth or provide relief to particular sectors. However, in Pakistan, these exemptions, proliferated in an unchecked manner, have now resulted in huge revenue losses at a juncture when the country's finances desperately need to stabilize.
With debt repayments due soon and IMF stand-by assistance possibly coming to the rescue of the country, the budget becomes the litmus test of Pakistan's national will for the reform of the economy and fiscal discipline.