Tax exemptions.

NOT all tax exemptions - the indirect, off-budget expenditures governments accrue by removing or reducing assigned tax liabilities that a person or a business is required to pay on income, property or transactions - are bad. Policymakers everywhere use them to attract new investments in one or more sectors of the economy, support struggling businesses, develop infrastructure, help people or boost growth. Sometimes such exemptions are necessary to make a country's tax regime simpler, more progressive and less opaque, and to reward compliance. But such concessions often become a drag on government budgets, undermine fair competition and discourage fresh investment, besides slowing down growth in underdeveloped countries like Pakistan. Why? Because the authorities don't have the capacity or will to design tax expenditure in a transparent manner to affect firms' investment decisions and fuel economic growth; instead, they cater to one power lobby or the other for various, including political, reasons.

Tax exemptions have always remained a popular tool for successive governments in Pakistan to shower favours on business lobbies for their support in spite of pressure from multilateral lenders to curtail these indirect expenditures in view of their impact on government budgets. A report by the FBR, Tax Expenditure 22, estimates the total cost to the national...