Pakistan Fiscal Management and Accountability

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Discussion Paper

Pakis tan Ins t i tu te of

Legislative Development

A n d T r a n s p a r e n c y

Pakistan: Fiscal Management & Accountability


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Discussion Paper

Pakistan: Fiscal Management & Accountability

Pakis tan Ins t i tu te of




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CONTENTSCONTENTSPreface

Profile of the Author

Introduction

Fiscal Deficit & Public Debt

Public Expenditure

Tax Potent ial

Conclusion

Annex I: Constitut ional Framew ork for Fiscal Management

Annex II: Fiscal Operations [ Data from w ebsite of the Ministr y of Finance]

Annex III: Selected data from the Economic Survey 2012- 2013

Annex IV: FBR's Perform ance (1996- 1997 to 20 12-1 203 )

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DISCUSSIO N PAPERPakistan: Fiscal Management & Accountability


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he Discussion Paper on Pakistan: Fiscal Management & Accountability has been authored by Dr. Ikramul Haq,TThe paper has been comm issioned to serve as a Discus sion Paper to a series of w orkshops o n Consolidating Democrati cDevolution in Pakistan organised by the Forum of Federations and Pakistan Institute of Legislative Development AndTransparency PILDAT through January-M arch 20 14.

The paper focuses on various aspects of fiscal management and accountability in the wake of the 18th constitutionalAmendm ent to the Constitution of Pakistan.

DisclaimerThe data and views express ed in this paper are those of the autho r and do not nec essarily reflec t the views of FoF and PILDAT.

Islamabad

January 2014

Advocate Supreme Court of Pakistan and international tax counsel.

Preface

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Preface



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Dr. Ikramul Haq, Advocate Supreme Court of Pakistan and international tax counsel, heads Huzaima & Ikram (TaxandPakistan), a leading law firm specialising in tax practice. Dr. Ikram is Visiting Professor at Lahore University of ManagementSciences (LUMS) and author of m any books that include Pakistan: Enigma of Taxation, Law & Practice of Incom e Tax, Law &Practice of Sales Tax, Law & Practice of Federal Excise, Practical Handbook of Inc om e Tax, Tax Laws o f Pakistan, Principles ofIncome Tax with Glossary, Master Tax Guide, Income Tax Digest 1886-2013 (with judicial analysis), Commentary onAvoidance of Double Taxation Agreements signed by Pakistan, Pakistan: From Hash to Heroin and its sequel Pakistan: Drug-trap to Debt-trap. He was tax administrator with Federal Board of Revenue (FBR) from 1984 to 1995. He has 29 years'experience of local and international tax practice. He has authored m ore than 1000 articles that have been published in varioustax journals in Pakistan and abroad. He is m ember of International Fiscal Ass ociation (IFA) and c ountry c orrespondence ofInternational Bureau of Fiscal Documentation (IBFD). He has written for IBFD chapters on Transfer Pricing and Tax andBusiness Laws of Pakistan. He is m ember of Supreme Court Bar Assoc iation and Pakistan Bar Council, besides life member of

Lahore High Court Bar Assoc iation.

bout the uthorAbout the Author

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Results of the first half of the current fiscal year indicate

that the econom y is on the track and that it is m oving in the1

r ight direction statem ent by Senato r Ishaq Dar, Financ eMinister, during a meeting with representatives of theDepartment for International Development (DFID) onJanuary 21, 20 14.

The root cause of our econom ic destruction has been thepolicy of 'reckless borrowing and ruthless spending'Dr.Ashfaque H Khan, Economy in 2012-13, The News,August 8, 2012.

Introduction

2For the last many decades, fiscal management andaccountability in Pakistan has been a serious cause ofconc ern for all the Government, people and donors. Thefundamental problem diagnosed by experts is a pathetictax-to-GDP ratio coupled with 'reckless' borrowing and'ruthless' spending.

Fiscal decentralisationinvolving the transfer of taxing andspending powers to sub-national levels of government istotally non-existent in Pakistan despite clear commandcontained in Article 140A of the Constitution of IslamicRepublic of Pakistan. Pakistan is in dire need of fiscal

decentralisation presently m ajor fiscal powers areconcentrated in the hands of federal government. Even theConstitution denies the provinces right to levy sales tax ongoods within their respective territories. The provincesalso have shown apathy to devolve administrative andfiscal pow ers to local governments. Since all broad-basedand buoyant sources of revenue are with the federalgovernment, co ntribution of provinces in total tax revenuesis only s ix percent and in overall national revenue base (taxand non-tax revenue) just around eight percent. This hasmade them totally dependence on Centre for transfersfrom divisible pool. What makes the situation more

disturbing is the fact that right of provinc es to levy sales taxon services is encroached by federal government throughlevy of presumptive taxes on services under the IncomeTax Ordinance, 2001, sales tax on gas, electricity andtelephone services and excise duty on a number of

3services.

The provinces should have the exclusive right to levy

indirect taxes on goods and services within theirrespective physical boundaries. Right to levy any tax ongoods s hould be restored to the provinces as w as the caseat the time of independence. Despite levying of taxes byfederal governm ent that should have been with provinc es,the Centre has miserably failed to reduce the burgeoningfiscal deficit that is reaching the horrifying m ark of Rs. 1.8trillion this year. Had provinces been allowed to generatetheir own resources, the present chaotic situation couldhave been averted. Centre has been claiming thatprovinces lack infrastruc ture to efficiently collect sales tax.This has proved wrong as Sindh and Punjab collected

muc h m ore sales tax on services than by Federal Board ofRevenue (FBR) after establishing their own taxapparatuses in 2011 and 2012 respectively. In 2013Khyber Pakhtunkhwa also f ollowed in their footstep.

We need amendm ents in Constitution to ensure judiciousdistribution of taxation rights between the federation and itsunits. Unless it is done, the provinces will continue toremain hugely dependent upon federal transfers.Transferring of indirect taxes on consum ption of goods tothe provinces w ill empow er the federating units and raisethe tax-to-GDP ratio. Sindh Revenue Board (SRB) andPunjab Revenue Authority (PRA) are proving this point.

Collection of SRB in 2011-12 and 2012-13 at Rs. 25 andRs. 33.7 billion is impressive as compared to what Sindhused to get from FBR never more than Rs, 12 billion.PRA in its very first year (2012 -13 ) collected Rs. 37 billioncom pared to Rs. 2 6 billion received in the same head fromthe FBR in 2011- 12.

The provincial performance in the case of sales tax onservices completely belies the impression that provincesdo not have the capacity to generate taxes. If sales tax ongoods is given back to provinces, as was the case at thetime of independence, they will perform much better asexperience of handling sales tax on services shows.However, the performance of provinces in collectingagricultural income tax is extremely poor. This is acom mon issue both at federal and provincial level arisingfrom absence of w ill to collect income tax from the rich andmighty the meagre collection of agricultural income

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1. The Federal Board of Revenue Chairman says that because of SROs and different agreements, almost two- thirds of our imports are duty free and onlythe remaining one-third is taxable. If only the SROs, which are nothing more than tax exemption to government's favourite businessmen and businesshouses, are revoked, the governm ent can easily double its revenues. If dishonest p ractices suc h as under-invoicing and tax evasions are eradicated, thegovernment can easily triple its revenues. Imagine the finance minister of any civilized nation, saying the economy is going in the right direction whentwo-third of tax money is virtually stolen under his very nose. The Frontier Post, January 23 , 201 4

2. In economics and political science, fiscal management is the use of government revenue collection and expenditure to influence the economy. Two m aininstrum ents of fiscal policy are changes in the level and compos ition of taxation and government spending in various sectors.

3. Centre-provincial harmony: Equitable distribution of fiscal rights needed, Business Recorder, March 1 3, 20 06.



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tax less than Rs, 3 billion by all provinces and

Centre should be a serious cause of c oncern. It isimperative that right to levy tax on income, includingagricultural incom e, should be w ith the Centre. In return,the Centre should hand over sales tax on goods to the

4provinces.

For the current fiscal year, FBR is required to collect Rs.2475 billion. The Federal government's total revenues(both tax and non-tax) are estimated at Rs. 3420 billion,out of which share of provinces is Rs. 1502 billion. Thefederal expenditure under debt servicing is Rs. 1154billion, defence affairs & s ervices is Rs. 627 and running of

civil government is Rs. 275 billion. After charge of thesefour items, there is deficit of Rs. 138 billion meaning bymore borrowings! While the provinces have not beenallowed to levy and collect indirect taxes on goods withintheir geographical boundaries, the federal government hasutterly failed to tap the real revenue potential. Failure of FBRto tap real tax potential adversely affects the provinces. Infiscal year 2012-13 due to massive revenue shortfall ofover Rs. 400 billion on the part of FBR, all the fourprovinces could not get the promised amo unts from NFC.Any shortfall in FBR's revenues or exemptions throughstatutory regulatory orders (SROs) jeopardise projectionof revenue collection and fiscal deficit.

104. Taxing agricultural inco me: qua Constitution, Business Recorder, April 9, 201 0.



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FBR has been persistently failed to meet budgetary targetsfor the last m any years w hat to speak of realising the real

5revenue potential, which is not less than Rs. 8 trillion . In20102-13, it even failed to collect Rs. 2000 billion. Thisyear target is less than Rs. 2 500 billion. The failure to tapthe real tax potential is the real dilemma of Pakistan. Poorperformance of FBR adversely affects the provinces asthey are wholly dependent on w hat the Centre collects andtransfers to them from the divisible pool. Centre isunwilling to grant the provinces their legitimate taxation

rights w hile it collects too little to meet their overall financialdemands. The size of the cake divisible pool is sosm all that nothing substantial can be done to com e out ofdebt enslavement and to spend adequately for the welfareof the people, no matter in whic h part of the country theylive.

Track record of FBR shows remote possibility of collectingeven Rs. 6 trillion in the next three years to give enoughfiscal spac e both to the Centre and the provinces to c om eout of the present economic mess, thus providing somerelief to the poor as well as trade and industry. Under the

given scenario, federation-provinces tax tangle willcontinue unchecked and further taxation through localgovernments, when elected, would not serve any usefulpurpose there will be no relief to the people, rather taxburden will increase manifold.

Pakistan will remain in debt enslavement and more andmore people will be pushed below the poverty line. If wewant to co me out of this c risis, the parliament will have toreconsider the prevailing social contract betweenfederation and the provinces. Provincial autonomy andlocal self-go vernance without taxation rights and equitabledistribution of income and wealth is meaningless. Wecannot overcom e perpetual econom ic and political crisesunless the provinces are given true autonomy; ow nershipof all resources; generation of o wn revenue and exclusiveright to utilise it for the welfare of their denizens.

Fiscal decentralisation and municipal self-rule shouldessentially be linked with a social policy based on theprinciple of universal entitlements for all residents in termsof acc ess to s ocial benefits and social servic es. Taxation

thPosition under 7 NFC Award

Salient features

Final share of provinces: Punjab 51.74

percent, Sindh 24.55 percent, KhyberPakhtunkhwa (KPK) 14.62 percent andBalochistan 9.09 percent.

Federal collection c harges to be reduced from

5% to 1%

Sindh to receive additional transfer of Rs. 6billion from federal government

Provinces in agreement on mul t ip le

indicators and respective weights

Sales tax ackno w ledged as provinc ial subject

KPK to be given additional 1% from federal

divisible pool

thPosition under 7 NFC Award

Who will get what?

Vertical distributionth

7 NFCth

6 NFC Change

Center

Provinces

44 %

56 %

52.5% -8.5

47.5% + 8.5

Horizontal distributionth

7 NFCth

6 NFC Change

Sindh

KPK

51.74%

24.55%

53.01% -1.27%

24.94% -0.39%

Punjab

Balochistan

14.62%

9.09%

14.88% -0.26%

7.17% + 1 .92%

Projected amount (in billions)

2009 2010 2014

Sindh

KPK

41 9

19 7

47 1 93 8

223 445

Punjab

Balochistan

11 8

53

133 265

83 165

5. FBR: new chairma n, old challenges,Business Record er,August 2, 2013



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without representation also m eans denial of s pending for6

the essential entitlements guaranteed in the Constitution.The principle of universal entitlements s eeks to prevent theform ation of inequalities and the foundation of the poor asa separate social group, w hereas residualism /m arginalismtakes the form assisting the poor and the needy, and thusimplicitly defining them as certain types of social groups.

The provincial parliaments in Pakistan should bepressurized by c ivil society to enact laws for establishmentof local governm ents as ordained under Article 140 A of theConstitution on the basis of soc ial policy they have so farjust cop ied the prev ious outdated ones w ith patch workhere and there. The ruling classes do not want to em pow erpeople through self-governance. They w ant to enjoy totalcontrol over resources. The local governments w ill not bemeaningful unless entitled, within national economicpolicy, to have adequate financial resources of their ow n,of which they may dispose freely within the framework oftheir powers and for public w elfare.

In a nutshell, for achieving the goal of fiscaldecentralisation, local governments' financial resourcesmus t com mensurate with the responsibilities provided forby the c onstitution and the law to ensure the welfare of thepeople and ensure sustainable growth at grass root level.

Part of the financial resources of local authorities shallderive from loc al taxes and s pend for providing universalentitlements and development. Pakistan must follow themodel of welfare states where resources available to localgovernments are based on a sufficiently diversified andbuoyant nature to enable them to keep pace with the realevolution of the cost of carry ing out their tasks.

There is no political will to implementing a well-definedreform agenda, on which general consensus exists.Addiction to borrowed money and lust for wastefulspending are the main stumbling bloc ks for achieving thecherished goal of self-reliance that can pave way for rapidgrowth, employm ent generation and substantial spendingfor social sectors.

The ever-widening fiscal deficit, amongst many otherreasons, has its roots in wasteful funding of a monstrousGovernment machinery, especially corruption-ridden-inefficient public sector enterprises (PSEs), and extendingof tax-free perks and perquisites to elites. These profuselybleed the already sc arce resources both tax and non-tax.The story of persistent failure of implementing a prudentfiscal policy in Pakistan and poor management of

econom ic affairs is thus, not unknown or untold it is even

candidly admitted in all official documents, released fromtime to time, relating to taxation, public expenditures andpublic borrowing.

This paper briefly touches some vital areas posingchallenges to fiscal m anagement and acc ountability vis--vis available solutions to ov ercome the prevalent crisis ofmeeting huge budgetary gap.

6. Municipal self-governance,Business Record er,July 19, 2013



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Fiscal Defici t & Public Debt

The absence of prudent fiscal pol icy coupled wit h lack

of implementation and accountability has destroyedmacroeconomic stability during the last five years thelast year of the federal governm ent has proved to be theworst, rather disastrous. At provincial level as well, theperformance of all the four governments has beenequally appalling' Fiscal Policy Statement for 20 12-1 3issuedby the Debt Policy Coordination Office of M inistry ofFinance.

Managing high fiscal deficit (root cause of m any economic

ills) coupled with massive debt burden is the toughestchallenge faced by fiscal m anagers of Pakistan. The well-admitted solution: substantial increase in resources anddrastic reduction in spending is easier said than done.

7Fiscal austerity, critics say, in the past had failed inreducing the debt burden of Pakistan.

From 20 07- 2012 , Pakistan's fiscal policy remained underimmense pressure owing to continued security relatedissues, greater than targeted subsidies, flood related

8expenses and global financial crisis. The government borrow ed heavily from external and internal resources inorder to finance the fiscal deficit, due to which a hugeamount of m oney was paid towards interest paym ents. Allthese factors relentlessly affected Pakistan's fiscal

9capacity to finance the fiscal deficit. (please seeofficial data at Annex III & IV. )

10Fiscal Pol icy Statement for 2012-201 3, released by theDebt Policy Coordination Office of the M inistry o f Financein com pliance of section 6 of the Fiscal Responsibility andDebt Limitation Act 200 5 [ FRDLA, 2005 ] , while expressinggrave concerns about overall fiscal scene, expressesdissatisfaction over failures of provinces in meeting the taxtargets. It says the efforts of provinces in collection of

taxes were not in line with the understanding reached

during the 7th National Finance Comm ission ( NFC) Award.The provinces registered a deficit of Rs. 39 billion asagainst targeted surplus of Rs. 125 billion, leaving asignificant shor tfall in non-tax revenues for the fisc al year2011-12.

The Fiscal Policy Statement for 2012-2013 also revealsthat despite transferring the functions of 17 ministries toprovinces, federal expenditure did not register anyreduction because majority of the employees of thedevolved m inistries preferr ed to stay on the Federal payrollrather than opting for the Provinces.

The second reason for increase in expenditure at Federallevel was creation of some new ministries and up-gradation of some divisions. Since the FederalGovernment agreed to finance the vertical programmesunder the NFC accord, the p ressure on its fiscal balancecontinued.

According to the Fiscal Policy Statement for 20 12- 2013, the provinces were unable to support the FederalGovernment as had been envisaged in the fiscaldevolution process. More specifically, it is observed, theprovinces' share in total expenditure increased from 31.5%

in 2011 to 34.5% in 2011-2012, whereas their share inrevenue generation remained almost the s ame at 6.0 % ofthe total (federal plus provincial) revenues.

It is revealed that the provinces posted surplus of Rs. 134billion in 2010-2 011 mainly due to upward revision in their

thshare (56%) in the divisible pool under the 7 NFC Award.

It is, however, disturbing to no te that in 2011 -201 2, theyregistered a deficit of Rs. 39 bill ion. They did not m akeany meaningful efforts to raise their own revenues andreduce unproduc tive expenditure. The deficit in 201 1-12

11was driven by sharp rise in provincial expenditures.

7. Dr. Akmal Hussain in 'The knife Edge of Fiscal Space' [Daily Times, January 22, 2004] aptly observed that: The history of economic policy in Pakistanshows that economic disasters have befallen the hapless citizenry due to sins of c omm ission as much as by sins of om ission. We will show in thisarticle that there was a time over a decade ago when incorrect sequencing of the Structural Adjustment Programme led to disastrous economicconsequences. That was a sin of com mission. Today w e may be about to com mit a sin of o mission: The failure to translate the over 10 billion dollarsState Bank reserves into increased GDP growth and poverty reduction could lead to continuing and unnecessary increase in the misery of the people,and an erosion of the reserves themselves. Successive governments stricken by the discreet charms of the IMF sought to reduce the budget deficit,regardless of the cost in terms of rising pover ty and declining grow th. That elusive symb ol of econom ic health is now at hand. After a decade of stringentrestrictions on development expenditure and more recently a sharp reduction in the debt-servicing burden (following debt restructuring), the fiscaldeficit as a percentage of GDP has fallen from 8 .8 per cent in 19 90- 91 to 4 .5 per cent in 20 02- 03, w hile State Bank reserves are at an all time high level ofover 10 billion dollars.

8. Economic Survey of Pakis tan 2012-13, page 48.9. Ibid10. Fiscal Policy Statement for 2012- 13, Debt Policy Coordination Office of Ministry of Finance

http://www.finance.gov.pk/publications/FPS_2012_13_web.pdf

11. Ibid



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Huge oppor tunities accrued to the Provinces in the wake

of the 7th NFC Award and 18th Consti tut ionalAmendm ent right steps towards fiscal independence,accountability and efficient decision making for theprovision of local services and financing thereof butthey failed to convert them for well-being of masses. It ishigh time that the Provinces should stop blaming theFederal Government for al l their i l ls and f iscalmismanagements. They should put their own houses inorder, exploit better opportunities available to them,exploit natural and hum an resources to the optim al level,tax the rich for the benefit of the poo r, reduce expenditur e,go for long-term projects yielding more and more

employments and ensure sustainable economic growthwith soc ial justice for all. So far their perform ances in theth 12wake of the 7 NFC Award are not satisfactory at all.

Acc ording to the Debt Policy Coordination Office, underthe 7th NFC award, around 70 per cent of the totalrevenues are down-streamed to provinces both directlyand indirectly. The Federal Government is left w ith only 30per cent of the total revenues, whereas, expenditure oninterest servicing, security and subsidies on food andenergy constitute 60.9 per cent of the total revenues. Furthermore, total revenues also include State bank ofPakistan (SBP) profit that will start declining once

Government starts repayment of SBP debt as envisaged inthe SBP Act and reduction in d omestic interest rates. Thisessentially means that the c onsolidated fiscal deficit of thecountry will remain on the higher side ti l l such time therevenue generation efforts bear fruits and the tax to GDP

13ratio is increased.

The Debt Policy Statement 201 2-2 013issued by the DebtCoordination Office of the Ministry of Finance incompliance of section 7 of FRDLA 2005 concedes that the debt to GDP ratio has hovered around 60% since2007-08. In 2011-12, publ ic debt serving stood at

Rs.1024 bill ion against Rs.856 bill ion paid during 2010-1411 . The Debt Coordination Office claims that soundness of Pakistan's debt position, as given byvarious sustainability ratios, remains higher than theinternationally accepted thresholds. Total Public debt

levels around 3.5 times and debt servicing below 30

percent of government revenue are generally believed tobe within the bounds of sustainability. Government ismaking co ncentrated efforts to increase the revenues andrationalize current expenditure to reduce the d ebt burdenand improve the debt carrying c apacity of the country to

15finance the growth and development needs.

All econom ists are unanimous that during 200 7-2 012 bothat the Federal and the Provincial levels no concretemeasures w ere taken to foster fisc al discipline. No strategywas devised to mitigate risks of f alling foreign reserves and

16increasing debt burden. Resultantly borrowings frombanks increased manifold to pay off liabilities of the PSEs.Acc ording to the SBP, this has inflicted eco nomy heavilyand resulted in bil l ions of rup ees increase in the stock of

17total debt & liabilities ( TDL).

Pakistan has lost som e US $ 1 2 bill ion forex reserve sinceJuly 2011, w hen they stood at $14 .8 bill ion. It has lost US$ 2.0 bill ion reserve since the signing of the IMFp r o g r a m m e . T h e l a s t f i v e y e a r s o f e c o n o m i cmismanagement brought the country to the verge ofdefault. The present governm ent sought the assistance ofthe IMF to prevent that. The IMF approved a newprogram me amounting US $ 6.68 bill ion on September 4,

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2013.

The unabated borrowings to meet burgeoning budgetarydeficit is sinking the economy. One of the majorweaknesses of economic governance is uncheckedwasteful spending on monstrous Government machineryand inefficient PSEs. Our foreign debt is going to be US $75 billion in 2015 and domestic debt Rs. 20 trillion ifimm ediate curative measures and tough decisions are nottaken.

Public Expenditur e

Fiscal consol idat ion must emphasise pers is tentstructural reforms for resource mobi l isat ion andexpendi ture rat ional isat ion over temporary f isca lmeasures such as increasing tax rates and reducing

12. Ibid13 . Ibid14 . Debt Policy Statement 2012- 13 , Debt Coordination Office of M inistry of Finance http://ww w.finance.gov.pk/publications/DPS_2012 _13_ web.pdf15. Ibid16. Pakistan's public debt (both rupee and dollar components) have grown at an average rate of 21.5 percent per annum from 2 008-1 2 as against an

average rate of 6.6 percent per annum during 2000-0 7. In absolute terms, public debt rose from Rs. 6,040 b illion in 2007-08 to Rs. 14,255 billion by theend of June 2013.

17. State Bank of Pakistan, Annual Report 2011-12 www.sbp.org.pk/reports/annual/arFY12/complete.pdf.

18. Dr. Ashfaque H Khan, External vulnerabilities, The News ,December 31, 2013.


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expenditure across the board. Fiscal institutions including

the country's debt office can play an important role inlocking any gains. Reducing public debt takes time;therefore, fiscal consolidation must focus on enduringstructural change Dr Ashfaque H Khan, A nation'sdebt, The New s, August 27, 2013.

During the past few years, greater than targeted budgetdeficit together with deficit financing from domesticsources, has resulted in a sharp increase in interestexpenditures. Interest paym ents have increased from Rs.716.6 billion or 3.9 per cent of the GDP in 2010-2011 toRs. 901.9 billion or 4.5 per cent of GDP in 2011-2 012.

In terms of the current expenditure, it stood at 28.9 per centduring 2011-2012. The rise in interest payments duringthe period indicates the growing unsustainability of thefiscal acc ount.

Another major revenue leakage relates to subsidies toloss-inc urring PSEs and po wer secto r, together amounting

19to Rs. 700 bill ion. The Economic Survey 2012-2013says that share of current expenditures in totalexpenditures has declined significantly from 84.0 percent

20in 2010-2011 to 79 .3 per cent in 2011-2012. It fu r therdeclined to 77.0 per cent in 2012-2 013 . There was also a

surge in defence expenditure that acc ounted for 16.2 percent of current expenditure in 2011- 2012 against 15.5 per

21cent in 2010-2011.

Period from 2008-2013 was adjudged as 'financial hara-22

kiri ' by some economists. Never in the histor y of thiscountry has the nation seen such a fiscally irresponsiblegovernment. They have maintained a large budget deficityear-after-year over the last five years, and accordinglymore than doubled the countr y's public debt ably assisted,of c ourse, by the exchange rate depreciation. Accord ingly,they damaged a relatively robust econom y in a short spanof five years without guilt and shame. Because of

unwill ingness to mo bilise resources on the one hand andreck less spending on the other a long wi th anunconsidered NFC Award, Pakistan's fiscal balance hasbeen destro yed thoro ughly in the last five years. The nationwill witness further instances of financial hara-kiri in thelast two weeks of the present regime the imp act of which

23will continue to haunt the econom y in the years to come.

Experts are even critical of the present policies

emphasising that fisc al consolidation is not receiving dueattention. There is no s erious work being done to controlthe wasteful expenditure by right-sizing the governmentapparatus. They argue that for effective fisc al managementand accountability, substantial reduction in unproductivecurrent expenditure is required through the followinginitiatives:

i. Twenty-five ministries can be either dissolved orrationalised, thereby s aving Rs 20 0 billion.

i i . Rs. 400-500 bil lion on financing the losses of PSEscan be eliminated by restructuring and privatisingthose entities.

iii. Badly targeted subsidies, consuming about Rs. 500billion should be withdrawn and some part of thesaved money c ould be directed to expand co verage ofthe social protection programm e for the poor.

iv. The total public debt at Rs 30 trillion is unsustainable.Debt servicing cost has reached Rs.1500 billion,whic h is over 40 per cent of total government revenue.Drastic m easures need to be taken to reduce the debtstock by retiring some of the debt with the proceeds ofprivatisation of public sector corporations such asPIA, Pakistan Railways and the Pakistan Steel Mills;sale of som e of the state-owned real estate which is

being used for unproductive purposes as perks for24

government officials.

Tax Potent ial

The people have to understand that the tax money stolenby the corrupt rich of the country represent the goodschools, colleges, hospitals, roads and many otherprojects of welfare stolen from us poor The FrontierPost, January 23, 20 14

The governm ent has relied on raising tax rates rather thanbroadening the tax base. In other w ords, the go vernmenthas raised the tax burden of those who were alreadypaying taxes. Those who are influential have never paidtaxes, and have once again remained out of the taxnetHurting the poor, The News, June 14, 2 013

In recent years Pakistan became target of severe criticism

19. Economic Survey of Pakistan 2012-13, page 5220. Ibid21. Ibid22. Dr. Ashfaque H Khan, Financial hara-kiri, The News, March 5, 201323. Ibid

24. Dr. Akmal Hussain, Creating the fiscal space, The Tribune, February 14, 2011


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from many countries and donors for not collecting taxes

due, especially from the rich and m ighty. It is an undeniablereality that both centre and provinces are not collectingtaxes diligently. For fiscal year 2012-2013, the FBRcollected Rs. 1,9 39.4 billion against original target of Rs.

252,381 bill ion showing huge shortfal l of Rs. 441billion. The contribution of Provinces in overall taxcollec tion is less than 6 per cent of the GDP.

Pakistan's tax potential at the Federal level is not less thanRs. 8 trillion. There are 10 m illion individuals having annual

26taxable income of Rs 1.5 million, total income taxcollection from them at the prevalent tax rates comes to

Rs. 3,750 billion. If we add income tax collected fromcorporate bodies, other non-individual taxpayers andindividuals having income between Rs. 400,000 to Rs.1,000,000, the gross figure would be Rs. 5,000 billion.The FBR collected only Rs. 7 39.7 billion as incom e tax in2012-2013.

Similarly, due to leakages in sales tax, federal excise andcustom duties, the total collection is not more than 30% ofactual potential. In fiscal year 2012-2013, the FBRcollected Rs. 841.3 billion under the head sales tax.Collection for customs and excise duties was Rs. 239billion and Rs. 11 9.4 billion respectively. The total indirect

collection of just Rs 1 199.7 billion was pathetically low. Itshould have been Rs 3500 billion. If this tax gap is bridged,the total revenue collection would not be less than Rs.8500 billion without imposing any new taxes or raisingexisting tax rates.

The following measures at the Federal and the Provinciallevels can increase the tax-to-GDP ratio from the present8.5 per c ent to 16 per cent, over the next two to three years:

i. Bridging of tax gap through effective enforcement &voluntary compliance

ii. Withdrawal of al l concessionary Statutory RegulatoryOrders (SROs)

iii . Substantial property tax on the r ich

ivPresum ptive agricultural income tax of Rs.5,0 00 peracre on irrigated agricultural holdings above 25 acresand Rs. 20 00 per acre on un-irrigated holdings above50 acres

v A capital gains tax on transfer of all moveable and

imm ovable assets.

vi Imposition of sales tax on all kinds of s ervices by theprovinces

Amending of tax codes each y ear through the Finance Billand in between, by way of statutory regulation orders(SROs) is not serving any useful purpose this is not asolution to im prove tax administration.

The solution lies in conver ting the FBR into an autonomousbody run by independent Board of Directors comprisingprofessionals and answerable directly to the Parliamentand not the headquarters of the ruling party. Taxes shouldbe imposed by the Parliament and not any executiveauthority.

The FBR must be insulated from all kinds of politicalinfluences. Enforcement of tax laws without any fear orfavour should be the first and top most priority of theGovernment if it wants to rescue the country from thepresent econom ic m ess coupled w ith expending taxes forthe benefit of masses and desisting from w asting funds onwhite elephants mons trous public sector enterprisessleaze with inefficiency and corruption so that public cansee that the elected Government is a responsible one andcares for them. This w ould promo te tax culture and restore

people's faith in the tax system . Voluntary tax com pliancecan be improved only through a strong deterrent systemwhere the compliant taxpayers are respected andrewarded, while evaders are exposed and punished underthe law.

25. The original target of Rs.2381 billion was how ever downw ard revised to Rs. 2007 billion. FBR has collected Rs. 1,939.4 billion. In absolute terms anadditional amo unt of Rs. 57 billion has been collected over the collection o f past fiscal year. The growth in net revenue collectio n has been 3.0 percentover the collection of FY: 201 1-1 2 wh ich is low est during last 13 years. Similarly the tax-GDP ratio dropped from 9.1% in the preceding year to 8.5% in2012- 13 FBR Year Book 2012-13

26. http://data.worldbank.org/country/pakistan


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Conclusion

27Effective fiscal management and acco untability alone can help Pakistan to effectively overcome fiscal deficit. Once fiscalspace is c reated by good governance, the government can foc us on providing basic amenities like safe drinking water, healthand education, transport and hous ing to the people.

Resource m obilisation should be given priority to build infrastructure, facilitate growth of s mall and medium s ized firms in theindustrial sector and small farms in the agricultural sector for an employment intensive and equitable economic growthprocess.

At the same tim e, large corporations w ith equity stakes for the poor can be established through public-private partnerships.This would set the stage for a struc tural change that could help achieve econom ic grow th for the people and by the peoplewhic h is presently c onfined to the elites only.

27. The Finance Minister of Pakistan during his meeting with a delegation of DFID on January 21, 20 14 expressed satisfaction over results of economy andits direction. He said that revenue collection has shown an increase of 16%, exports have gone up by 5%, remittances by 9% and grow th in the econo myin the first quar ter has been reported by the Pakistan Bureau of Statistics to be at 5%. Besides there has been an unprecedented surge in the KarachiStock Exchange Index which has crossed the 27000 points. On the foreign exchange reserves position, he said the government inherited a fragileposition and entered into an IMF programm e to stabilize it. Admitting th at Pakistan has negative inflow s despite an IMF plan, Mr. Ishaq Dar said that thegovernm ent has c halked out a plan to increase the foreign exchange reserves to US$16 billio n by the end of the current year . Earlier, the team of IMF atthe end of its first review visit to Pakistan [October 28-November 8, 20 13] issued official statement that it expects growth to reach about 2 percent forFY2013/14 as a whole. The mission said it was pleased with the strong fiscal performance in the first quarter of 20 13/14 and the steady implementation

of the government's structural reform agenda.


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PPENDICESAPPENDICES


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Annexure I

Constitutional Framework for Fiscal M anagement

The 1973 Constitution of Pakistan [ the Constitution] provides explicit provisions for r unning the Islamic Republic of Pakistan(a federation) w ith a three-tier sys tem of governance the federal, provincial and local. Till today, the third tier (localgovernment) is non-op erative Artic le 140A of the Constitution requires establishment of loc al governments by all provincesdevolving po litical, administrative and financial responsibility .

The Federal Legislature may make laws on any subject for the entire federation, including for extra-territorial operations,whereas Provincial Legislatures m ay m ake laws not enumerated in the Federal Legislative List Artic le 142 of theConstitution.

The matters of common interest listed in Part-II of the Federal Legislative list are dealt with and settled by the Council ofComm on Interests appointed by the President of Pakistan. The Council c onsists of the Chief Minister of each Province and anequal number of m embers from the Federal Government nom inated by the Prime M inister as the members of this Council andis chaired by the Prime M inister himself, if he is the m ember of the Council, or b y a person nom inated by the President. Allaspects of public sector finance, such as currency, public debt, financial and accounting procedures are solely federalmatters. Ac cordingly relevant laws and regulations are issued by the Federal Government.

The Auditor General of Pakistan is the auditor of both the Federal and Provinc ial Governm ents and his duties and powers havebeen given in the Pakistan (Audit and Ac counts) Order 197 3.

The collection of m ajor taxes suc h as incom e tax, custom duties, excise duties and sales tax and borrowings f rom externalsources rests with the Federal Government, w hile the collection of revenues from local resources suc h as land revenue, sale ofland, and sale of w ater for irrigation are assigned to the Provinces. The proceeds of som e taxes s pecified in the Constitution are

divided between the Provinces after deducting a percentage of collection charges by the Federal Government. In order todistribute these taxes and coordinate important matters of Federal and Provincial finance, the Constitution provides for aNational Finance Comm ission consis ting of the Minister of Finance of the Federal Government and Ministers o f Finance of thevarious Provincial Governments. This commission allocates a share for each Province from the divisible pool of taxescollec ted. In addition , the Provinc ial Governm ents receive grants from the Federal Government.

As regards expenditure, each Provincial Government incurs outlays acco rding to the com mitm ents made in individual budgetestimates. Because of c omm onality in the financial provisions of the Federal and Provincial Governments, procedures andpractice in budgeting and accounting are similar and vary only in detail.

Financial Procedure

The executive authority of the Federation of Pakistan vests with the President and is exercised by the Federal Governmentconsis ting of the Prime Minis ter and Federal Ministers . The Prime Minis ter is the Chief Executive of the Federal Governm ent andmanages public funds , w hile those of the Provinces are managed by the Chief Ministers. The Prime Minister is assisted by theCabinet and, in financial matters , by the Finance Minister. Similarly, for the Provinces, Chief Minis ters are the Chief Executiv eswho are assisted by the Provincial Ministers.

The Prime Minister makes known to the National Assembly each year the financial needs of the Federal Government. Thefinancial needs of the Provincial Governments are m ade known to the Provincial Assem blies by the Chief Ministers. These arediscussed and funded from revenues raised from taxes and other sources. No tax or duty can be imposed nor can anyexpenditure be incurred without the authority of the National Assembly or by the Provincial Assembly, as the case m ay be.


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Consolidated Fund

The Government acc ounts are m entioned in two parts, viz the Federal and Provincial Consolidated Fund and Public Acco unts.Revenue receipts, m oneys received in repayment of loans given by Government, and the loans raised by Government arecredited to the par ticular Federal/Provinc ial Consolidated Fund.

The current and development expenditure along with expenditure on debt servic ing is debited to Government account.

The Public Acc ount com prises all moneys received by or on behalf of Government or those deposited with c ourts of law suc has civil and c riminal cour t Deposits. The Federal and Provincial Governments keep their own separate accounts with the StateBank of Pakistan.

The Federal Governm ent generally uses all branches of the State Bank, or the National Bank of Pakistan ac ting as agent of t heState Bank. The Provincial Governments are restricted however, to the branches of the two banks in their respective

jur isdic tio ns.


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Annexure II

Fiscal Operati ons

BUDGET AT A GLANCE[FY 2013-2014]

Rs. in bill ion

RECEIPTS EXPENDITURE

Tax Revenue* 2,598 A. CURRENT 2,829

Non-Tax Revenue 822 Interest Payment 1,154

a) Gross Revenue Receipts 3,420

b) Less Provincial Share 1,502 Pension 171

I. Net Revenue Receipts (a-b) 1,918 Defence Affairs & Services 627

II. Net Capital Receipts (Non Bank) 507 Grants and Transfers 337

III. External Receipts (net) 169 Subsidies 240

IV. Estimated Provincial Surplus 23 Running of Civil Government 275

Provision for Pay & Pension 25

V. Bank Borrow ing 975 B. DEVELOPMENT 76 2

Federal PSDP 540

Net Lending 50

Other Dev. Expenditure 172

TOTAL RESOURCE (I to V) 3,591 TOTAL EXPENDITURE (A+ B) 3,591

Out of which FBR Taxes: Rs 2,475 billion

23



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Provisional

Table 1Pakistan: Summar y of Consolidated Federal and Provinci al

Budgetary Operations, 2013- 2014

(In Mi llion of Pakistan Rupees)

Total Revenue 829,712

Tax Revenue 537,056

Federal 494,948

Provincial 42,108

Non-Tax 292,656

Federal 281,960

Provincial 10,696

Total Expenditure 1,116,620

Current Expenditure 868,377

Of which : Mark-up Payments 301,141

Defence 146,464

Development Expenditure & net lending 170,149

Statistical Discrepancy 78,094

Budget Deficit 286,908

Financing 286,908

External (27,213)

Domestic 314,121

Non-Bank 116,086

Bank 198,035

Memo Items:

Total Revenue 3.2

Tax Revenue 2.1

Nontax Revenue 1.1

Total Expenditure 4.3Current 3.3

July-Sept. 2013

Of which : Mark-up Payments 1.2

Defence 0.6

Development Expenditure and net lending 0.7

Budget deficit 1.1

GDP (Rs. in Billion) 26,001

Note: Figures based on inform ation fr om AGPR/Provinc ial A.Gs./ SBP/EAD.


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Provisional

Table 2 Pakistan: Summary of Consolidated Federal andProvincial Revenue 2013-2014


July-Sept. 2013

Total Revenue 829,712

Tax Revenue 537,056

Direct Taxes 160,777

Taxes on property 3,607

Taxes on goods and services 255,924

Excise duty 24,685

Sales Tax 231,239Taxes on international trade 52,791

Other taxes 63,957

Stamp duties 4,431

Motor vehicles tax 3,156

Other taxes 30,620

Petroleum Levy 25,750

Nontax Revenue 292,656

Mark-up (PSEs & Others) 56,849

Dividend 3,719

SBP profit 80,000Defence 1,956

Citizenship, Naturalization & Passpor t Fee 3,989

Development Surcharges on Gas 20,846

Discount Retained on Crude Oil 3,938

Royalty on Oil/Gas 19,173

Windfall Levy against Crude Oil 3,773

Gas Infrastructure Development Cess 3,046

Foreign Grants 10,115

C-01010 Others (Profit) 67,636

Others 17,616Memo Items:

Total Revenue 3.2

Tax revenue 2.1

Direct Taxes 0.6

Taxes on proper ty 0.0

Taxes on goods and services 1.0

Excise duty 0.1

Sales Tax 0.9

Taxes on international trade 0.2

Other taxes 0.2

Nontax Revenue 1.1

GDP (Rs. in Bil lion) 26,001


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Provisional

Table 3Pakistan: Summary of Consolidated Federal and

Provincial Expenditure 2013- 2014


Total Expenditure 1,038,526Current Expenditure 868,377

Federal 639,530

General Public Service 451,994

Servicing of Domestic Debt 286,262

Servicing of Foreign Debt 14,879Superannuation Allowances & Pension 36,437

Grants (Other than Provinces) 41,819

Other General Public Service 72,597

Defence Affairs and Service 146,464

Public Orders and Safety Affairs 18,281

Economics Affairs 6,240

Environmental Protection 144

Housing and Community Amenities 81

Health 2,283

Recreation Culture and Religion 2,062

Education Affairs and Services 11,704Social Protection 277

Provincial 228,847

Development Expenditure and net lending 170,149

July-Sept. 2013

Total Development Expenditure 87,126

PSDP 79,538

Federal* 44,949

Provincial 34,589

Other Development Expenditure 7,588

Net lending 83,023

Memo Items:

Total Expenditure 4.0

Current Expenditure 3.3

Federal 2.5

General Public Service 1.7

Servicing of Domestic Debt 1.1

Servicing of Foreign Debt 0.1

Superannuation Allowances & Pension 0.1

Defence Affairs and Service 0.6

Provincial 0.9

Development Expenditure 0.3

GDP (Rs. in Bill ion) 26,001


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Annexure III

Selected data fr om the Economic Survey 2012-2013

Fiscal Policy DevelopmentIt has been widely recognized that a prudent fiscal policy (low level of fisc al deficit and public debt) plays a significant role notonly in reducing the risks of economic crisis but can also improve country's fiscal capacity to finance larger fiscal deficitwithout endangering economic stability and debt sustainability. Since the inception of global financial crisis in 2008-09,countries around the world dealt with the issue of consolidating their budgets while at the same time sus taining the econom icgrowth. However, recent improvement in global economic situation has somewhat lowered short-term fiscal risks. Stillconc entrated efforts are required to contain the s pending at reasonable level.

Over the years, Pakistan's fiscal polic y remained under imm ense pressure owing to continued security related issues, greaterthan targeted subsidies, flood related expenses and global financial crisis. Although, Pakistan's econom y w as not directlyaffected from financial crisis, however, in confluence w ith unplanned expenditures m entioned above during the past five yearsresulted in m ounting fisc al pressures. Besides, the governm ent borrow ed heavily from external and internal resources in orderto finance the fiscal deficit, due to which a huge amount of money was paid towards interest payments. All these factorsrelentlessly affected Pakistan's fisc al capacity to finance the fiscal deficit. Nevertheless, during the past three years the effor tsto contain the fiscal deficit within reasonable limit through an expenditure management strategy, austerity measures andreforms in Public Sector enterprises (Box-1) have yielded the result. Moreover, during past two years the governmentconsolidated the outstanding power sector debt of wor th Rs. 511 billion (Rs 120 b illion in 2010 -11 and Rs 39 1 billion in 2011-12.). This one of settlement during 2010-1 1 and 2011 -12 w ill be helpful in making substantial savings on interest payments incom ing year.

All the key fiscal indicators surpassed their budgeted targets set for relevant years, how ever several efforts to contain theexpenditures and to increase the revenues during past five y ears resulted in significant d ecline of fisc al deficit from 7.3 percentof GDP in 2007-0 8 to 6 .8 percent of GDP in 2011- 12. Total expenditures as percentage of GDP declined from 21.4 percent in200 7-0 8 to 19 .6 percent of GDP in 2011- 12. It is expected to decline further by 0.6 percentage point to 19.0 percent in 2012 -13. In total expenditures, current expenditures w ere contained at 15.5 percent of GDP in 201 1-1 2 from 17.4 percent in 2007-08, while it is expected to d ecline further in 201 2-1 3 at 1 4.6 percent of GDP. On the other hand development expendituresstood at 3.6 percent in 2011 -12 as com pared to 4.2 percent of GDP in 2007 -08 . It is expected to rise by 4.4 percent in 2012-13. Out of total development expenditures, Rs 873 billion was earmarked to PSDP (allocation of Rs 36 0 billion to federalgovernment and Rs 513 billion to provincial governm ent). On the revenue side, tax to GDP ratio remained w ithin the narrowband of 9.1 to 10.3 percent since 2007- 08 to 201 1-1 2. Total revenues declined from 14.1 percent in 2007- 08 to 12.8 percentin 2011-12 on account of decline in non-tax revenues from 4.2 percent in 2007-08 to 2.4 percent of GDP in 2011-12.However, total revenues are expected to inc rease by 14.3 percent in 2012 -13 owing to increase in tax revenues up to 1 1.1percent and non-tax revenues up to 3.2 percent of GDP in 2012 -13 . The figure 4.1 reflects the w idening of fiscal deficit duringthe past 5 years due to decrease in revenues and increase in expenditures.

Struct ure of Tax RevenueA well designed tax structure of the country not only improves the economic and industrial competitiveness but also

contributes tow ard stimulating industrial activity and accordingly grow th in the economy. The strong base of a tax systemprovides a m ore stable source of inc om e needed to finance the public expenditure with an aim to relieve poverty and deliverpublic servic es. Historically, Pakistan's tax system undermined due to struc tural weaknesses like narrow tax base, m assivetax evasion and administrative weaknesses etc. these struc tural weaknesses have taken a toll on overall tax collection as thecountry has witnessed a low est tax-to GDP ratio not only in the developing countries but also w ithin the region.

Despite the increase in tax revenues, FBR tax to GDP ratio varied between 8.5 to 9 .6 percent during the past 12 years. DuringJuly-April, 2012-13 FBR tax to GDP ratio stood at 6.6 percent against 7.1 percent recorded in the same period last year.Present tax struc ture of Pakistan is distor tionary and inc entivizing m assive tax evasion. Additionally, som e sectors are undertaxes and s om e are not taxed at all w hich reflects the narrow base. In particular, there is a least contribution in taxes from themajor sectors of our economy (agriculture and services), as agriculture is contributing 2.5 percent in tax against its 21.4percent share in GDP, w hile services s ector is contributing 36 .7 p ercent against its major s hare in GDP i.e. 57.7 percent. Thereis a broad cons ensus that tax to GDP ratio can only be enhanced if all sectors of econom y c ontribute proportionately toward

tax revenue.


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Table 4.1 : Fiscal Ind icators as Percent of GDP

Year Real GDP Over all

2006-07 5.5 4.1

2007-08 5.0 7.3

2008-09 0.4 5.2

2009-10 2.6 6.2

2010-11 3.7 6.5

2011-12 4.4 6.8

2012-13 3.6* 4.7

Expenditure

Total

19.5

21.4

19.2

20.2

18.9

19.6

19.0

Current

14.9

17.4

15.5

16.7

15.9

15.5

14.6

Development

4.7

4.2

3.6

3.5

2.8

3.6

4.4

Revenue

Total Rev.

14.0

14.1

14.0

14.0

12.4

12.8

14.3

Tax

9.6

9.9

9.1

10.1

9.3

10.3

11.1

Non-Tax

4.4

4.2

4.9

3.9

3.0

2.4

3.2

* : Real GDP estimated for 20 12- 13Note 1: The base of Pakistan's GDP has been changed from 1999- 2000 to 200 5-06.

Fig: 4.1-Fiscal Deficit

Expenditures

TotalRevenues

Revenue

2005-

06

2006-

07

2007-

08

2008-

09

2009-

10

2010-

11

2011-

12

2012-

13

July-

Mar

22

20

18

16

14

12

Fiscal Deficit

Percents

2001-

02

2002-

03

2003-

04

2004-

05

2005-

06

2006-

07

2007-

08

2008-

09

2009-

10

2010-

11

2011-

12

2012-

13

B.E

11.0

10.5

10.0

9.5

9.0

8.5

8.0

Fig 4.2: FBR Tax Rev as % of GDP


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Tax structure in Pakistan has w itnessed substantial changes over the years as the s hare of direct tax increased from 35.3

percent in 2001-0 2 to 39 .2 percent in 2011- 12 and is expected to increase further by 39 .1 percent in 2012 -13. Sales tax sharein total tax collection increased from 4 1.2 percent in 2001- 02 to 43 .01 percent 2011 -12. Share of Custom duty in indirect taxeshas increased from 1 8.3 percent in 2001- 02 to 19 .0 percent in 2011-1 2, w hereas it is expected to decrease by 17.1 percent in2012 -13 . On the other hand the share of excise duty in indirect taxes has declined from 18 percent in 200 1-0 2 to 10 .7 in 201 1-12 and it is expected to decline further by 8.0 percent in 2012-1 3. Sales tax as an impor tant consump tion tax accounts f or 74.3percent of indirect taxes.

Review of Public ExpendituresPublic expenditures can play an impor tant role in physical and human capital form ation over time and can be a effective tool inboosting econo mic growth. In Pakistan, public expenditures rem ained under great pressure during the past five years.

During the past few years, greater than targeted budget deficit together with deficit financing from domestic sources, has

resulted in a sharp increase in interest expenditures. Interest payments have increased from Rs.716.6 billion or 3.9 percent ofGDP in 2010 -11 to Rs.901 .9 billion or 4.5 p ercent of GDP in 2011 -12 . As percent of the current expenditure it stood at 28.9percent during 2011-1 2. It is expected to reduce by 4.0 percent of GDP in 2012 -13 . The rise in interest paym ents during theperiod indicates the growing uns ustainability of the fisc al account.

The other major fiscal leakage is subsidies to lossmaking PSEs and the power sector. During July-March, 2012-13 actualdisbursement against the budgeted subsidy of Rs.208 .6 billion stood at Rs.27 0 billion, thus already surpassed the target byRs.61.4 billion in first nine months of c urrent fiscal year. It is expected to increase further due to loss making PSEs and thepersistent rise in circ ular debt in the pow er sector.

Fiscal perform anceAcco rding to the co nsolidated revenue and expenditure statement of the government, total revenues grew by 2 2.6 percentduring July-March, 2 012- 13 and stood at Rs. 2,141 .9 billion com pared to 1,747.0 b illion in the same period last year. The total

collection in tax revenues amo unted to Rs. 1,5 57.6 billion against Rs. 1 ,393.9 billion in the same period last year, posted agrowth of 11.5 percent. It was mainly on account of insignificant growth in federal tax revenues which are recorded at 8.4

Table 4.3: Trends in Components of Expenditure (As % of GDP)

Year TotalExp. (A)

CurrentExp. (B)

InterestPayments

(C)

Defence(D)

Development Exp

(E)

Non InterestNon-DefenceExp (A-C-D)

FiscalDeficit

RevenueDeficit/Surplus(TR-Total CE)

Primarydeficit

(TR-NI

2006-07 19.5 14.9 4.2 2.7 4.7 12.6 4.1 -0.8 -1.2

2007-08 21.4 17.4 4.8 2.6 4.2 14.0 7.3 -3.3 -2.5

2008-09 19.2 15.5 5.0 2.5 3.6 11.7 5.2 -1.4 -0.2

2009-10 20.2 16.7 4.4 2.5 3.5 13.3 6.2 -2.7 -1.8

2010-11 18.9 15.9 3.9 2.5 2.8 12.5 6.5 -3.5 -2.6

2011-12 19.6 15.5 4.5 2.5 3.6 12.6 6.8 -2.8 -2.3

2012-13B 19.0 14.6 4.0 2.3 4.4 12.7 4.7 -0.3 -0.7

B: Budgeted

* Excluding Rs 120 billion in 201 0-11 and Rs 391 billion in 2011-1 2 on account of debt Consolidation.


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percent, of whic h FBR tax revenues increased by only 5.6 percent during July-M arch, 201 2-1 3. While the remaining growth

was c ontributed by the receipts from Petroleum Development Levy as it stood at Rs. 81.0 billion during July-March 20 12-1 3against Rs.38.2 billion during the same period last year.

Table 4.4 Consolidated Revenue & Expenditure of the Government

Budget Estimates2012-13

Prov. Actual Growth

July-March2011-12

July-March2012-13

July-March2012-13

A. Total Revenue 3,378.5 1,747.0 2,141.9 22.6

a) Tax Revenue 2,614.5 1,393.9 1,557.6 11.5

Federal 2,534.5 1,336.2 1,448.0 8.4

of which FBR Revenues 2,381.0 1,280.4 1,352.3 5.6

Provincial Tax Revenue 80.0 57.6 109.6 90.3

b) Non-Tax Revenue 764.0 353.2 584.3 65.4

B. Total Expenditure 4,484.2 2,641.9 3,188.1 20.7

a) Current Expenditure 3,452.2 2,154.1 2,642.0 22.6

Federal 2,339.2 1,478.7 1,887.1 27.6

- Interest 925.8 624.5 772.2 23.7

- Defense 545.4 348.0 405.8 16.6

Provincial 1,113.0 675.4 754.9 11.8

b) Development Expenditure & net lending 1,032.0 428.0 445.8 4.2

PSDP 873.0 375.6 407.4 8.5

Other Development 154.3 45.4 37.3 -17.8

c) Net Lending 4.7 6.9 1.1 -84.1

C. Overall Fiscal Deficit 1,105.7 894.9* 1,046.2 16.9

As % of GDP 4.7 4.5 4.6 -

Financing of Fiscal Deficit 1,105.7 894.9 1,046.2 16.9

i) External Sources 134.9 47.4 -4.1 -108.6

i i ) Domestic 970.8 847.5 1,050.3 23.9

- Bank 483.8 443.8 856.7 93.0

- Non-Bank 487.0 403.7 193.7 -52.0

GDP at Market Prices 23,655 20,091 22,909 14.0

Source: EA wing calculations and Budget Wing, Finance DivisionNote: Gas development surcharge is inc luded in tax revenues.* Excluding one of payment of Rs.391 billion on account of debt consolidation.


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FBR Tax Collect ion

FBR tax collection for the fiscal year 2012 -13 was targeted at Rs.2,38 1 billion whic h was 2 6.4 percent higher over the actualcollection of Rs.188 3.0 billion during 2011 -12 .

During the first ten months of 2012-13 registered a weak growth of 5.5 percent in FBR tax collection due to energy/gasshor tages, security issues, failure to implem ent tax reforms and decline in impor ts. The total collection stood at Rs.1,5 05.3billion against Rs.1,4 26.2 billion during same period last year. Achievement of the cur rent target is contingent upon not only onbetter econom ic c onditions but effective implementation of tax administration reforms is also c rucial.

Tabl e 4.5: FBR Tax Revenues (Rs. Billion)

Revenue Heads 2011-12 July-Apri l % Change

2011-12 2012-13

A. DIRECT TAXES

Gross 607.9 596.7 -1.8

Refund/Rebate 79.0 43.0

Net 738.4 528.9 553.7 4.7

B. INDIRECT TAXES

Gross 943.6 989.3 4.8


Net 1,144.3 897.3 951.6 6.1

B.1 SALES TAX

Gross 673.2 697.2 3.6


Net 804.9 635. 669.4 5.4

B.2 FEDERAL EXCISE

Gross 95.8 91.2 -4.8


Net 122.5 95.6 90.8 -5.0

B.3 CUSTOM

Gross 174.6 200.9 15.1


Net 216.9 166.5 191.4 15.0

TOTAL TAX COLLECTION

Gross 1551.5 1586.0 2.2


Net 1,882.7 1426.2 1505.3 5.5

Source: FBR


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Direct Taxes

The net collection of direct taxes has registered a growth of 4.7 percent during July-April, 2012- 13, w hile the gross c ollectionwitnessed a decline of 1.8 percent during the period under review. Bulk of the tax revenues of direct taxes were realized fromincom e tax. The net collection has gone up from Rs.5 28.9 billion to Rs 553 .7 billion. Major revenue spinners of direct taxes arewithholding tax, voluntary payments and collection on demand.

Indir ect TaxesThe gross and net collections of indirect taxes have witnessed a growth of 4 .8 and 6.1 percent respectively. It has accountedfor around 63 percent of the total FBR tax revenues.

Within indirect taxes, grow th in net collection of sales tax increased by 5.4 percent. The gross and net sales tax co llectionduring July-April, 2012- 13 stoo d at Rs. 697.2 billion and Rs.669.4 billion respectively posting a growth of 3.6 and 5.4 percentrespectively over the corresponding period of 20 11- 12. The growth in sales tax was significantly affected due to the transfer ofservices to provinc es. In fact, around 52 percent of total sales tax was contributed by sales tax on impor t during July-April,2012 -13 , while the rest w as contributed by dom estic sector. Within net domestic sales tax collection, the major co ntributioncame from POL products, telecom services, natural gas, fertilizers, other services, sugar, cigarettes, beverages, cement,electrical energy etc. On the other hand, POL products, plastic, edible oil, fertilizers, iron and steel, vehicles, machinery,chemic als, oilseeds etc contributed significantly to the collection of sales tax from im ports .

Custom duty collection has registered a growth o f 15.1 and 15.0 percent in both gross and net terms respectively. The grossand net collection has increased from Rs.1 74.6 b illion and Rs. 166.5 billion during July-April, 2011 -12 to Rs.2 00.9 billion andRs.191.4 billion respectively during July-April, 2012 -13. The major revenue spinners of c ustom duty have been automobiles,edible oil, petroleum products, machinery, plastic, iron and s teel, paper and paperboard etc.The collection o f Federal ExciseDuties (FED) during July-April, 2012- 13 has recorded a negative growth on acco unt of withdraw al of excise duty on m ost ofthe petroleum products and perfumery & cosm etics. The net collection stood at Rs.90.8 billion during July-April, 2012-1 3 ascom pared to Rs.95.6 billion during the same period last y ear. The major revenue spinners of FED are cigarettes, cem ent,

beverages, natural gas, and international travel serv ices etc.

Provincial BudgetThe total outlay of the four provincial budgets for 201 2-1 3 stood at Rs.1,761.7 billion, 19.4 percent higher than the outlay of

Table 4.6: Overview of Provincial Budgets (Rs Billion)

Items Punjab Sindh KPK Baluchistan Total

2011-12 RE

2012-13 BE

2011-12 RE

2012-13 BE

2011-12 RE

2012-13 BE

2011-12 RE

2012-13 BE

2011-12 RE

2012-13 BE

A. Tax Revenue 621.4 758 345.5 419.5 183.6 222.6 104.4 125.9 1254.9 1526

Provincial Taxes 44.3 55 64 73.1 3.6 4 5.7 5.4 117.6 137.5

GST on Services 36.6 40.5 25 32 8.9 8.9 3.7 4.1 74.2 85.5

Share in Federal Taxes 540.5 662.5 256.5 314.4 171.1 209.7 95 116.4 1 0 6 3 . 1303

B. Non-Tax Revenue 34.2 28.4 73.6 82.7 21.7 26 16.8 16.6 146.3 153.7

C. All Others -16.7 -10.6 24.8 48.3 31.1 34.8 33.5 52.1 72.7 124.6

Total Revenues( A+ B+ C)

638.9 775.8 443.9 550.5 236.4 283.4 154.7 194.6 1 4 7 3 . 1 8 0 4 .

a) CurrentExpenditure

468 532.9 309.5 315.3 161 191.6 85.2 107.3 1023.7 1147.1

b) Development 165.5 250 156 231 84.5 97.6 45.7 36 451.7 614.6

Expenditure

Total Exp (a+ b) 633.5 782.9 465.5 546.3 245.5 289.2 130.9 143.3 1475.4 1761.7Source: Provincial Finance Wing, Ministry of Finance


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Rs.1,475 .4 billion last year. Punjab witnessed the highest grow th of 23 .6 percent in budgetary outlay, followed by KPK (17 .8

percent), Sindh (17.4 percent) and Baluchistan (9.5 percent). The overall provincial revenue receipt is estimated at Rs1,80 4.3 billion for the fiscal year 2012 -13, whic h is 22 .4 percent com pared to last year. The increase is m ainly attributed to thetransfer of GST on services to the provinces. During 2011-1 2 provincial revenues witnessed the growth of 2 5.1 percent.

Allocation of Revenues between the Federal Government and ProvincesFiscal decentralization policy aimed at delegating fiscal powers and responsibilities from the national to sub nationalgovernments in order to achieve economic efficiency, equality and macroeconomic stability. It also ensures effectivegovernance through financial autonomy of provincial governm ents.

In Pakistan the resource distribution is made through the National finance Comm ission ( NFC) award. Historically the resourcedistribution w as based on the single criteria of population. Consequently the distribution of powers between the federation andprovinces remained a critical issue. Recognizing the importance of other factors, 7th National Finance Commission

accounted for revenue generation, poverty and inverse population density.

The most s ignificant aspect of this aw ard was that it has ensured the financial autonomy of the provinces by increasing theirshare in divisible pool from 50 percent to 56 percent in 2010-1 1 and 57.5 percent from 201 1-1 2 onw ards. According to theseventh NFC award, the distribution of the resources is based on multi-weighted criteria which consist of population (82percent), poverty/ backw ardness (10.3 percent), revenue collection/generation (5.0 percent) and area or inverse populationdensity (2.7 percent).

On the other hand share of federal government in the net proceeds of the divisible pool stood at 44 percent in 20 10-1 1 and42.5 percent from 20 11- 12 onw ards. Total transfers to provinces have been projected to increase to Rs 1,545 .5 billion: anincrease of 22.1 percent in 201 2-13 over the actual transfer of Rs 1,266.0 billion in 2011 -12 .

Table 4.7: Transfers to Provinces (NET)

(Rs. Billion)

2008-09 2009-10 2010-11 2011-12 2012-13 BE

Divisible Pool 477.4 574.1 834.7 1,063.1 1,303.0

Straight Transfer 82.4 81.2 163.0 145.6 155.9

Special Grants/Subventions 40.6 82.0 54.1 53.9 56.7

Project Aid 26.3 16.0 21.9 47.8 66.0

Program Loans 0.0 0.0 0.0 4.6 10.8

Japanese Grant 0.0 0.0 0.1 0.7 0.8

Total Transfer to Province 626.8 753.3 1,073.7 1,315.0 1,592.5Interest Paym ent 18.5 18.7 18.5 12.9 15.4

Loan Repayment 21.0 24.0 32.4 36.1 31.5

Transfer to Province(Net) 587.3 710.6 1,022.8 1,266.0 1,545.5

Source: Various issue of Budget in Brief


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Figure 4.3 depicts the rising trend in provincial tax growth s ince 2007 -08 , particularly during first nine months of c urrent fiscal

year it posted a significant growth of 90.3 percent.

Major par t of this grow th achieved through the collection of sales tax on services by Punjab and Sindh. Similarly provincesreceived the significant am ount of the federal government as their share from the divisible pool along with additional grants.Hence the provincial resource mobilization perform ed remarkably w ell during the first nine months of fiscal year 2012 -13 withthe growth rate of 20.8 percent as it stood at Rs. 1,1 25.5 billion against Rs. 93 2.0 b illion in the same period last year.

Another significant feature of provincial fiscal operation is the containment of total expenditures, which reduced by 14.4percent during July-M arch, 2012 -13 o n account of slow growth in current and development expenditures. On account of highrevenues and decrease in expenditures, the provinces posted a surplus of Rs. 103.3 billion during July-March, 2012-13.Punjab posted the surplus of Rs. 42.0 billion followed by Baluchistan (Rs. 21 .9 billion), Sindh (Rs. 20 .1 billion and KPK (Rs.19.3 billion).

Fig: 4.3- Provincial Taxes

125.0

100.0

75.0

50.0

25.0

0.0

2007-08 2008-09 2009-10 2010-11 2011-12 2012-13(Jul-Mar)


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Table 4.8: 5-Years Overview of Provincial Fiscal Operations (Rs. Billion)

Items 2007-08 2008-09 2009-10 2010-11 2011-12 July-March

2012-13 2011-12

A. Tax Revenue 498.2 571.7 688.3 1,063.9 1,197.1 1,002.8 819.8

Provincial Taxes 40.8 46.1 54.8 64.6 107.2 109.6 57.6

Share in Federal Taxes 457.4 525 .6 633 .5 999.3 1,089 .9 8 93.2 762.2

B. Non-Tax Revenue 78.0 83.8 67.9 62.3 48.0 49.0 36.0

C. All Others 91.0 95.0 120.0 85.1 88.6 73.7 76.2

Total Revenues (A+ B+ C) 667.2 750.5 876.2 1,211.3 1,333.7 1,125.5 932.0

a) Current Expenditure 457.0 564.2 646.2 831.2 980.6 766.3 687.1

b) Development Expenditure 214.1 201.8 258.4 245.6 375.4 219.9 175.0

Total Exp (a+ b) 671.1 766.0 904.6 1,076.8 1,356.0 986.2 862.1


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Year Targets Collection

1996-97 286.0 282.1 5.2 98.6 11.6

1997-98 297.6 293.6 4.1 98.7 11.0

1998-99 308.0 308.5 5.1 100.2 10.5

1999-00 351.7 347.1 12.5 98.7 9.1

2000-01 406.5 392.3 13.0 96.5 9.3

2001-02 414.2 404.1 3.0 97.6 9.1

2002-03 458.9 460.6 14.0 100.4 9.4

2003-04 510 520.8 1 3.1 102.1 9.2

2004-05 590 590.4 1 3.4 101.8 9.1

2005-06 690 713.4 2 0.8 103.4 9.4

2006-07 935 847.2 1 8.8 101.5 9.8

2007-08 1.000 1008.1 18.9 100.8 9.8

2008-09 1,179 1157.0 14.8 98.1 8.9

2009-10 1,380 1327.4 14.7 69.0 9.0

2010-11 1,667 1587.0 19.6 95.2 8.8

2011-12 1952.3 1883.0 18.2 96.5 9.1

2012-13 2007 1939.4 03.0 96.6 8.5

Growth i nCollection (% )

Target Achieved(%)

Tax to GDP ratio

FBR's Performance (1996-1 997 to 201 2-20 13)(Rs. in b illions)

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Annexure IV



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