WWW.PILDAT.

ORG

Discussion Paper

Pakistan: Fiscal Management & Accountability

Pakistan Institute of Legislative Development A n d Tr a n s p a r e n c y

WWW.PILDAT.ORG

Discussion Paper

Pakistan: Fiscal Management & Accountability

Pakistan Institute of Legislative Development A n d Tr a n s p a r e n c y

PILDAT is an independent, non-partisan and not-for-profit indigenous research and training institution with the mission to strengthen democracy and democratic institutions in Pakistan. PILDAT is a registered non-profit entity under the Societies Registration Act XXI of 1860, Pakistan.

Copyright Pakistan Institute of Legislative Development And Transparency PILDAT All Rights Reserved Printed in Pakistan Published: January 2014 ISBN: 978-969-558-407-5 Any part of this publication can be used or cited with a clear reference to PILDAT

Pakistan Institute of Legislative Development A n d Tr a n s p a r e n c y

Pakistan Institute of Legislative Development and Transparency - PILDAT Islamabad Office: No. 7, 9th Avenue, F-8/1, Islamabad, Pakistan Lahore Office: 45-A, Sector XX, 2nd Floor, Phase III Commercial Area, DHA, Lahore, Pakistan Tel: (+92-51) 111-123-345; Fax: (+92-51) 226-3078 E-mail: info@pildat.org; Web: www.pildat.org

Pakistan: Fiscal Management & Accountability

DISCUSSION PAPER

CONTENTS
Preface Profile of the Author Introduction Fiscal Deficit & Public Debt Public Expenditure Tax Potential Conclusion Annex I: Constitutional Framework for Fiscal Management Annex II: Fiscal Operations [Data from website of the Ministry of Finance] Annex III: Selected data from the Economic Survey 2012-2013 Annex IV: FBR's Performance (1996-1997 to 2012-1203) 09 13 14 15 17 21 23 28 36

Pakistan: Fiscal Management & Accountability

DISCUSSION PAPER

Preface Preface

he Discussion Paper on Pakistan: Fiscal Management & Accountability has been authored by Dr. Ikramul Haq, Advocate Supreme Court of Pakistan and international tax counsel.

The paper has been commissioned to serve as a Discussion Paper to a series of workshops on Consolidating Democratic Devolution in Pakistan organised by the Forum of Federations and Pakistan Institute of Legislative Development And Transparency PILDAT through January-March 2014. The paper focuses on various aspects of fiscal management and accountability in the wake of the 18th constitutional Amendment to the Constitution of Pakistan.

Disclaimer
The data and views expressed in this paper are those of the author and do not necessarily reflect the views of FoF and PILDAT. Islamabad January 2014
05

Pakistan: Fiscal Management & Accountability

DISCUSSION PAPER

About the Author About the Author

Dr. Ikramul Haq, Advocate Supreme Court of Pakistan and international tax counsel, heads Huzaima & Ikram (Taxand Pakistan), a leading law firm specialising in tax practice. Dr. Ikram is Visiting Professor at Lahore University of Management Sciences (LUMS) and author of many books that include Pakistan: Enigma of Taxation, Law & Practice of Income Tax, Law & Practice of Sales Tax, Law & Practice of Federal Excise, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary, Master Tax Guide, Income Tax Digest 1886-2013 (with judicial analysis), Commentary on Avoidance of Double Taxation Agreements signed by Pakistan, Pakistan: From Hash to Heroin and its sequel Pakistan: Drugtrap 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 more than 1000 articles that have been published in various tax journals in Pakistan and abroad. He is member of International Fiscal Association (IFA) and country correspondence of International Bureau of Fiscal Documentation (IBFD). He has written for IBFD chapters on Transfer Pricing and Tax and Business Laws of Pakistan. He is member of Supreme Court Bar Association and Pakistan Bar Council, besides life member of Lahore High Court Bar Association.
07

Pakistan: Fiscal Management & Accountability

DISCUSSION PAPER

Results of the first half of the current fiscal year indicate that the economy is on the track and that it is moving in the right direction1 statement by Senator Ishaq Dar, Finance Minister, during a meeting with representatives of the Department for International Development (DFID) on January 21, 2014. The root cause of our economic destruction has been the policy of 'reckless borrowing and ruthless spending'Dr. Ashfaque H Khan, Economy in 2012-13, The News, August 8, 2012.

Introduction
For the last many decades,2 fiscal management and accountability in Pakistan has been a serious cause of concern for allthe Government, people and donors. The fundamental problem diagnosed by experts is a pathetic tax-to-GDP ratio coupled with 'reckless' borrowing and 'ruthless' spending. Fiscal decentralisation involving the transfer of taxing and spending powers to sub-national levels of government is totally non-existent in Pakistan despite clear command contained in Article 140A of the Constitution of Islamic Republic of Pakistan. Pakistan is in dire need of fiscal decentralisationpresently major fiscal powers are concentrated in the hands of federal government. Even the Constitution denies the provinces right to levy sales tax on goods within their respective territories. The provinces also have shown apathy to devolve administrative and fiscal powers to local governments. Since all broad-based and buoyant sources of revenue are with the federal government, contribution of provinces in total tax revenues is only six percent and in overall national revenue base (tax and non-tax revenue) just around eight percent. This has made them totally dependence on Centre for transfers from divisible pool. What makes the situation more disturbing is the fact that right of provinces to levy sales tax on services is encroached by federal government through levy of presumptive taxes on services under the Income Tax Ordinance, 2001, sales tax on gas, electricity and telephone services and excise duty on a number of services.3
1.

The provinces should have the exclusive right to levy indirect taxes on goods and services within their respective physical boundaries. Right to levy any tax on goods should be restored to the provinces as was the case at the time of independence. Despite levying of taxes by federal government that should have been with provinces, the Centre has miserably failed to reduce the burgeoning fiscal deficit that is reaching the horrifying mark of Rs. 1.8 trillion this year. Had provinces been allowed to generate their own resources, the present chaotic situation could have been averted. Centre has been claiming that provinces lack infrastructure to efficiently collect sales tax. This has proved wrong as Sindh and Punjab collected much more sales tax on services than by Federal Board of Revenue (FBR) after establishing their own tax apparatuses in 2011 and 2012 respectively. In 2013 Khyber Pakhtunkhwa also followed in their footstep. We need amendments in Constitution to ensure judicious distribution of taxation rights between the federation and its units. Unless it is done, the provinces will continue to remain hugely dependent upon federal transfers. Transferring of indirect taxes on consumption of goods to the provinces will empower the federating units and raise the tax-to-GDP ratio. Sindh Revenue Board (SRB) and Punjab Revenue Authority (PRA) are proving this point. Collection of SRB in 2011-12 and 2012-13 at Rs. 25 and Rs. 33.7 billion is impressive as compared to what Sindh used to get from FBRnever more than Rs, 12 billion. PRA in its very first year (2012-13) collected Rs. 37 billion compared to Rs. 26 billion received in the same head from the FBR in 2011-12. The provincial performance in the case of sales tax on services completely belies the impression that provinces do not have the capacity to generate taxes. If sales tax on goods is given back to provinces, as was the case at the time of independence, they will perform much better as experience of handling sales tax on services shows. However, the performance of provinces in collecting agricultural income tax is extremely poor. This is a common issue both at federal and provincial level arising from absence of will to collect income tax from the rich and mightythe meagre collection of agricultural income

2. 3.

The Federal Board of Revenue Chairman says that because of SROs and different agreements, almost two-thirds of our imports are duty free and only the remaining one-third is taxable. If only the SROs, which are nothing more than tax exemption to government's favourite businessmen and business houses, are revoked, the government can easily double its revenues. If dishonest practices such as under-invoicing and tax evasions are eradicated, the government can easily triple its revenues. Imagine the finance minister of any civilized nation, saying the economy is going in the right direction when two-third of tax money is virtually stolen under his very nose.The Frontier Post, January 23, 2014 In economics and political science, fiscal management is the use of government revenue collection and expenditure to influence the economy. Two main instruments of fiscal policy are changes in the level and composition of taxation and government spending in various sectors. Centre-provincial harmony: Equitable distribution of fiscal rights needed, Business Recorder, March 13, 2006.
09

Pakistan: Fiscal Management & Accountability

DISCUSSION PAPER

taxless than Rs, 3 billion by all provinces and Centreshould be a serious cause of concern. It is imperative that right to levy tax on income, including agricultural income, should be with the Centre. In return, the Centre should hand over sales tax on goods to the provinces.4 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. The federal expenditure under debt servicing is Rs. 1154 billion, defence affairs & services is Rs. 627 and running of civil government is Rs. 275 billion. After charge of these four items, there is deficit of Rs. 138 billionmeaning by more borrowings! While the provinces have not been allowed to levy and collect indirect taxes on goods within their geographical boundaries, the federal government has utterly failed to tap the real revenue potential. Failure of FBR to tap real tax potential adversely affects the provinces. In fiscal year 2012-13 due to massive revenue shortfall of over Rs. 400 billion on the part of FBR, all the four provinces could not get the promised amounts from NFC. Any shortfall in FBR's revenues or exemptions through statutory regulatory orders (SROs) jeopardise projection of revenue collection and fiscal deficit.

4.
10

Taxing agricultural income: qua Constitution, Business Recorder, April 9, 2010.

Pakistan: Fiscal Management & Accountability

DISCUSSION PAPER

Position under 7th NFC Award

Salient features

Position under 7th NFC Award

Who will get what? Vertical distribution 7th NFC Center Provinces 44% 56% 7th NFC Punjab 51.74% 24.55% 14.62% 9.09% Sindh KPK Balochistan 6th NFC 52.5% 47.5% 6th NFC 53.01% 24.94% 14.88% 7.17% Change -8.5 +8.5

Final share of provinces: Punjab 51.74

percent, Sindh 24.55 percent, Khyber Pakhtunkhwa (KPK) 14.62 percent and Balochistan 9.09 percent.

Federal collection charges to be reduced from

5% to 1%

Horizontal distribution Change -1.27% -0.39% -0.26% +1.92%

Sindh to receive additional transfer of Rs. 6

billion from federal government

Provinces in agreement on multiple

indicators and respective weights

Projected amount (in billions) 2009 Punjab Sindh KPK Balochistan 419 197 118 53 2010 471 223 133 83 2014 938 445 265 165

Sales tax acknowledged as provincial subject KPK to be given additional 1% from federal
divisible pool

FBR has been persistently failed to meet budgetary targets for the last many years what to speak of realising the real revenue potential, which is not less than Rs. 8 trillion5. In 20102-13, it even failed to collect Rs. 2000 billion. This year target is less than Rs. 2500 billion. The failure to tap the real tax potential is the real dilemma of Pakistan. Poor performance of FBR adversely affects the provinces as they are wholly dependent on what the Centre collects and transfers to them from the divisible pool. Centre is unwilling to grant the provinces their legitimate taxation rights while it collects too little to meet their overall financial demands. The size of the cakedivisible poolis so small that nothing substantial can be done to come out of debt enslavement and to spend adequately for the welfare of the people, no matter in which part of the country they live. Track record of FBR shows remote possibility of collecting even Rs. 6 trillion in the next three years to give enough fiscal space both to the Centre and the provinces to come out of the present economic mess, thus providing some relief to the poor as well as trade and industry. Under the
5. FBR: new chairman, old challenges, Business Recorder, August 2, 2013

given scenario, federation-provinces tax tangle will continue unchecked and further taxation through local governments, when elected, would not serve any useful purposethere will be no relief to the people, rather tax burden will increase manifold. Pakistan will remain in debt enslavement and more and more people will be pushed below the poverty line. If we want to come out of this crisis, the parliament will have to reconsider the prevailing social contract between federation and the provinces. Provincial autonomy and local self-governance without taxation rights and equitable distribution of income and wealth is meaningless. We cannot overcome perpetual economic and political crises unless the provinces are given true autonomy; ownership of all resources; generation of own revenue and exclusive right to utilise it for the welfare of their denizens. Fiscal decentralisation and municipal self-rule should essentially be linked with a social policy based on the principle of universal entitlements for all residents in terms of access to social benefits and social services. Taxation

11

Pakistan: Fiscal Management & Accountability

DISCUSSION PAPER

without representation also means denial of spending for the essential entitlements guaranteed in the Constitution.6 The principle of universal entitlements seeks to prevent the formation of inequalities and the foundation of the poor as a separate social group, whereas residualism/marginalism takes the form assisting the poor and the needy, and thus implicitly defining them as certain types of social groups. The provincial parliaments in Pakistan should be pressurized by civil society to enact laws for establishment of local governments as ordained under Article 140A of the Constitution on the basis of social policythey have so far just copied the previous outdated ones with patch work here and there. The ruling classes do not want to empower people through self-governance. They want to enjoy total control over resources. The local governments will not be meaningful unless entitled, within national economic policy, to have adequate financial resources of their own, of which they may dispose freely within the framework of their powers and for public welfare. In a nutshell, for achieving the goal of fiscal decentralisation, local governments' financial resources must commensurate with the responsibilities provided for by the constitution and the law to ensure the welfare of the people and ensure sustainable growth at grass root level. Part of the financial resources of local authorities shall derive from local taxes and spend for providing universal entitlements and development. Pakistan must follow the model of welfare states where resources available to local governments are based on a sufficiently diversified and buoyant nature to enable them to keep pace with the real evolution of the cost of carrying out their tasks. There is no political will to implementing a well-defined reform agenda, on which general consensus exists. Addiction to borrowed money and lust for wasteful spending are the main stumbling blocks for achieving the cherished goal of self-reliance that can pave way for rapid growth, employment generation and substantial spending for social sectors. The ever-widening fiscal deficit, amongst many other reasons, has its roots in wasteful funding of a monstrous Government machinery, especially corruption-riddeninefficient public sector enterprises (PSEs), and extending of tax-free perks and perquisites to elites. These profusely bleed the already scarce resourcesboth tax and non-tax. The story of persistent failure of implementing a prudent fiscal policy in Pakistan and poor management of
6.
12

economic affairs is thus, not unknown or untoldit is even candidly admitted in all official documents, released from time to time, relating to taxation, public expenditures and public borrowing. This paper briefly touches some vital areas posing challenges to fiscal management and accountability vis-vis available solutions to overcome the prevalent crisis of meeting huge budgetary gap.

Municipal self-governance, Business Recorder, July 19, 2013

Pakistan: Fiscal Management & Accountability

DISCUSSION PAPER

Fiscal Deficit & Public Debt

The absence of prudent fiscal policy coupled with lack of implementation and accountability has destroyed macroeconomic stability during the last five yearsthe last year of the federal government has proved to be the worst, rather disastrous. At provincial level as well, the performance of all the four governments has been equally appalling'Fiscal Policy Statement for 2012-13 issued by the Debt Policy Coordination Office of Ministry of Finance. Managing high fiscal deficit (root cause of many economic ills) coupled with massive debt burden is the toughest challenge faced by fiscal managers of Pakistan. The welladmitted solution: substantial increase in resources and drastic reduction in spending is easier said than done. Fiscal austerity, critics7 say, in the past had failed in reducing the debt burden of Pakistan. From 2007-2012, Pakistan's fiscal policy remained under immense pressure owing to continued security related issues, greater than targeted subsidies, flood related expenses and global financial crisis.8 The government borrowed heavily from external and internal resources in order to finance the fiscal deficit, due to which a huge amount of money was paid towards interest payments. All these factors relentlessly affected Pakistan's fiscal capacity to finance the fiscal deficit.9 (please see official data at Annex III & IV. ) Fiscal Policy Statement for 2012-2013,10 released by the Debt Policy Coordination Office of the Ministry of Finance in compliance of section 6 of the Fiscal Responsibility and Debt Limitation Act 2005 [FRDLA, 2005], while expressing grave concerns about overall fiscal scene, expresses dissatisfaction over failures of provinces in meeting the tax targets. It says the efforts of provinces in collection of
7.

taxes were not in line with the understanding reached during the 7th National Finance Commission (NFC) Award. The provinces registered a deficit of Rs. 39 billion as against targeted surplus of Rs. 125 billion, leaving a significant shortfall in non-tax revenues for the fiscal year 2011-12. The Fiscal Policy Statement for 2012-2013 also reveals that despite transferring the functions of 17 ministries to provinces, federal expenditure did not register any reduction because majority of the employees of the devolved ministries preferred to stay on the Federal payroll rather than opting for the Provinces. The second reason for increase in expenditure at Federal level was creation of some new ministries and upgradation of some divisions. Since the Federal Government agreed to finance the vertical programmes under the NFC accord, the pressure on its fiscal balance continued. According to the Fiscal Policy Statement for 2012-2013, the provinces were unable to support the Federal Government as had been envisaged in the fiscal devolution process. More specifically, it is observed, the provinces' share in total expenditure increased from 31.5% in 2011 to 34.5% in 2011-2012, whereas their share in revenue generation remained almost the same at 6.0% of the total (federal plus provincial) revenues. It is revealed that the provinces posted surplus of Rs. 134 billion in 2010-2011 mainly due to upward revision in their share (56%) in the divisible pool under the 7th NFC Award. It is, however, disturbing to note that in 2011-2012, they registered a deficit of Rs. 39 billion. They did not make any meaningful efforts to raise their own revenues and reduce unproductive expenditure. The deficit in 2011-12 was driven by sharp rise in provincial expenditures.11

Dr. Akmal Hussain in 'The knife Edge of Fiscal Space' [Daily Times, January 22, 2004] aptly observed that: The history of economic policy in Pakistan shows that economic disasters have befallen the hapless citizenry due to sins of commission as much as by sins of omission. We will show in this article that there was a time over a decade ago when incorrect sequencing of the Structural Adjustment Programme led to disastrous economic consequences. That was a sin of commission. Today we may be about to commit a sin of omission: The failure to translate the over 10 billion dollars State 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 poverty and declining growth. That elusive symbol of economic health is now at hand. After a decade of stringent restrictions on development expenditure and more recently a sharp reduction in the debt-servicing burden (following debt restructuring), the fiscal deficit as a percentage of GDP has fallen from 8.8 per cent in 1990-91 to 4.5 per cent in 2002-03, while State Bank reserves are at an all time high level of over 10 billion dollars. 8. Economic Survey of Pakistan 2012-13, page 48. 9. Ibid 10. 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
13

Pakistan: Fiscal Management & Accountability

DISCUSSION PAPER

Huge opportunities accrued to the Provinces in the wake of the 7th NFC Award and 18th Constitutional Amendmentright steps towards fiscal independence, accountability and efficient decision making for the provision of local services and financing thereofbut they failed to convert them for well-being of masses. It is high time that the Provinces should stop blaming the Federal Government for all their ills and fiscal mismanagements. They should put their own houses in order, exploit better opportunities available to them, exploit natural and human resources to the optimal level, tax the rich for the benefit of the poor, reduce expenditure, go for long-term projects yielding more and more employments and ensure sustainable economic growth with social justice for all. So far their performances in the wake of the 7th NFC Award are not satisfactory at all. 12 According to the Debt Policy Coordination Office, under the 7th NFC award, around 70 per cent of the total revenues are down-streamed to provinces both directly and indirectly. The Federal Government is left with only 30 per cent of the total revenues, whereas, expenditure on interest servicing, security and subsidies on food and energy constitute 60.9 per cent of the total revenues. Furthermore, total revenues also include State bank of Pakistan (SBP) profit that will start declining once Government starts repayment of SBP debt as envisaged in the SBP Act and reduction in domestic interest rates. This essentially means that the consolidated fiscal deficit of the country will remain on the higher side till such time the revenue generation efforts bear fruits and the tax to GDP ratio is increased.13 The Debt Policy Statement 2012-2013 issued by the Debt Coordination Office of the Ministry of Finance in compliance of section 7 of FRDLA 2005 concedes that the debt to GDP ratio has hovered around 60% since 2007-08. In 2011-12, public debt serving stood at Rs.1024 billion against Rs.856 billion paid during 201011.14 The Debt Coordination Office claims that soundness of Pakistan's debt position, as given by various sustainability ratios, remains higher than the internationally accepted thresholds. Total Public debt
12. 13. 14. 15. 16.

levels around 3.5 times and debt servicing below 30 percent of government revenue are generally believed to be within the bounds of sustainability. Government is making concentrated efforts to increase the revenues and rationalize current expenditure to reduce the debt burden and improve the debt carrying capacity of the country to finance the growth and development needs.15 All economists are unanimous that during 2007-2012 both at the Federal and the Provincial levels no concrete measures were taken to foster fiscal discipline. No strategy was devised to mitigate risks of falling foreign reserves and increasing debt burden.16 Resultantly borrowings from banks increased manifold to pay off liabilities of the PSEs. According to the SBP , this has inflicted economy heavily and resulted in billions of rupees increase in the stock of total debt & liabilities (TDL).17 Pakistan has lost some US $ 12 billion forex reserve since July 2011, when they stood at $14.8 billion. It has lost US $ 2.0 billion reserve since the signing of the IMF programme. The last five years of economic mismanagement brought the country to the verge of default. The present government sought the assistance of the IMF to prevent that. The IMF approved a new programme amounting US $ 6.68 billion on September 4, 2013.18 The unabated borrowings to meet burgeoning budgetary deficit is sinking the economy. One of the major weaknesses of economic governance is unchecked wasteful spending on monstrous Government machinery and inefficient PSEs. Our foreign debt is going to be US $ 75 billion in 2015 and domestic debt Rs. 20 trillion if immediate curative measures and tough decisions are not taken.

Public Expenditure
Fiscal consolidation must emphasise persistent structural reforms for resource mobilisation and expenditure rationalisation over temporary fiscal measures such as increasing tax rates and reducing

Ibid Ibid Debt Policy Statement 2012-13, Debt Coordination Office of Ministry of Finance http://www.finance.gov.pk/publications/DPS_2012_13_web.pdf Ibid Pakistan's public debt (both rupee and dollar components) have grown at an average rate of 21.5 percent per annum from 2008-12 as against an average rate of 6.6 percent per annum during 2000-07. In absolute terms, public debt rose from Rs. 6,040 billion in 2007-08 to Rs. 14,255 billion by the end 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.
14

Pakistan: Fiscal Management & Accountability

DISCUSSION PAPER

expenditure across the board. Fiscal institutions including the country's debt office can play an important role in locking any gains. Reducing public debt takes time; therefore, fiscal consolidation must focus on enduring structural changeDr Ashfaque H Khan, A nation's debt, The News, August 27, 2013. 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 per cent of the GDP in 2010-2011 to Rs. 901.9 billion or 4.5 per cent of GDP in 2011-2012. In terms of the current expenditure, it stood at 28.9 per cent during 2011-2012. The rise in interest payments during the period indicates the growing unsustainability of the fiscal account. Another major revenue leakage relates to subsidies to loss-incurring PSEs and power sector, together amounting to Rs. 700 billion.19 The Economic Survey 2012-2013 says that share of current expenditures in total expenditures has declined significantly from 84.0 percent in 2010-2011 to 79.3 per cent in 2011-2012.20 It further declined to 77.0 per cent in 2012-2013. There was also a surge in defence expenditure that accounted for 16.2 per cent of current expenditure in 2011-2012 against 15.5 per cent in 2010-2011.21 Period from 2008-2013 was adjudged as 'financial harakiri' by some economists.22 Never in the history of this country has the nation seen such a fiscally irresponsible government. They have maintained a large budget deficit year-after-year over the last five years, and accordingly more than doubled the country's public debt ably assisted, of course, by the exchange rate depreciation. Accordingly, they damaged a relatively robust economy in a short span of five years without guilt and shame. Because of unwillingness to mobilise resources on the one hand and reckless spending on the other along with an unconsidered NFC Award, Pakistan's fiscal balance has been destroyed thoroughly in the last five years. The nation will witness further instances of financial hara-kiri in the last two weeks of the present regime the impact of which will continue to haunt the economy in the years to come.23
19. 20. 21. 22. 23. 24.

Experts are even critical of the present policies emphasising that fiscal consolidation is not receiving due attention. There is no serious work being done to control the wasteful expenditure by right-sizing the government apparatus. They argue that for effective fiscal management and accountability, substantial reduction in unproductive current expenditure is required through the following initiatives: Twenty-five ministries can be either dissolved or rationalised, thereby saving Rs 200 billion. ii. Rs. 400-500 billion on financing the losses of PSEs can be eliminated by restructuring and privatising those entities. iii. Badly targeted subsidies, consuming about Rs. 500 billion should be withdrawn and some part of the saved money could be directed to expand coverage of the social protection programme for the poor. iv. The total public debt at Rs 30 trillion is unsustainable. Debt servicing cost has reached Rs.1500 billion, which is over 40 per cent of total government revenue. Drastic measures need to be taken to reduce the debt stock by retiring some of the debt with the proceeds of privatisation of public sector corporations such as PIA, Pakistan Railways and the Pakistan Steel Mills; sale of some of the state-owned real estate which is being used for unproductive purposes as perks for government officials.24 i.

Tax Potential
The people have to understand that the tax money stolen by the corrupt rich of the country represent the good schools, colleges, hospitals, roads and many other projects of welfare stolen from us poorThe Frontier Post, January 23, 2014 The government has relied on raising tax rates rather than broadening the tax base. In other words, the government has raised the tax burden of those who were already paying taxes. Those who are influential have never paid taxes, and have once again remained out of the tax netHurting the poor, The News, June 14, 2013 In recent years Pakistan became target of severe criticism

Economic Survey of Pakistan 2012-13, page 52 Ibid Ibid Dr. Ashfaque H Khan, Financial hara-kiri, The News, March 5, 2013 Ibid Dr. Akmal Hussain, Creating the fiscal space, The Tribune, February 14, 2011
15

Pakistan: Fiscal Management & Accountability

DISCUSSION PAPER

from many countries and donors for not collecting taxes due, especially from the rich and mighty. It is an undeniable reality that both centre and provinces are not collecting taxes diligently. For fiscal year 2012-2013, the FBR collected Rs. 1,939.4 billion against original target of Rs. 2,381 billion25 showing huge shortfall of Rs. 441 billion. The contribution of Provinces in overall tax collection is less than 6 per cent of the GDP . Pakistan's tax potential at the Federal level is not less than Rs. 8 trillion. There are 10 million individuals having annual taxable income of Rs 1.5 million,26 total income tax collection from them at the prevalent tax rates comes to Rs. 3,750 billion. If we add income tax collected from corporate bodies, other non-individual taxpayers and individuals 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. 739.7 billion as income tax in 2012-2013. Similarly, due to leakages in sales tax, federal excise and custom duties, the total collection is not more than 30% of actual potential. In fiscal year 2012-2013, the FBR collected Rs. 841.3 billion under the head sales tax. Collection for customs and excise duties was Rs. 239 billion and Rs. 119.4 billion respectively. The total indirect collection of just Rs 1199.7 billion was pathetically low. It should 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 raising existing tax rates. The following measures at the Federal and the Provincial levels can increase the tax-to-GDP ratio from the present 8.5 per cent to 16 per cent, over the next two to three years: Bridging of tax gap through effective enforcement & voluntary compliance ii. Withdrawal of all concessionary Statutory Regulatory Orders (SROs) iii. Substantial property tax on the rich iv Presumptive agricultural income tax of Rs.5,000 per acre on irrigated agricultural holdings above 25 acres and Rs. 2000 per acre on un-irrigated holdings above 50 acres v A capital gains tax on transfer of all moveable and i.

immovable assets. vi Imposition of sales tax on all kinds of services by the provinces Amending of tax codes each year through the Finance Bill and in between, by way of statutory regulation orders (SROs) is not serving any useful purposethis is not a solution to improve tax administration. The solution lies in converting the FBR into an autonomous body run by independent Board of Directors comprising professionals and answerable directly to the Parliament and not the headquarters of the ruling party. Taxes should be imposed by the Parliament and not any executive authority. The FBR must be insulated from all kinds of political influences. Enforcement of tax laws without any fear or favour should be the first and top most priority of the Government if it wants to rescue the country from the present economic mess coupled with expending taxes for the benefit of masses and desisting from wasting funds on white elephantsmonstrous public sector enterprises sleaze with inefficiency and corruptionso that public can see that the elected Government is a responsible one and cares for them. This would promote tax culture and restore people's faith in the tax system. Voluntary tax compliance can be improved only through a strong deterrent system where the compliant taxpayers are respected and rewarded, while evaders are exposed and punished under the law.

25. The original target of Rs.2381 billion was however downward revised to Rs. 2007 billion. FBR has collected Rs. 1,939.4 billion. In absolute terms an additional amount of Rs. 57 billion has been collected over the collection of past fiscal year. The growth in net revenue collection has been 3.0 percent over the collection of FY: 2011-12 which is lowest during last 13 years. Similarly the tax-GDP ratio dropped from 9.1% in the preceding year to 8.5% in 2012-13FBR Year Book 2012-13 26. http://data.worldbank.org/country/pakistan
16

Pakistan: Fiscal Management & Accountability

DISCUSSION PAPER

Conclusion
Effective fiscal management and accountability alone can help Pakistan to effectively overcome fiscal deficit.27 Once fiscal space is created by good governance, the government can focus on providing basic amenities like safe drinking water, health and education, transport and housing to the people. Resource mobilisation should be given priority to build infrastructure, facilitate growth of small and medium sized firms in the industrial sector and small farms in the agricultural sector for an employment intensive and equitable economic growth process. At the same time, large corporations with equity stakes for the poor can be established through public-private partnerships. This would set the stage for a structural change that could help achieve economic growth for the people and by the people which is presently confined to the elites only.

27. The Finance Minister of Pakistan during his meeting with a delegation of DFID on January 21, 2014 expressed satisfaction over results of economy and its direction. He said that revenue collection has shown an increase of 16%, exports have gone up by 5%, remittances by 9% and growth in the economy in the first quarter has been reported by the Pakistan Bureau of Statistics to be at 5%. Besides there has been an unprecedented surge in the Karachi Stock Exchange Index which has crossed the 27000 points. On the foreign exchange reserves position, he said the government inherited a fragile position and entered into an IMF programme to stabilize it. Admitting that Pakistan has negative inflows despite an IMF plan, Mr. Ishaq Dar said that the government has chalked out a plan to increase the foreign exchange reserves to US$16 billion by the end of the current year. Earlier, the team of IMF at the end of its first review visit to Pakistan [October 28-November 8, 2013] issued official statement that it expects growth to reach about 2 percent for FY2013/14 as a whole. The mission said it was pleased with the strong fiscal performance in the first quarter of 2013/14 and the steady implementation of the government's structural reform agenda.
17

APPENDICES APPENDICES

Pakistan: Fiscal Management & Accountability

DISCUSSION PAPER

Annexure I Constitutional Framework for Fiscal Management

The 1973 Constitution of Pakistan [the Constitution] provides explicit provisions for running the Islamic Republic of Pakistan (a federation) with a three-tier system of governancethe federal, provincial and local. Till today, the third tier (local government) is non-operativeArticle 140A of the Constitution requires establishment of local governments by all provinces devolving political, 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 may make laws not enumerated in the Federal Legislative ListArticle 142 of the Constitution. The matters of common interest listed in Part-II of the Federal Legislative list are dealt with and settled by the Council of Common Interests appointed by the President of Pakistan. The Council consists of the Chief Minister of each Province and an equal number of members from the Federal Government nominated by the Prime Minister as the members of this Council and is chaired by the Prime Minister himself, if he is the member of the Council, or by a person nominated by the President. All aspects of public sector finance, such as currency, public debt, financial and accounting procedures are solely federal matters. Accordingly relevant laws and regulations are issued by the Federal Government. The Auditor General of Pakistan is the auditor of both the Federal and Provincial Governments and his duties and powers have been given in the Pakistan (Audit and Accounts) Order 1973. The collection of major taxes such as income tax, custom duties, excise duties and sales tax and borrowings from external sources rests with the Federal Government, while the collection of revenues from local resources such as land revenue, sale of land, and sale of water for irrigation are assigned to the Provinces. The proceeds of some taxes specified in the Constitution are divided between the Provinces after deducting a percentage of collection charges by the Federal Government. In order to distribute these taxes and coordinate important matters of Federal and Provincial finance, the Constitution provides for a National Finance Commission consisting of the Minister of Finance of the Federal Government and Ministers of Finance of the various Provincial Governments. This commission allocates a share for each Province from the divisible pool of taxes collected. In addition, the Provincial Governments receive grants from the Federal Government. As regards expenditure, each Provincial Government incurs outlays according to the commitments made in individual budget estimates. Because of commonality in the financial provisions of the Federal and Provincial Governments, procedures and practice 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 Government consisting of the Prime Minister and Federal Ministers. The Prime Minister is the Chief Executive of the Federal Government and manages public funds, while those of the Provinces are managed by the Chief Ministers. The Prime Minister is assisted by the Cabinet and, in financial matters, by the Finance Minister. Similarly, for the Provinces, Chief Ministers are the Chief Executives who are assisted by the Provincial Ministers. The Prime Minister makes known to the National Assembly each year the financial needs of the Federal Government. The financial needs of the Provincial Governments are made known to the Provincial Assemblies by the Chief Ministers. These are discussed and funded from revenues raised from taxes and other sources. No tax or duty can be imposed nor can any expenditure be incurred without the authority of the National Assembly or by the Provincial Assembly, as the case may be.

21

Pakistan: Fiscal Management & Accountability

DISCUSSION PAPER

Consolidated Fund
The Government accounts are mentioned in two parts, viz the Federal and Provincial Consolidated Fund and Public Accounts. Revenue receipts, moneys received in repayment of loans given by Government, and the loans raised by Government are credited to the particular Federal/Provincial Consolidated Fund. The current and development expenditure along with expenditure on debt servicing is debited to Government account. The Public Account comprises all moneys received by or on behalf of Government or those deposited with courts of law such as civil and criminal court Deposits. The Federal and Provincial Governments keep their own separate accounts with the State Bank of Pakistan. The Federal Government generally uses all branches of the State Bank, or the National Bank of Pakistan acting as agent of the State Bank. The Provincial Governments are restricted however, to the branches of the two banks in their respective jurisdictions.

22

Pakistan: Fiscal Management & Accountability

DISCUSSION PAPER

Annexure II Fiscal Operations BUDGET AT A GLANCE [FY 2013-2014]

Rs. in billion RECEIPTS Tax Revenue* Non-Tax Revenue a) b) I. II. III. IV. Gross Revenue Receipts Less Provincial Share Net Revenue Receipts (a-b) Net Capital Receipts (Non Bank) External Receipts (net) Estimated Provincial Surplus 2,598 822 3,420 1,502 1,918 507 169 23 Pension Defence Affairs & Services Grants and Transfers Subsidies Running of Civil Government Provision for Pay & Pension V. Bank Borrowing 975 B. DEVELOPMENT Federal PSDP Net Lending Other Dev. Expenditure TOTAL RESOURCE (I to V) Out of which FBR Taxes: 3,591 TOTAL EXPENDITURE (A+B) 171 627 337 240 275 25 762 540 50 172 3,591 A. CURRENT Interest Payment EXPENDITURE 2,829 1,154

Rs 2,475 billion

23

Pakistan: Fiscal Management & Accountability

DISCUSSION PAPER

Table 1

Provisional Pakistan: Summary of Consolidated Federal and Provincial Budgetary Operations, 2013-2014
(In Million of Pakistan Rupees) July-Sept. 2013

Total Revenue Tax Revenue Federal Provincial Non-Tax Federal Provincial Total Expenditure Current Expenditure Of which : Mark-up Payments Defence Development Expenditure & net lending Statistical Discrepancy Budget Deficit Financing External Domestic Non-Bank Bank Memo Items: Total Revenue Tax Revenue Nontax Revenue Total Expenditure Current Of which : Mark-up Payments Defence Development Expenditure and net lending Budget deficit GDP (Rs. in Billion) Note: Figures based on information from AGPR/Provincial A.Gs./ SBP/EAD.

829,712 537,056 494,948 42,108 292,656 281,960 10,696 1,116,620 868,377 301,141 146,464 170,149 78,094 286,908 286,908 (27,213) 314,121 116,086 198,035 3.2 2.1 1.1 4.3 3.3 1.2 0.6 0.7 1.1 26,001

25

Pakistan: Fiscal Management & Accountability

DISCUSSION PAPER

Table 2

Provisional Pakistan: Summary of Consolidated Federal and Provincial Revenue 2013-2014

(In Million of Pakistan Rupees)

July-Sept. 2013 Total Revenue Tax Revenue Direct Taxes Taxes on property Taxes on goods and services Excise duty Sales Tax Taxes on international trade Other taxes Stamp duties Motor vehicles tax Other taxes Petroleum Levy Nontax Revenue Mark-up (PSEs & Others) Dividend SBP profit Defence Citizenship, Naturalization & Passport Fee Development Surcharges on Gas Discount Retained on Crude Oil Royalty on Oil/Gas Windfall Levy against Crude Oil Gas Infrastructure Development Cess Foreign Grants C-01010 Others (Profit) Others Memo Items: Total Revenue Tax revenue Direct Taxes Taxes on property Taxes on goods and services Excise duty Sales Tax Taxes on international trade Other taxes Nontax Revenue GDP (Rs. in Billion)
26

829,712 537,056 160,777 3,607 255,924 24,685 231,239 52,791 63,957 4,431 3,156 30,620 25,750 292,656 56,849 3,719 80,000 1,956 3,989 20,846 3,938 19,173 3,773 3,046 10,115 67,636 17,616 3.2 2.1 0.6 0.0 1.0 0.1 0.9 0.2 0.2 1.1 26,001

Pakistan: Fiscal Management & Accountability

DISCUSSION PAPER

Provisional Table 3 Pakistan: Summary of Consolidated Federal and Provincial Expenditure 2013-2014
(In Million of Pakistan Rupees) July-Sept. 2013 Total Expenditure Current Expenditure Federal General Public Service Servicing of Domestic Debt Servicing of Foreign Debt Superannuation Allowances & Pension Grants (Other than Provinces) Other General Public Service Defence Affairs and Service Public Orders and Safety Affairs Economics Affairs Environmental Protection Housing and Community Amenities Health Recreation Culture and Religion Education Affairs and Services Social Protection Provincial Development Expenditure and net lending Total Development Expenditure PSDP Federal* Provincial Other Development Expenditure Net lending Memo Items: Total Expenditure Current Expenditure Federal General Public Service Servicing of Domestic Debt Servicing of Foreign Debt Superannuation Allowances & Pension Defence Affairs and Service Provincial Development Expenditure GDP (Rs. in Billion) 1,038,526 868,377 639,530 451,994 286,262 14,879 36,437 41,819 72,597 146,464 18,281 6,240 144 81 2,283 2,062 11,704 277 228,847 170,149 87,126 79,538 44,949 34,589 7,588 83,023 4.0 3.3 2.5 1.7 1.1 0.1 0.1 0.6 0.9 0.3 26,001
27

Pakistan: Fiscal Management & Accountability

DISCUSSION PAPER

Annexure III Selected data from the Economic Survey 2012-2013

Fiscal Policy Development It has been widely recognized that a prudent fiscal policy (low level of fiscal deficit and public debt) plays a significant role not only in reducing the risks of economic crisis but can also improve country's fiscal capacity to finance larger fiscal deficit without 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 sustaining the economic growth. However, recent improvement in global economic situation has somewhat lowered short-term fiscal risks. Still concentrated efforts are required to contain the spending at reasonable level. Over the years, Pakistan's fiscal policy remained under immense pressure owing to continued security related issues, greater than targeted subsidies, flood related expenses and global financial crisis. Although, Pakistan's economy was not directly affected from financial crisis, however, in confluence with unplanned expenditures mentioned above during the past five years resulted in mounting fiscal pressures. Besides, the government borrowed heavily from external and internal resources in order to finance the fiscal deficit, due to which a huge amount of money was paid towards interest payments. All these factors relentlessly affected Pakistan's fiscal capacity to finance the fiscal deficit. Nevertheless, during the past three years the efforts to contain the fiscal deficit within reasonable limit through an expenditure management strategy, austerity measures and reforms in Public Sector enterprises (Box-1) have yielded the result. Moreover, during past two years the government consolidated the outstanding power sector debt of worth Rs. 511 billion (Rs 120 billion in 2010-11 and Rs 391 billion in 201112.). This one of settlement during 2010-11 and 2011-12 will be helpful in making substantial savings on interest payments in coming year. All the key fiscal indicators surpassed their budgeted targets set for relevant years, however several efforts to contain the expenditures and to increase the revenues during past five years resulted in significant decline of fiscal deficit from 7.3 percent of GDP in 2007-08 to 6.8 percent of GDP in 2011-12. Total expenditures as percentage of GDP declined from 21.4 percent in 2007-08 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 201213. In total expenditures, current expenditures were contained at 15.5 percent of GDP in 2011-12 from 17.4 percent in 200708, while it is expected to decline further in 2012-13 at 14.6 percent of GDP . On the other hand development expenditures stood at 3.6 percent in 2011-12 as compared to 4.2 percent of GDP in 2007-08. It is expected to rise by 4.4 percent in 201213. Out of total development expenditures, Rs 873 billion was earmarked to PSDP (allocation of Rs 360 billion to federal government and Rs 513 billion to provincial government). On the revenue side, tax to GDP ratio remained within the narrow band of 9.1 to 10.3 percent since 2007-08 to 2011-12. Total revenues declined from 14.1 percent in 2007-08 to 12.8 percent in 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 increase by 14.3 percent in 2012-13 owing to increase in tax revenues up to 11.1 percent and non-tax revenues up to 3.2 percent of GDP in 2012-13. The figure 4.1 reflects the widening of fiscal deficit during the past 5 years due to decrease in revenues and increase in expenditures. Structure of Tax Revenue A well designed tax structure of the country not only improves the economic and industrial competitiveness but also contributes toward stimulating industrial activity and accordingly growth in the economy. The strong base of a tax system provides a more stable source of income needed to finance the public expenditure with an aim to relieve poverty and deliver public services. Historically, Pakistan's tax system undermined due to structural weaknesses like narrow tax base, massive tax evasion and administrative weaknesses etc. these structural weaknesses have taken a toll on overall tax collection as the country has witnessed a lowest tax-to GDP ratio not only in the developing countries but also within 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. During July-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 structure of Pakistan is distortionary and incentivizing massive tax evasion. Additionally, some sectors are under taxes and some are not taxed at all which reflects the narrow base. In particular, there is a least contribution in taxes from the major sectors of our economy (agriculture and services), as agriculture is contributing 2.5 percent in tax against its 21.4 percent share in GDP , while services sector is contributing 36.7 percent against its major share in GDP i.e. 57.7 percent. There is a broad consensus that tax to GDP ratio can only be enhanced if all sectors of economy contribute proportionately toward tax revenue.
28

Pakistan: Fiscal Management & Accountability

DISCUSSION PAPER

Table 4.1: Fiscal Indicators as Percent of GDP Year Real GDP Overall Total 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 5.5 5.0 0.4 2.6 3.7 4.4 3.6* 4.1 7.3 5.2 6.2 6.5 6.8 4.7 19.5 21.4 19.2 20.2 18.9 19.6 19.0 Expenditure 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. Tax 14.0 14.1 14.0 14.0 12.4 12.8 14.3 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 2012-13 Note 1: The base of Pakistan's GDP has been changed from 1999-2000 to 2005-06.

Fig: 4.1-Fiscal Deficit 22 20 Total Revenues 18 16 14

2005-06 2006-07

Expenditures

Fiscal Deficit Revenue

2010-11 2012-13 July-Mar 2011-12 2012-13 B.E
29

2007-08

2008-09

Fig 4.2: FBR Tax Rev as % of GDP 11.0 10.5 Percents 10.0 9.5 9.0 8.5
2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

8.0

2009-10

2011-12

12

Pakistan: Fiscal Management & Accountability

DISCUSSION PAPER

Tax structure in Pakistan has witnessed substantial changes over the years as the share of direct tax increased from 35.3 percent in 2001-02 to 39.2 percent in 2011-12 and is expected to increase further by 39.1 percent in 2012-13. Sales tax share in total tax collection increased from 41.2 percent in 2001-02 to 43.01 percent 2011-12. Share of Custom duty in indirect taxes has increased from 18.3 percent in 2001-02 to 19.0 percent in 2011-12, whereas it is expected to decrease by 17.1 percent in 2012-13. On the other hand the share of excise duty in indirect taxes has declined from 18 percent in 2001-02 to 10.7 in 201112 and it is expected to decline further by 8.0 percent in 2012-13. Sales tax as an important consumption tax accounts for 74.3 percent of indirect taxes. Review of Public Expenditures Public expenditures can play an important role in physical and human capital formation over time and can be a effective tool in boosting economic growth. In Pakistan, public expenditures remained 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 of GDP in 2010-11 to Rs.901.9 billion or 4.5 percent of GDP in 2011-12. As percent of the current expenditure it stood at 28.9 percent during 2011-12. It is expected to reduce by 4.0 percent of GDP in 2012-13. The rise in interest payments during the period indicates the growing unsustainability of the fiscal account. The other major fiscal leakage is subsidies to lossmaking PSEs and the power sector. During July-March, 2012-13 actual disbursement against the budgeted subsidy of Rs.208.6 billion stood at Rs.270 billion, thus already surpassed the target by Rs.61.4 billion in first nine months of current fiscal year. It is expected to increase further due to loss making PSEs and the persistent rise in circular debt in the power sector. Fiscal performance According to the consolidated revenue and expenditure statement of the government, total revenues grew by 22.6 percent during July-March, 2012-13 and stood at Rs. 2,141.9 billion compared to 1,747.0 billion in the same period last year. The total collection in tax revenues amounted to Rs. 1,557.6 billion against Rs. 1,393.9 billion in the same period last year, posted a growth 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 Year Total Current Interest Exp. (A) Exp. (B) Payments (C) Defence Develop (D) ment Exp (E) Non Interest Non-Defence Exp (A-C-D) (As % of GDP) Fiscal Revenue Deficit Deficit/Surplus (TR-Total CE) Primary deficit (TR-NI 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13B 19.5 21.4 19.2 20.2 18.9 19.6 19.0 14.9 17.4 15.5 16.7 15.9 15.5 14.6 4.2 4.8 5.0 4.4 3.9 4.5 4.0 2.7 2.6 2.5 2.5 2.5 2.5 2.3 4.7 4.2 3.6 3.5 2.8 3.6 4.4 12.6 14.0 11.7 13.3 12.5 12.6 12.7 4.1 7.3 5.2 6.2 6.5 6.8 4.7 -0.8 -3.3 -1.4 -2.7 -3.5 -2.8 -0.3 -1.2 -2.5 -0.2 -1.8 -2.6 -2.3 -0.7

B: Budgeted * Excluding Rs 120 billion in 2010-11 and Rs 391 billion in 2011-12 on account of debt Consolidation.
30

Pakistan: Fiscal Management & Accountability

DISCUSSION PAPER

percent, of which FBR tax revenues increased by only 5.6 percent during July-March, 2012-13. While the remaining growth was contributed by the receipts from Petroleum Development Levy as it stood at Rs. 81.0 billion during July-March 2012-13 against Rs.38.2 billion during the same period last year. Table 4.4 Consolidated Revenue & Expenditure of the Government Budget Estimates 2012-13 Prov. Actual July-March 2011-12 A. Total Revenue a) Tax Revenue Federal of which FBR Revenues Provincial Tax Revenue b) Non-Tax Revenue B. Total Expenditure a) Current Expenditure Federal - Interest - Defense Provincial b) Development Expenditure & net lending PSDP Other Development c) Net Lending C. Overall Fiscal Deficit As % of GDP Financing of Fiscal Deficit i) External Sources ii) Domestic - Bank - Non-Bank GDP at Market Prices
Source: EA wing calculations and Budget Wing, Finance Division Note: Gas development surcharge is included in tax revenues. * Excluding one of payment of Rs.391 billion on account of debt consolidation.
31

Growth July-March 2012-13 22.6 11.5 8.4 5.6 90.3 65.4 20.7 22.6 27.6 23.7 16.6 11.8 4.2 8.5 -17.8 -84.1 16.9 16.9 -108.6 23.9 93.0 -52.0 14.0

July-March 2012-13 2,141.9 1,557.6 1,448.0 1,352.3 109.6 584.3 3,188.1 2,642.0 1,887.1 772.2 405.8 754.9 445.8 407.4 37.3 1.1 1,046.2 4.6 1,046.2 -4.1 1,050.3 856.7 193.7 22,909

3,378.5 2,614.5 2,534.5 2,381.0 80.0 764.0 4,484.2 3,452.2 2,339.2 925.8 545.4 1,113.0 1,032.0 873.0 154.3 4.7 1,105.7 4.7 1,105.7 134.9 970.8 483.8 487.0 23,655

1,747.0 1,393.9 1,336.2 1,280.4 57.6 353.2 2,641.9 2,154.1 1,478.7 624.5 348.0 675.4 428.0 375.6 45.4 6.9 894.9* 4.5 894.9 47.4 847.5 443.8 403.7 20,091

Pakistan: Fiscal Management & Accountability

DISCUSSION PAPER

FBR Tax Collection FBR tax collection for the fiscal year 2012-13 was targeted at Rs.2,381 billion which was 26.4 percent higher over the actual collection of Rs.1883.0 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/gas shortages, security issues, failure to implement tax reforms and decline in imports. The total collection stood at Rs.1,505.3 billion against Rs.1,426.2 billion during same period last year. Achievement of the current target is contingent upon not only on better economic conditions but effective implementation of tax administration reforms is also crucial. Table 4.5: FBR Tax Revenues Revenue Heads 2011-12 July-April 2011-12 A. DIRECT TAXES Gross Refund/Rebate Net B. INDIRECT TAXES Gross Refund/Rebate Net B.1 SALES TAX Gross Refund/Rebate Net B.2 FEDERAL EXCISE Gross Refund/Rebate Net B.3 CUSTOM Gross Refund/Rebate Net TOTAL TAX COLLECTION Gross Refund/Rebate Net
32

(Rs. Billion) % Change

2012-13

607.9 79.0 738.4 528.9

596.7 43.0 553.7

-1.8

4.7

943.6 46.3 1,144.3 897.3 673.2 38.0 804.9 635. 95.8 0.2 122.5 95.6

989.3 37.7 951.6 697.2 27.8 669.4 91.2 0.4 90.8

4.8

6.1 3.6 5.4 -4.8

-5.0

174.6 8.1 216.9 166.5

200.9 9.5 191.4

15.1

15.0

1551.5 125.3 1,882.7 1426.2

1586.0 80.7 1505.3

2.2

5.5 Source: FBR

Pakistan: Fiscal Management & Accountability

DISCUSSION PAPER

Direct Taxes The net collection of direct taxes has registered a growth of 4.7 percent during July-April, 2012-13, while the gross collection witnessed a decline of 1.8 percent during the period under review. Bulk of the tax revenues of direct taxes were realized from income tax. The net collection has gone up from Rs.528.9 billion to Rs 553.7 billion. Major revenue spinners of direct taxes are withholding tax, voluntary payments and collection on demand. Indirect Taxes The gross and net collections of indirect taxes have witnessed a growth of 4.8 and 6.1 percent respectively. It has accounted for around 63 percent of the total FBR tax revenues. Within indirect taxes, growth in net collection of sales tax increased by 5.4 percent. The gross and net sales tax collection during July-April, 2012-13 stood at Rs. 697.2 billion and Rs.669.4 billion respectively posting a growth of 3.6 and 5.4 percent respectively over the corresponding period of 2011-12. The growth in sales tax was significantly affected due to the transfer of services to provinces. In fact, around 52 percent of total sales tax was contributed by sales tax on import during July-April, 2012-13, while the rest was contributed by domestic sector. Within net domestic sales tax collection, the major contribution came 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, chemicals, oilseeds etc contributed significantly to the collection of sales tax from imports. Custom duty collection has registered a growth of 15.1 and 15.0 percent in both gross and net terms respectively. The gross and net collection has increased from Rs.174.6 billion and Rs. 166.5 billion during July-April, 2011-12 to Rs.200.9 billion and Rs.191.4 billion respectively during July-April, 2012-13. The major revenue spinners of custom duty have been automobiles, edible oil, petroleum products, machinery, plastic, iron and steel, paper and paperboard etc.The collection of Federal Excise Duties (FED) during July-April, 2012-13 has recorded a negative growth on account of withdrawal of excise duty on most of the petroleum products and perfumery & cosmetics. The net collection stood at Rs.90.8 billion during July-April, 2012-13 as compared to Rs.95.6 billion during the same period last year. The major revenue spinners of FED are cigarettes, cement, beverages, natural gas, and international travel services etc. Provincial Budget The total outlay of the four provincial budgets for 2012-13 stood at Rs.1,761.7 billion, 19.4 percent higher than the outlay of Table 4.6: Overview of Provincial Budgets Items Punjab 201112 RE 621.4 44.3 36.6 540.5 34.2 -16.7 638.9 468 165.5 633.5 201213 BE 758 55 40.5 662.5 28.4 -10.6 775.8 532.9 250 782.9 Sindh 201112 RE 345.5 64 25 256.5 73.6 24.8 443.9 309.5 156 465.5 201213 BE 419.5 73.1 32 314.4 82.7 48.3 550.5 315.3 231 546.3 KPK 201112 RE 183.6 3.6 8.9 171.1 21.7 31.1 236.4 161 84.5 245.5 201213 BE 222.6 4 8.9 209.7 26 34.8 283.4 191.6 97.6 289.2 Baluchistan 201112 RE 104.4 5.7 3.7 95 16.8 33.5 154.7 85.2 45.7 130.9 201213 BE 125.9 5.4 4.1 116.4 16.6 52.1 194.6 107.3 36 143.3 (Rs Billion) Total 2011- 201212 RE 13 BE 1254.9 1526 117.6 74.2 137.5 85.5

A. Tax Revenue Provincial Taxes GST on Services Share in Federal Taxes B. Non-Tax Revenue C. All Others Total Revenues (A+B+C) a) Current Expenditure b) Development Expenditure Total Exp (a+b)

1 0 6 3 . 1303 146.3 153.7 72.7 124.6 1473. 1804. 1023.7 1147.1 451.7 614.6

1475.4 1761.7
33

Source: Provincial Finance Wing, Ministry of Finance

Pakistan: Fiscal Management & Accountability

DISCUSSION PAPER

Rs.1,475.4 billion last year. Punjab witnessed the highest growth 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 Rs 1,804.3 billion for the fiscal year 2012-13, which is 22.4 percent compared to last year. The increase is mainly attributed to the transfer of GST on services to the provinces. During 2011-12 provincial revenues witnessed the growth of 25.1 percent. Allocation of Revenues between the Federal Government and Provinces Fiscal decentralization policy aimed at delegating fiscal powers and responsibilities from the national to sub national governments in order to achieve economic efficiency, equality and macroeconomic stability. It also ensures effective governance through financial autonomy of provincial governments. In Pakistan the resource distribution is made through the National finance Commission (NFC) award. Historically the resource distribution was based on the single criteria of population. Consequently the distribution of powers between the federation and provinces 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 significant aspect of this award was that it has ensured the financial autonomy of the provinces by increasing their share in divisible pool from 50 percent to 56 percent in 2010-11 and 57.5 percent from 2011-12 onwards. According to the seventh NFC award, the distribution of the resources is based on multi-weighted criteria which consist of population (82 percent), poverty/backwardness (10.3 percent), revenue collection/generation (5.0 percent) and area or inverse population density (2.7 percent). On the other hand share of federal government in the net proceeds of the divisible pool stood at 44 percent in 2010-11 and 42.5 percent from 2011-12 onwards. Total transfers to provinces have been projected to increase to Rs 1,545.5 billion: an increase of 22.1 percent in 2012-13 over the actual transfer of Rs 1,266.0 billion in 2011-12.

Table 4.7: Transfers to Provinces (NET) 2008-09 477.4 82.4 40.6 26.3 0.0 0.0 626.8 18.5 21.0 587.3 2009-10 574.1 81.2 82.0 16.0 0.0 0.0 753.3 18.7 24.0 710.6 2010-11 834.7 163.0 54.1 21.9 0.0 0.1 1,073.7 18.5 32.4 1,022.8 2011-12 1,063.1 145.6 53.9 47.8 4.6 0.7 1,315.0 12.9 36.1 1,266.0

(Rs. Billion) 2012-13 BE 1,303.0 155.9 56.7 66.0 10.8 0.8 1,592.5 15.4 31.5 1,545.5

Divisible Pool Straight Transfer Special Grants/Subventions Project Aid Program Loans Japanese Grant Total Transfer to Province Interest Payment Loan Repayment Transfer to Province(Net)
Source: Various issue of Budget in Brief

34

Pakistan: Fiscal Management & Accountability

DISCUSSION PAPER

Figure 4.3 depicts the rising trend in provincial tax growth since 2007-08, particularly during first nine months of current fiscal year it posted a significant growth of 90.3 percent. Major part of this growth achieved through the collection of sales tax on services by Punjab and Sindh. Similarly provinces received the significant amount of the federal government as their share from the divisible pool along with additional grants. Hence the provincial resource mobilization performed remarkably well during the first nine months of fiscal year 2012-13 with the growth rate of 20.8 percent as it stood at Rs. 1,125.5 billion against Rs. 932.0 billion in the same period last year. Another significant feature of provincial fiscal operation is the containment of total expenditures, which reduced by 14.4 percent during July-March, 2012-13 on account of slow growth in current and development expenditures. On account of high revenues 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).

Table 4.8: 5-Years Overview of Provincial Fiscal Operations Items A. Tax Revenue Provincial Taxes Share in Federal Taxes B. Non-Tax Revenue C. All Others Total Revenues (A+B+C) a) Current Expenditure b) Development Expenditure Total Exp (a+b) 2007-08 498.2 40.8 457.4 78.0 91.0 667.2 457.0 214.1 671.1 2008-09 571.7 46.1 525.6 83.8 95.0 750.5 564.2 201.8 766.0 2009-10 688.3 54.8 633.5 67.9 120.0 876.2 646.2 258.4 904.6 2010-11 1,063.9 64.6 999.3 62.3 85.1 1,211.3 831.2 245.6 1,076.8 2011-12 1,197.1 107.2 1,089.9 48.0 88.6 1,333.7 980.6 375.4 1,356.0

(Rs. Billion) July-March 2012-13 1,002.8 109.6 893.2 49.0 73.7 1,125.5 766.3 219.9 986.2 2011-12 819.8 57.6 762.2 36.0 76.2 932.0 687.1 175.0 862.1

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)

35

Pakistan: Fiscal Management & Accountability

DISCUSSION PAPER

Annexure IV FBR's Performance (1996-1997 to 2012-2013) (Rs. in billions)

Year 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13

Targets 286.0 297.6 308.0 351.7 406.5 414.2 458.9 510 590 690 935 1.000 1,179 1,380 1,667 1952.3 2007

Collection 282.1 293.6 308.5 347.1 392.3 404.1 460.6 520.8 590.4 713.4 847.2 1008.1 1157.0 1327.4 1587.0 1883.0 1939.4

Growth in Collection (%) 5.2 4.1 5.1 12.5 13.0 3.0 14.0 13.1 13.4 20.8 18.8 18.9 14.8 14.7 19.6 18.2 03.0

Target Achieved (%) 98.6 98.7 100.2 98.7 96.5 97.6 100.4 102.1 101.8 103.4 101.5 100.8 98.1 69.0 95.2 96.5 96.6

Tax to GDP ratio 11.6 11.0 10.5 9.1 9.3 9.1 9.4 9.2 9.1 9.4 9.8 9.8 8.9 9.0 8.8 9.1 8.5

36

Pakistan Institute of Legislative Development A n d Tr a n s p a r e n c y

Islamabad Office: No. 7, 9th Avenue, F-8/1, Islamabad, Pakistan Tel: (+92-51) 111 123 345 | Fax: (+92-51) 226-3078 Lahore Office: 45-A, Sector XX, 2nd Floor, Phase III Commercial Area, DHA, Lahore Tel: (+92-42) 111 123 345 | Fax: (+92-42) 3569 3896 E-mail: info@pildat.org | Web: www.pildat.org