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Budget 2001-2002
Not an easy task

Proceeding of a seminar organized by Management Association of Pakistan

Apr 16 - 22, 2001

Pakistan has received second tranche from the International Monetary Fund (IMF) under stand-by funding arrangement and chances for entering into a long-term assistance programme under PRFG are bright. It has not been an easy task. While nature was kind enough to bless the country in the shape of bumper wheat crop, the economic managers were able to make certain difficult decisions, to implement policies and to provide necessary impetus for revival of the economy. The signs of recovery have started appearing. The Management Association of Pakistan (MAP) organized a pre-budget seminar during this past week. Mueen Afzal, Secretary General, Finance and Economic Affairs presented the key note. Khalid Rafi, Senior Partner, A. F. Ferguson & Company and Ebrahim Sidat were the other two speakers.

Mueen said, "Over the last eighteen months the GoP has been able to overcome short-term problems and was also able to address three key issues: Foreign exchange reserves, budget deficit and investors' confidence. The success can be gauged from re-entry into the IMF assistance programme. Now the measures are directed to achieve medium and long term objectives. Two indicators are prominent: collection of CBR-related revenue and export performance. Present government has assigned priority to some key areas. These are Agriculture, small and medium enterprises, energy sector, information technology and public sector development. These are the areas which can help in boosting GDP growth rate and contain trade deficit. Along with this tax reforms, tariff reforms, support price for wheat and improvement in over all governance level have started yielding results. Efforts are also being made to keep various policies consistent. The GoP was also able to reduce prices of POL products. This was not an easy task and government also made some decisions, i.e. increased electricity and gas tariffs, imposed GST on a number of products and system for support prices for agricultural products was discontinued except for wheat."

Mueen agreed that the achievements are not spectacular but, in way, should not be considered small. Referring to a general complaint the GoP fixes unrealistic targets, he said, "The situation demands that the only way out is working hard to achieve difficult targets. Pakistan's exports have been stagnant for a number of years. The initial export target for the year 2000-2001 was US$ 10 billion. Many critics said we could not achieve this. However, efforts are being made. We estimate that exports will be above US$ 9.25 billion. We would have succeeded in containing trade deficit, had prices of crude oil not gone so high. After a long time investors have started BMR and fresh investment. Revenue collection by CBR have increased substantially and the GoP has also reduced reliance on development surcharge on POL products. Alongwith this efforts are being made to completely deregulate POL trade. Necessary steps have been taken to expedite process of privatization."

Indicating the complexion of next budget, Mueen said, "As all of you are aware, Pakistan has to set realistic and achievable targets and to make efforts to achieve difficult targets. However, options are limited. Import tariff and corporate tax rates have to be rationalized. It is expected that as a result of documentation of economy, we would be able to increase tax net, improve competitiveness of local industries. We are negotiating with international donors to reschedule debts to ensure sustainable debt servicing level. At the same time, we are aware of the adverse impact of drought-like situation. We estimate that agri output may go down, but at the same time efforts are being made to convince farmers to cultivate those crops which require lesser water."

Responding to a point that various associations are asked to submit budget proposals, but these are hardly incorporated in the budget, Mueen made an offer to MAP. He said, "We are trying to minimize post budget controversies. I invite the MAP members individually and collectively to send budget proposals. After the announcement of budget, I will also ensure that MAP representatives and CBR officials sit together to thrash out why these proposals could not be accepted. We want greater participation of people in preparing a friendly budget, minimize pressure of various 'pressure groups'. Our commitment is evident from a fact that, it was for the first time details of stand-by agreement with the IMF were released. We want Pakistanis to share our limitations or reasons for imposing a tax or withdrawing an exemption.

Earlier in his presentation, Khalid Rafi discussed two key issues assessment and refund procedures. His remarks regarding various amnesty schemes must be remembered by those who advocate such schemes. He said, "This is a slap on the face of tax payers." He also discussed various issues which are often termed 'small irritants' but all of them put together encourage tax evasion in the society. In his view corruption cannot be one sided. He suggested that GoP should fix realistic and achievable targets. Soon after announcement of budget, practice of downward revision of targets must end. Referring to CBR-related target, he said, expected refunds should be kept in mind. While talking about self-assessment scheme, he said, "This option should also be offered to the most documented sectors." At the same time he demanded abolishing the scheme due to under-declaration of income. Discussing refunds and its process, he said, "Over the years the quantum of accumulated refunds has gone so high that speedy payment can only enhance budget deficit. Delays also encourage corruption."

He also emphasized curbing discretionary powers of tax regime as well as induction of qualified professionals. Discretionary powers allow the tax officials to extort money and even reopen cases when companies insist of timely and full payment of refund. The lack of qualified people in the regime creates situation like demand for withholding tax on accrued expenses. It is beyond that any one demands withholding tax on a payment which has not been paid. He also made a few suggestions like: acceptance of returns on face value, detailed audit only once in three years and out sourcing of detailed audit. He was of the opinion that the amount being paid to professional auditors by income tax department is peanut.

Ebrahim Sidat termed budget preparing a daunting task. While budget has to be prepared on broad guide line provided by the IMF, other harsh realities have to be kept in mind. More than 44 million people live below poverty line in the country and it is the development budget which is slashed at the slightest pretext. While external debt exceeds US$ 32 billion, domestic debt has crossed Rs 260 billion. The result is two heads alone debt servicing and defence expenditure take the largest percentage of total current expenditure. Pakistan has been borrowing to meet debt servicing obligation which has become un-sustainable. He also seconded Khalid Rafi's point that targets set in Pakistan are often unrealistic. While CBR often fails to meet the target, it is once again given a higher target. Often efforts have been made to tax the existing tax payers by hiking the tax rate. The classical example is withholding tax which was initially 2.5 per cent and its current rate is 10 per cent. Not only that tax and duty rates are high there is multiplicity of taxes.

Referring to tax structure of limited companies, Sidat said, "Limited companies and partnerships are not charged income tax at the same rate. The rate for limited companies is 43 per cent whereas partnership firms have to pay income tax at 35 per cent. This practice discourages formation of limited companies. It may be true that small business entities have their own role, but at the same time limited companies should not be penalized."

Sidat was very critical of the law of taxing reserves of listed companies. He was of the opinion that while the law may not force those companies who hardly pay any dividend, dividend paying companies are being penalized for their efficiency." The forced payment of dividend would not allow the good companies to undertake BMR and expansion. On the one hand such companies will pay dividend and on the other hand will be forced to borrow in case their cashflow is disturbed due to any reason. Economic fundamentals do not remain constant year after year.

Taking the advantage of the presence of Mueen Afzal, Sidat made a few suggestions. These included reducing number of taxes, rationalizing tax rates and doing away with exemptions. He also stressed the need for formulating Sales Tax Laws and stopping discrimination between registered and un-registered entities. In his opinion un-registered entities should be charged a higher rate to enforce the concept of documentation. The effort should be to go after tax evaders and not the existing tax payers.

Earlier Moin Fudda, President of MAP introduced the topic, the speakers and also explained why this seminar could not be held in March reason being a very hectic schedule of Mueen Afzal. Chairman, CBR could not attend the seminar due to his 'other pressing engagements'. At the end, Masood Naqvi, Vice President of MAP offered vote of thanks.