FEDERAL BUDGET 2001-2002
By Prof. Dr. Khawaja Amjad Saeed
Sep 03 - 09, 2001
On June 18, 2001, the honorable Federal Finance Minister announced Federal Budget 2001-02. He read out a detailed budget speech highlighting economic position of Pakistan alongwith difficulties being faced. Later he unfolded budget proposals. The budget has been a subject of continuous debate in Pakistan and abroad. There are several ways in which the above budget can be analyzed. However, we have examined the structural imbalances which need to be immediately addressed to ensure our financial and economic sovereignty. The earlier this is done, the better.
The Federal Government needs Rs. 752 billion (Rs. 622 b for current expenditure and Rs. 130 b for ADP 2001-2002). Against this, net federal revenue of Rs. 454 (Table 1) is available. Consequently, there is a forecasted deficit of Rs. 298 billion. For the last several years, such deficits have all along been included in our previous federal budgets. In absolute numbers the deficits continue to grow. There is a need to arrest this trend and develop a strategy to ensure a significant increase in domestic resources so that steps are taken to make a positive and steady start towards self reliance.
CURRENT REVENUE 2001-2002
1. Indirect Taxes
2. Direct Taxes
3. Non-Tax Revenue
Less: Transfer to Provinces
. Source: Extracted from Budget Documents for 2001-2002, Islamabad: Ministry of Finance, Government of Pakistan, June 18, 2001.
DOMESTIC RESOURCE MOBILISATION
The present Government has rightly announced that, at the Federal level, there will be three major Federal taxes namely, Income Tax, Sales Tax and Custom Duties.
DIRECT TAXES (RS. 150 b)
Income Tax has correctly been declared as the future tax of Pakistan. The Government intends to introduce new law entitled Income Tax Ordinance 2001 to tap the potential assessees and to expand the network through sound organizational restructuring and stating the law in a simplified manner. Indeed there is a vast potential of tax payers who need to be included in the income tax net. At present there are only 1.7 million assessees. To ensure that vast potential of tax assessees is tapped, the following suggestions may be given favourable consideration:
1. Except for widows and pensioners, all available exemptions under the Second Schedule annexed to the Income Tax Ordinance 1979 be withdrawn. To begin with, a lower rate of income tax be charged.
2. Everyone, irrespective of nature and source of income, be included in income tax net, provided the annual income exceeds Rs. 60,000.
3. Cooperation of Chambers of Commerce and Industry, Stock Exchanges and various trade associations be solicited to significantly increase the number of income tax payers in Pakistan.
4. Survey, already carried out in an extensive manner, be used to help identify potential assessees.
5. Marketing of the responsibilities of tax payers be undertaken so that the curve of number of income tax payers registers an upward trend.
6. Strategies be initiated to ensure that the present number of income tax payers (1.7 million) is enhanced to at least 3.5 million. The current ratio of tax assessees to population is extremely low (1.2%). This area requires special attention and be tackled on war footing, failing which our fate of continuing to live with budget deficits and heavy reliance on domestic and foreign loans will continue. This will seriously affect our economic sovereignty.
7. Tax assessment procedures be streamlined in a manner which must ensure tax-friendly regime.
8. Salary package of tax authorities be reviewed to enable them to enjoy reasonably decent living and deliver the justice in a free and fair manner.
9. Simplified forms for filing income tax returns be used. The income tax return for individuals be reduced to preferably one page.
10. Accountability mechanism for assessees and tax officials be developed to pave the way for fair treatment as output of the tax delivery system.
11. Tax payers have already been declared as heroes by the Federal Finance Minister in his Budget Speech of June 18, 2001. This spirit be now converted into honor and dignity to honest tax payers.
INDIRECT TAX (RS. 308 b)
Indirect tax consists of three parts namely Sales Tax (Rs. 185 b: 60%), Custom Duties (Rs. 70 b: 23%) and Excise Duties (Rs. 53 b: 17%).
The Government has announced that Sales Tax, already implemented at the retail and distributors levels, will be the future tax. A steadily rising amount is being collected under this heading. Earlier to this, sales tax was being collected at import stage and at manufacturing stage. A continuous and sustained dialogue between CBR and the sales tax assessees will resolve the problems. This area is of critical nature and is suggested to be strongly pursued.
The expected revenue from custom duties is likely to be declining under WTO regime. However, the Government has done well to reduce custom duties on 4000 items. A vigilant crackdown on smuggling and uprooting the corruption in custom department will increase the revenues under this head.
The Government has announced that Federal Excise duty will be eliminated in future. For the last two years several items have been identified for removal of excise duty.
The Federal Government will have three taxes in future namely, Income Tax, Sales Tax and Custom Duty. This will enable CBR to concentrate on strengthening their logistics to ensure an appropriate strategy for accelerating tax collection.
NON TAX REVENUE (RS. 139 b)
Non Tax revenue constitutes 22% of federal current revenue for 2001-2002. Table 2 shows the major components.
NON-TAX REVENUE 2001-2002
Income from property and enterprises
Receipts from Civil Administration and other functions
Source: Extracted from Budget Documents for 2001-2002, op. cit.
SURCHARGES (RS. 47 b)
Surcharges consist of two types namely Petroleum Levy (Rs. 32 b) and natural gas (Rs. 15 b). These represent 7% of the total federal revenue for 2001-2002.
FEDERAL CURRENT EXPENDITURE (Rs. 622 b)
At one time defence expenditure, used to be priority number one of Pakistan. Table 3 will show that it has been relegated to last priority in terms of allocation.
CURRENT EXPENDITURE: 2001-2002
1. Debt Services
2. Other Expenditure
3. Defence Expenditure
Source: Extracted from Budget Documents for 2001-2002, op.cit.
DEBT SERVICES (RS. 329 b)
Due to continuous internal and external borrowing, the amount of debt services has been registering a rise. We are caught up in a difficult and serious position. In the Federal Budget under review debt services constitutes 53% of total current expenditure. Its break up is given in Table 4.
1.Debt Servicing - Domestic debt - Interest
2.Foreign Debt (Servicing - interest Rs. 46b and loan repayment Rs. 69b)
Source: Extracted from Budget Documents for 2001-2002, op.cit.
Domestic debt, based on Summary Report of Debt Reduction and Management (2001) of Dr. Pervaiz Hasan, is Rs. 3.2 trillion. Foreign debt of Pakistan (long and short term) is US $ 38. Contingent liabilities, first time recognized by the Government, is most likely to jack up the above foreign debt amount. In the above report 2010 Vision has been spelled out. One wonders whether the figure shown in the above table will actually be achieved. The debt services amount is also on the low side. There are two reasons which account for this comment. Firstly, foreign debts have been rescheduled for some time. Consequently their otherwise actual impact is not reflected in the above figure. Secondly, based on past practice, amount payable for retirement of domestic debt representing principal has not been included in the above amount. If the budget would have been prepared taking into account the above two factors, probably nothing will be available for defence expenditure and for running the affairs of the Government.
OTHER EXPENDITURE (RS. 161 b)
Major break up of other expenditure is given in Table 5.
COMPOSITION OF OTHER EXPENDITURE
1. Running of Civil Government
2. Subsidies and Grants
Source: Excerpted from Federal Budget 2001-2002 documents, op.cit.
There is a need to undertake value for money audit for those who are in service. Cost rationalization techniques are needed to be operationalized. Senior Cost and Management Accountants may be associated in this respect. A thorough scrutiny of the expenditure should be undertaken to significantly reduce the expenditure. Economy measures should not only be announced but also strictly implemented. Cost consciousness should be created amongst employed. Sizable reduction of use of utilities be ensured. Austerity should be popularized in all walks of life and reflected in real life situation.
Every employee must understand that they are being paid as salary and other benefits through loans taken by the Government. How long we will continue to operate our affairs through indebtedness regime?
DEFENCE EXPENDITURE (RS. 132 b)
Defence expenditure is a classified expenditure — not subject to public scrutiny. It is high time that transparency principle in this respect be extended. Till such time, this is not done, it is advisable to set up economy committee within the armed forced who should meet continuously and on war footing keep developing measures to reduce expenditure, wherever possible.
In this respect it is well appreciated that the allocation to defence expenditure is the same as per last year. The defence budget was increased Rs. 128 billion in Indian Union Budget 2000-2001. An increase of 20% defence expenditure was announced in the Indian Union Budget for 2001-2002. Our defence expenditure when compared to Indian Budget allocation to defence expenditure is too small. With Allah's grace, our Armed Forces are indoctrinated with a thought of "Quantity Outnumbered". The intangibles of human factor and nuclear strength continue to present impregnable defences.
FEDERAL ADP 2001-2002
Table 6 present broad details of Federal ADP 2001-2002.
FEDERAL ADP 2001-2002
1. Departments of Federal Government
2. Provincial ADPs
3. Autonomous Bodies
4. Special Programs
Source: Excerpted from Budget Documents for 2001-2002, op.cit.
A brief review of each of the above heads of development expenditure together with recommendations is now presented.
DEPARTMENTS OF FEDERAL GOVERNMENT (RS. 53 b)
A sum of Rs. 9 billion has been allocated to water and power division. Projects with Rs. 2 billion and above amount have been earmarked a sum of Rs. 35b. These include transport and communication, health, science and IT, population welfare, rural development, fuels, railways, Kashmir Affairs Division, Other development projects will get Rs. 9 billion.
PROVINCIAL ADPs (RS. 30 b)
Unfortunately 1973 Constitution of Pakistan does not prescribe any guidelines for distributing amounts to provinces. However, allocation to provincial programs include: Punjab (47%), Sindh (17%), NWFP (23%) and Balochistan (13%). These allocations are not in line with NFC Award effective July 01, 1997 which are applicable for distribution of Federal Revenue Divisible Pool.
AUTONOMOUS BODIES (RS. 27 b)
Autonomous bodies must raise funds from capital market and should not be a burden on the Federal Budget. The allocation includes WAPDA - Power (Rs. 13 b), National Highway Authority (Rs. 13 b) and village electrification (Rs. 1 b).
SPECIAL PROGRAMS (RS. 20 b)
Special considerations have governed allocation of Rs. 10 billion for drought relief program, Rs. 7 billion for Khushal Pakistan and Rs. 3 billion for devolution plan.
It is hoped that value for money audit should be conducted on the above expenditure.
It is high time that we introduce innovative approach to ensure that we learn to live within our means, substantially water down the domestic and external debt, reduce waste and significantly reduce the expenditure, accelerate domestic resource mobilization with a quantum jump, initiate socio-economic policies to increase economic activities with a quantum jump, give proper attention to increase in productivity, tap the hidden wealth of Pakistan, reduce Government activities in business and trade, inspire confidence amongst our local investors, create congenial atmosphere to attract expatriates abroad to invest in Pakistan, boost our exports, uproot forces of criminal activities and ensure peace and tranquillity.
For all the above, a committed approach with a clear cut strategy is the crying need of today. This is certainly possible. Let us do it now.
* Dean: Executive Programs, Punjab College of Business Administration, Lahore.