PAKISTAN FEDERAL BUDGET 2003-04

The natural gas is gradually assuming a leading role on the economic development of Pakistan

By Prof. Dr. KHAWAJA AMJAD SAEED*FCA, FCMA.
Email: kamjadsaeed@yahoo.com

May 19 - 25, 2003
 

The Federal Budget 2003-2004 will be presented in the National Assembly of Pakistan in June, 2003. On account of tight secrecy, everybody is in a puzzling mood. Pensioners are hoping for increase in their pensions. Business community is expecting relief, tariff reduction, reduction in taxes and helpful attitude of bureaucracy. The government hopes to beef up their exchequer to reduce budget deficit. The unemployed persons expect generation of employment. Investors, at home and abroad are looking forward to helpful enabling environments. Salaried class is expecting less taxes on their perks. All in all, various stakeholders are eagerly awaiting announcement of the forthcoming budget.

By Allah's grace, our image abroad is steadily improving. The Transparency International in their CPI (Corruption Perception Index) for 2002 has placed Pakistan at number 77 as against 12 in 2001. This rank is out of 102 Countries. The level and quantum of corruption is on the decline in Pakistan

Moody's continue to upgrade our rating. Opacity Index released in Economist, London on March 03, 2001 placed Pakistan better than India for investment.

MAJOR ASSUMPTIONS

Projections relating to Federal Budget 2002-2003 announced by the Federal Budget 2002-2003 are given in Table 1:

Table: 1 MAJOR ASSUMPTIONS: 2002-2003 BUDGET

Particulars

Forecasts

1.

GDP (%)

5.0

2.

Fiscal Deficit to GDP (%)

3.5

3.

Inflation (CPI) (%)

4.0

4.

Gross Investment to GDP (%)

17.2

5.

Exports ($ b)

10.4

6.

Current Account Deficit rates to GDP ($ b)

1.8

7.

FX reserves to Imports

18 weeks

Table 2 captures the overall position relating to Federal Budget 2002-03. This shows the quantum and level for dependence of our government on loans. Economic sovereignty is an agenda of the future. How long the government will take to stand on her own feet? The earlier this is done the better.

Table: 2 MASTER CHART: FEDERAL BUDGET 2002-2003

Particulars

Billion Rs.

%

Needed

1. Current Expenditure

608

82

2. ADP: 2002-2003

134

18

.

742

100

Available

Current Revenue - Net

481

64

Shortfall

261

36

.

742

100

Financing Pattern

1. External Resources

198

76

2. Net Capital Receipts

36

14

3. Self Financing of PSDP by Provinces

29

11

.

263

101

4. Others

(2)

(1)

. 261 100

Source: Extracted from Budget Documents for 2002-2003, issued by the Ministry of Finance, Government of Pakistan, Islamabad, June 15, 2002.

SUGGESTED TAX REFORM STRATEGY

The present tax system in Pakistan is a subject of severe criticism. Assessees are screaming for a new tax system. Even the government is struggling hard to devise new tax strategy. Society looks to all stakeholders to a new face of tax system. Lot of new strategies are being developing for reducing the number of taxes, rationalizing the tax system and streamlining the Central Board of Revenue.

However, Table No. 3 summarizes the suggested tax reform strategy of the Government of Pakistan announced to be reflected in the Federal Budget 2003-2004.

Table 3: SUGGESTED TAX REFORM STRATEGY

S. No.

Focus

Strategy

1.

Number of Taxes at Federal & Provincial Levels

Reduction

2.

Tax Rates & Penalties

Reduction

3.

Assessment and Collection Procedures

Simplify

4.

Labour Levies

Reforms

5.

Dispute Resolution

Efficiency

6.

Tax Base

Broaden

7.

Tax Administration

Honesty and Efficiency

BUDGET SCENARIO

Pakistan is still in search of an Economic System since her birth. The father of nation, Quaid-e-Azam Mohammad Ali Jinnah, on July 01, 1948 while inaugurating State Bank of Pakistan, had advised that we should not adopt western economic system and must follow an economic system based on Quran and Sunnah. How long we will take to follow his advice?

The present government has inherited seven legacies namely, debt burden, defence imperatives, autonomous bodies burden, population growth, political uncertainties, previous plunder and loot, poverty and tax evasion.

The challenges facing the Ministry of Finance include: operationalizing double entry book-keeping, presenting a balance sheet of Pakistan to the nation, enlightened budgetary system preferably based on PPBS (Planning, Programming Budgeting System) and saying good-bye to secrecy and replacing it by open system of announcing budgetary proposals for developing consensus in advance before submitting these to Parliament.

The unanimously approved 1973 Constitution of Pakistan is yet awaiting implementation of the spirit contained as per following articles:

1973 CONSTITUTION

Article

Focus

3

Elimination of exploitation.

18

Freedom of trade, business and profession.

37

Promotion of social justice and eradication of social evils.

38

Promotion of social and economic well being of the people.

The government is urged to have a special session of both houses of Parliament and develop a strategic plan to achieve the spirit of above Articles for ushering in an era of prosperity on wider scale and strengthen social frontiers of our country and ensure the fruits of democracy be shared by all stakeholders specially by the impoverished, downtrodden and underprivileged class of the society.

BREAKTHROUGH APPROACH

Incremental approach was followed in the past. The present policy is continuous improvement. The future orientation is breakthrough approach. Suggested niche approach on Income Tax is as under:

The present number of tax payers on Income Tax register is in the range of 1.4 million to 1.8 million. Some talk about less than one million. In a total Pakistan population of 147 million the ratio of tax payers is slightly above 1%. This percentage is 52% in Singapore and 26% in Hong Kong. Based on views shared in Lahore Chamber of Commerce and Industry by past Presidents, the potential is 7.2 million. Strategies should be developed in the forthcoming budget 2003-04 to ensure that 3 to 4 million tax payers are enrolled with income tax authorities so that a significant increase under income tax is ensured and budget deficit at least on revenue budget is wiped out.

The Government is expected to revisit the four canons of taxation explained by Adam Smith namely;

1. Equality
2. Certainty
3. Convenience
4. Economy

REVIEW OF CURRENT EXPENDITURE
DEBT SERVICING: RS. 290 BILLION

The Economy of Pakistan has been planned all along on debt financing. Domestic resource mobilization to meet current expenditure and development expenditure was never addressed in a serious manner. Till now, the internal loan of Pakistan stands at Rs. 1.16 trillion and the reported figure of external loan is $ 35 billion. This is on declining trend. The Federal Budget is prepared in such a manner that no amount is charged/appropriated for return of internal servicing except to the extent of profit/return payable to lenders from whom internal loans have been taken. However, debt service of foreign loans does include the amount for payment of installment and interest.

The crying need is to develop a strategic plan to substantially reduce the above amount on staggered basis on a period of 3 to 5 years, failing which debt servicing will continue to be a burden with a heavy drain on the federal budget and consequently budget deficit will continue to be up-swinging.

Planning on self-reliant approach needs to be operationalised rather than given a lip service through sloganeering as has been consistently done in the past. Enough awareness exists in this respect. Now action plan is the crying need of the hour. The Government of Pakistan has succeeded in getting debts rescheduled. A sum of $ 12.5 billion was rescheduled at Paris Club in December 2001. More rescheduling is continuing. Consequently the Federal Budget 2003-2004 is likely to have less amount under the above heading.

OTHER EXPENDITURE: RS. 172 BILLION

"Other expenditure" has achieved rank No. 2 after debt servicing. A plan on the following lines is urgently to rationalize the above expenditure:

a) The Institute of Cost and Management Accountants of Pakistan be associated with expenditure rationalization exercise. This can be given as a project. The Institute will set up a Task Force which will undertake the above exercise withing three months and will present a report to rationalize the above expenditure.

b) An analysis be carried out to explore the possibility of closing down the ministries at Federal level the business of which is substantially provincial under the 1973 Constitution of Pakistan, e.g. Education, Health, Sports, Labour, Youth Affairs to name a few. For policy formulation, the Planning Commission may have lean set up for the shedded ministries. The government may take bold initiative in this respect like other bold initiatives undertaken by it relating to Tax Amnesty Scheme and Tax Survey for documentation of economy in the past.

c) Activity Based Management (ABM) may be considered for implementation. This will require association of specialists in ABM to undertake the exercise. Cost and Management Accountants can also play a productive role in this respect.

d) The government must target 100% computer literacy in bureaucracy by starting massive training programs. Human Resource Development will be strengthened and IT revolution will enable fuller participation of the government employees. Value for money will eventually spring up as a motivational slogan.

e) Austerity must be developed as a culture in Pakistan. This will help develop substantial expenditure reduction.

DEFENSE: RS. 146 BILLION

Details/Composition of the above amount are not available in the Budget Documents. Historically the amount is considered to be confidential. There is a need to consider making the details transparent.

It is interesting to note that this amount is too small compared to Indian Defense expenditure. For 2000-2001, the Indian Budget included an addition of Rs. 128 billion in the defense expenditure. However, by the Allah's grace and blessings, the nuclear deterrence provide a strong shield to our defense. Moreover, the armed forces of Pakistan has a quality edge over the economy. Indian defense budget for 2003-2004 now stands at Rs. 752 billion which is even greater than the total Pakistan Federal Budget 2002-2003.

SUGGESTIONS: STRATEGIC DIRECTIONS

Some suggestions are given below for consideration of the government relating to development of Federal Budget 2003-2004:

BUDGETING SYSTEM:

While several budgeting systems exist in the world, Planning Programming Budgeting System (PPBS), managerial revolution of McNamara, is suggested for application in Pakistan. This will replace the incremental/decremental budget system which is currently being followed.

FINANCIAL SYSTEM:

Double Entry Book-keeping system should be operationalized. This was introduced in 1494 by Luca Pacioli, an Italian Mathematician. The nation wishes to see the balance sheet of the country. Serious thought be given to implement this suggestion to enhance our credibility on financial front at home and abroad.

GOOD BYE TO SECRECY:

Every year the Federal Budget is released in tense atmosphere. The government in power has fear of strikes, demonstrations, and other uncertainties. The business community is afraid of new taxes and implications which may unfavorably affect after the announcement of Fiscal, Monetary, Trade and other policies. Public at large and particularly people in low strata of income bracket have fear of losing their purchasing power. All in all, fear phobia continues to dominate with growing uncertainties. We have been living with the above framework for the last over five decades. It is high time that we should switch to other system. We must say good-bye to secrecy style of budget announcements. This legacy must be replaced with an enlightened system of open door policy relating to budget making in Pakistan.

COST AND MANAGEMENT ACCOUNTANTS ROLE

All persons carrying on business in Pakistan should be legally required to maintain books of account. The concession of "No Account" maintenance be immediately abolished. This will generate employment of commerce and business graduates and at higher levels the members of the two professional institutes, namely, Institute of Cost and Management Accountants of Pakistan and Institute of Chartered Accountants of Pakistan will have an opportunity to productively contribute towards documenting the economy.

"Cost Audit" term as included in Section 258 of the Companies Ordinance 1984 be replaced by "Cost Review" and be made exclusive domain of practicing members of the Institute of Cost and Management Accountants of Pakistan.

The government may consider employment of the above members in Government Corporations, public sector enterprises and audit and accounts departments to benefit from the expertise of Cost and Management Accountants.

Assignments for sales tax audit, custom receipts audit and excise record audit be given to Cost and Management Accountants.

The offices of the Auditor General Office of Pakistan be encouraged through sponsorship to qualify the examination of the Institute of Cost and Management Accountants of Pakistan.

The following strategy is suggested for favorable consideration of the Government for developing Federal Budget 2003-2004:

DOMESTIC RESOURCE MOBILIZATION:

Domestic Resource Mobilization may be initiated as the niche for resource generation. Some very good steps have been taken in this direction. Now we must consolidate the gains and accelerate our efforts to achieve such heights as will enable us to wipe out the budget deficits and operationalize self-reliance in our beloved country. This approach must always be pursued on war footing for staying economically sovereign.

REVENUE BUDGET:

In the first week of May every year, the revenue budget should be released with the following framework along with major decisions which the government wishes to take in the following areas:

a) Taxation
b) Non-Tax Revenue
c) Economic Policies covering all the three sectors of the economy namely, agriculture, industry and services sector.
d) Major policy decision affecting stakeholders.

The above may be announced for public debate and discussion for developing consensus. By the end of May every year, the nation would have been involved and subsequently budget approval can go through a smooth process.

ADP:

ADP may be released in the first week of April each year together with any comments/observations from the stakeholders. Debate may continue through seminars, print and electronic media and by the end of April of each year. By then consensus would have been achieved and ADP would then be ready for implementation w.e.f. July 01 of each year.

The provinces will also have a clear view of availability of funds from Federal Budget. Therefore, clarity will exist about the resources on which their respective ADPs can be developed by them. The autonomous bodies will have clear-cut idea regarding their programs and committed resources. On-going and new schemes picture will be available. Besides, details would be available for special programs as well. Thus participative approach will develop and this would be fruitful and productive from the view point of the country.

CONCLUSION

It is high time that synergy be unleashed to accomplish the goal of economic sovereignty, self-reliance, prosperity on wide spread basis and ensuring an accelerated socio-economic strategy to uplift the image of Pakistan and enable it to play a productive role in the 21st century.

*Principal, Hailey College of Banking & Finance, Constituent College of University of the Punjab, Lahore.