The current year's budget has a total projected outlay of Rs.1.315 trillion, including Rs. 880 billion for current expenditure and Rs. 435 billion for development programme. The overall size of the budget is 19.7 percent higher than the previous year's Rs. 1.098 trillion figure.

SHAMIM AHMED RIZVI, Bureau Chief, Islamabad
Apr 30 - May 13, 2007

President General Pervez Musharraf has directed the Ministry of Finance and Revenue to put up a tax-free and pro-poor budget for the next financial year (2007-08), setting a revenue collection target of Rs 1 trillion. The outlay of the next budget is likely to surpass 1.8 trillion. He has specially reminded the budget makers to formulate the budget in a manner that must provide visible relief to the poor segments. "It must be a poor man budget in the real sense," he observed.

Meanwhile, it is expected that the Revenue Division that is moving ahead of its current year's financial targets could exceed the revised target for the current year of Rs.835 billion. Abdullah Yousaf, Chairman and Secretary General of the Revenue Division, is working hard to formulate next year's budget proposals in accordance with the priorities determined by the President.

Highly placed sources revealed that the formation commanders were also briefed by the President about the country's economy, expressing satisfaction on the economic health that was constantly overviewed by President Musharraf himself. He, throughout, has been maintaining liaison with the senior officials concerned since he considers the economy of the country as his one of the strong points. The budgetary proposals are being firmed up and the budget will be presented in the National Assembly in the first week of June.

The instructions about the outlines of the next year's budget have significant importance in the wake of general elections to be held during the coming fiscal year and the budget proposals will have a decisive impact on the electioneering, the sources observed, adding that the economy of the country has successfully coped with the October-2005 earthquake, but sizeable amount would be allocated for the relief and reconstruction work for the affected people and the areas for the second year. Next year's budget will be free from the fallout impact of the oil prices and despite the subsidiary given by the government on this count, the budget will be free of any significant impact of the oil prices in the world market, the sources added.

The current year's budget has a total projected outlay of Rs.1.315 trillion, including Rs. 880 billion for current expenditure and Rs. 435 billion for development programme. The overall size of the budget is 19.7 percent higher than previous year's Rs. 1.098 trillion. The next year budget will be a conspicuous improvement on it. The current year's defence expenditure was estimated at Rs.250.1 billion against last year's revised estimate of Rs. 241 billion and budgeted allocation of Rs.223 billion. It is expected that the expenditures for the defence budget would not be enhanced drastically for the next years.

The current year's budget estimate of Rs.378 billion transfers to the provinces under net proceeds of the federal divisible pool against last year's revised estimates of Rs. 331 billion, showing an increase of about 10 percent or Rs. 47 billion higher, while the allocation in this head for the next year would be even higher. The proposals from the provinces would be given due consideration in the process of allocation of the amount in this head, the sources said.

According to the sources in the Central Board of Revenue, the CBR is committed to meeting the revised revenue target of Rs.1 trillion set for the next financial year despite a shortfall in collection of customs duty and sales tax. The projected target was thoroughly discussed at the last board meeting, chaired by the CBR Chairman, at which the main topic of discussion was the negative growth in customs duty and sales tax, collected at the import stage in March 2007. Responding positively to the sector-wise presentation made by the Member Fiscal Research and Statistics (FRS), the tax authorities informed the council members that the board has committed to realizing the Rs.1 trillion target set by President Musharraf. Therefore, all CBR wings should start preparing policy proposals for increasing the revenue collection and broadening the tax base, the Chairman told the meeting participants.

Informed sources have quoted the CBR chief as saying that the Board will not only exceed the target of Rs. 835 billion set for the fiscal 2006-07, but will also fashion a plan to cross Rs.1 trillion target set for the next fiscal. The strategy chalked out at the board meeting is a part of the 10-year 'Vision-2017' programme, which envisages increasing the total revenue collection to Rs.4.3 trillion and taking the tax to GDP ratio, which at present stands at only 9.4 to 14.5 by 2016-17. Under the Vision-2017 programme, the CBR plans to secure five percent growth in the tax to GDP ratio by tapping all potential sectors of the economy. The tax authorities have, meanwhile, demarcated six priority areas that will be subjected to special focus for broadening the tax base. The strategy envisages mounting greater efforts for controlling customs duty evasion, bringing all transporters, wholesalers and retailers under the tax-net; conducting evaluation of impact of taxes imposed on edible oil, ghee and sugar for rationalization of duties and taxes; and introducing a tax-friendly culture for bringing taxes. Introducing a tax-friendly culture for bringing more people under the tax net and adopting policies to reduce the burden of indirect taxes to provide relief to low-income groups. In its conceptual framework the strategy appears to be sound enough, though its results will depend on how rigorously it is implemented.

A special feature of 'vision 2017' programme is that it lays maximum stress on encouraging voluntary compliance, and on shifting the focus from high tariff rates to a lower taxation structure. Secondly, under the new strategy the CBR envisages a fundamental policy shift from collecting taxes on production and investment to income and consumption. Thirdly, the strategy is tailored to ensure minimum possible contact between the taxmen and the taxpayers, so as to curtail chances of tax evasion. There have been press reports regarding large-scale under invoicing and mis-declarations by importers to avoid paying taxes. A favourite subterfuge used by some importers and exporters is the filing of exaggerated refund claims through use of fictitious invoices, non-accounted cash sales or purchases, and under-reporting of sales by maintaining multiple account books, etc. Unchecked sale of smuggled goods by local traders poses yet another problem for the tax authorities.

The CBR is endeavouring to take the number of taxpayers in the country to the level of 1.725 million by the end of current fiscal year from 1.65 million. "The annual growth in the number of tax payers has lately been 20 percent". Member CBR (Direct Taxes) Salman Nabi said this while speaking at a pre-budget seminar organized by ACCA. Quoting a report of Sate Bank of Pakistan (SBP), Salman Nabi said that tax base in the country could be broadened to the level of 3 million payers. He stated that only 22 percent of Pakistan's population was economically active.

About the direct taxes target taxes target for the year 2006-07, he said that the CBR had already crossed the target within first nine months of the year. "Direct taxes now form 42 percent of the total revenue collection," the CBR member said. In addition to 1.65 million income tax assesses, 2.7 million electricity consumers, 28 million bank account holders, 5.5 million landline phone users and 52 million mobile phone users were paying taxes in one way or the other, he explained. CBR had made the tax administration faceless during the last three years, he added.

Broadening the tax base will involve imparting to the system a truly multi-pronged complexion. Unfortunately, the policy so far seems to be dictated by a mindset that puts premium on granting unjustified exemptions and concessions. For instance, agriculture and real estate, particularly the former, can be a huge source of additional revenue, if taped rigorously. According to the late Dr. Mahboob-ul-Haq, the aggregate annual income of big landholders in Pakistan was over Rs.600 billion, but they did not pay even Rs.1 billion on their farm income. A subterfuge usually employed by landholders is that many of them tend to show their non-agricultural income as agricultural income to avoid paying taxes. Capital gains tax is another lucrative source that needs to be tapped by the government. Shares market is yet another factor. Obviously, all these sectors should be brought under the tax net if the targets set out in the Vision-2017 are to be achieved. There should also be greater synchronization among federal and provincial taxes, so as to achieve a unified thrust of the new strategy.

The ambitious targets set under Vision-2017 program can only be achieved by easing out all weak spots in the taxation structure, and by bringing about uniformity in the application of tax laws. Pakistan's current tax to GDP ratio at 9.4 is among the lowest in the region. The main causes of Pakistan's low tax to GDP ratio include a narrow tax base, poor compliance by tax collectors and duty payers, too many exemptions and a huge underground economy created primarily by smuggling, owing to money and massive tax evasion. These are some of the "black holes" that have been doing rounds on the country's economy.