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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.

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Published: January 2014

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

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 DISCUSSION PAPER
Pakistan: Fiscal Management & Accountability

CONTENTS
Preface

Profile of the Author

Introduction 09
Fiscal Deficit & Public Debt 13
Public Expenditure 14
Tax Potential 15
Conclusion 17
Annex I: Constitutional Framework for Fiscal Management 21

Annex II: Fiscal Operations [Data from website of the Ministry of Finance] 23

Annex III: Selected data from the Economic Survey 2012-2013 28

Annex IV: FBR's Performance (1996-1997 to 2012-1203) 36

 DISCUSSION PAPER
Pakistan: Fiscal Management & Accountability

Preface
Preface

T 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
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 DISCUSSION PAPER
Pakistan: Fiscal Management & Accountability

Aboutthethe
About Author
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: Drug-
trap 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.
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 DISCUSSION PAPER
Pakistan: Fiscal Management & Accountability

Results of the first half of the current fiscal year indicate The provinces should have the exclusive right to levy
that the economy is on the track and that it is moving in the indirect taxes on goods and services within their
right direction1 statement by Senator Ishaq Dar, Finance respective physical boundaries. Right to levy any tax on
Minister, during a meeting with representatives of the goods should be restored to the provinces as was the case
Department for International Development (DFID) on at the time of independence. Despite levying of taxes by
January 21, 2014. federal government that should have been with provinces,
the Centre has miserably failed to reduce the burgeoning
The root cause of our economic destruction has been the fiscal deficit that is reaching the horrifying mark of Rs. 1.8
policy of 'reckless borrowing and ruthless spending'Dr. trillion this year. Had provinces been allowed to generate
Ashfaque H Khan, Economy in 2012-13, The News, their own resources, the present chaotic situation could
August 8, 2012. have been averted. Centre has been claiming that
provinces lack infrastructure to efficiently collect sales tax.
Introduction This has proved wrong as Sindh and Punjab collected
much more sales tax on services than by Federal Board of
For the last many decades,2 fiscal management and Revenue (FBR) after establishing their own tax
accountability in Pakistan has been a serious cause of apparatuses in 2011 and 2012 respectively. In 2013
concern for allthe Government, people and donors. The Khyber Pakhtunkhwa also followed in their footstep.
fundamental problem diagnosed by experts is a pathetic
tax-to-GDP ratio coupled with 'reckless' borrowing and We need amendments in Constitution to ensure judicious
'ruthless' spending. distribution of taxation rights between the federation and its
units. Unless it is done, the provinces will continue to
Fiscal decentralisation involving the transfer of taxing and remain hugely dependent upon federal transfers.
spending powers to sub-national levels of government is Transferring of indirect taxes on consumption of goods to
totally non-existent in Pakistan despite clear command the provinces will empower the federating units and raise
contained in Article 140A of the Constitution of Islamic the tax-to-GDP ratio. Sindh Revenue Board (SRB) and
Republic of Pakistan. Pakistan is in dire need of fiscal Punjab Revenue Authority (PRA) are proving this point.
decentralisationpresently major fiscal powers are Collection of SRB in 2011-12 and 2012-13 at Rs. 25 and
concentrated in the hands of federal government. Even the Rs. 33.7 billion is impressive as compared to what Sindh
Constitution denies the provinces right to levy sales tax on used to get from FBRnever more than Rs, 12 billion.
goods within their respective territories. The provinces PRA in its very first year (2012-13) collected Rs. 37 billion
also have shown apathy to devolve administrative and compared to Rs. 26 billion received in the same head from
fiscal powers to local governments. Since all broad-based the FBR in 2011-12.
and buoyant sources of revenue are with the federal
government, contribution of provinces in total tax revenues The provincial performance in the case of sales tax on
is only six percent and in overall national revenue base (tax services completely belies the impression that provinces
and non-tax revenue) just around eight percent. This has do not have the capacity to generate taxes. If sales tax on
made them totally dependence on Centre for transfers goods is given back to provinces, as was the case at the
from divisible pool. What makes the situation more time of independence, they will perform much better as
disturbing is the fact that right of provinces to levy sales tax experience of handling sales tax on services shows.
on services is encroached by federal government through However, the performance of provinces in collecting
levy of presumptive taxes on services under the Income agricultural income tax is extremely poor. This is a
Tax Ordinance, 2001, sales tax on gas, electricity and common issue both at federal and provincial level arising
telephone services and excise duty on a number of from absence of will to collect income tax from the rich and
services.3 mightythe meagre collection of agricultural income

1. 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
2. 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.
3. Centre-provincial harmony: Equitable distribution of fiscal rights needed, Business Recorder, March 13, 2006.
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Pakistan: Fiscal Management & Accountability

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

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Pakistan: Fiscal Management & Accountability

Position under 7th NFC Award Position under 7th NFC Award

Salient features Who will get what?

Vertical distribution
* Final share of provinces: Punjab 51.74
percent, Sindh 24.55 percent, Khyber 7th NFC 6th NFC Change
Pakhtunkhwa (KPK) 14.62 percent and Center 44% 52.5% -8.5
Balochistan 9.09 percent. Provinces 56% 47.5% +8.5
Horizontal distribution
* Federal collection charges to be reduced from
5% to 1% 7th NFC 6th NFC Change
Punjab 51.74% 53.01% -1.27%
* Sindh to receive additional transfer of Rs. 6 Sindh 24.55% 24.94% -0.39%
billion from federal government
KPK 14.62% 14.88% -0.26%

* Provinces in agreement on multiple Balochistan 9.09% 7.17% +1.92%

indicators and respective weights Projected amount (in billions)
2009 2010 2014
* Sales tax acknowledged as provincial subject
Punjab 419 471 938
Sindh 197 223 445
* KPK to be given additional 1% from federal
divisible pool KPK 118 133 265
Balochistan 53 83 165

FBR has been persistently failed to meet budgetary targets given scenario, federation-provinces tax tangle will
for the last many years what to speak of realising the real continue unchecked and further taxation through local
revenue potential, which is not less than Rs. 8 trillion5. In governments, when elected, would not serve any useful
20102-13, it even failed to collect Rs. 2000 billion. This purposethere will be no relief to the people, rather tax
year target is less than Rs. 2500 billion. The failure to tap burden will increase manifold.
the real tax potential is the real dilemma of Pakistan. Poor
performance of FBR adversely affects the provinces as Pakistan will remain in debt enslavement and more and
they are wholly dependent on what the Centre collects and more people will be pushed below the poverty line. If we
transfers to them from the divisible pool. Centre is want to come out of this crisis, the parliament will have to
unwilling to grant the provinces their legitimate taxation reconsider the prevailing social contract between
rights while it collects too little to meet their overall financial federation and the provinces. Provincial autonomy and
demands. The size of the cakedivisible poolis so local self-governance without taxation rights and equitable
small that nothing substantial can be done to come out of distribution of income and wealth is meaningless. We
debt enslavement and to spend adequately for the welfare cannot overcome perpetual economic and political crises
of the people, no matter in which part of the country they unless the provinces are given true autonomy; ownership
live. of all resources; generation of own revenue and exclusive
right to utilise it for the welfare of their denizens.
Track record of FBR shows remote possibility of collecting
even Rs. 6 trillion in the next three years to give enough Fiscal decentralisation and municipal self-rule should
fiscal space both to the Centre and the provinces to come essentially be linked with a social policy based on the
out of the present economic mess, thus providing some principle of universal entitlements for all residents in terms
relief to the poor as well as trade and industry. Under the of access to social benefits and social services. Taxation

5. FBR: new chairman, old challenges, Business Recorder, August 2, 2013

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 DISCUSSION PAPER
Pakistan: Fiscal Management & Accountability

without representation also means denial of spending for economic affairs is thus, not unknown or untoldit is even
the essential entitlements guaranteed in the Constitution.6 candidly admitted in all official documents, released from
The principle of universal entitlements seeks to prevent the time to time, relating to taxation, public expenditures and
formation of inequalities and the foundation of the poor as public borrowing.
a separate social group, whereas residualism/marginalism
takes the form assisting the poor and the needy, and thus This paper briefly touches some vital areas posing
implicitly defining them as certain types of social groups. challenges to fiscal management and accountability vis--
vis available solutions to overcome the prevalent crisis of
The provincial parliaments in Pakistan should be meeting huge budgetary gap.
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-ridden-
inefficient 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. Municipal self-governance, Business Recorder, July 19, 2013

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Fiscal Deficit & Public Debt 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
'The absence of prudent fiscal policy coupled with lack
against targeted surplus of Rs. 125 billion, leaving a
of implementation and accountability has destroyed
significant shortfall in non-tax revenues for the fiscal year
macroeconomic stability during the last five yearsthe
2011-12.
last year of the federal government has proved to be the
worst, rather disastrous. At provincial level as well, the The Fiscal Policy Statement for 2012-2013 also reveals
performance of all the four governments has been that despite transferring the functions of 17 ministries to
equally appalling'Fiscal Policy Statement for 2012-13 provinces, federal expenditure did not register any
issued by the Debt Policy Coordination Office of Ministry of reduction because majority of the employees of the
Finance. devolved ministries preferred to stay on the Federal payroll
rather than opting for the Provinces.
Managing high fiscal deficit (root cause of many economic
ills) coupled with massive debt burden is the toughest The second reason for increase in expenditure at Federal
challenge faced by fiscal managers of Pakistan. The well- level was creation of some new ministries and up-
admitted solution: substantial increase in resources and gradation of some divisions. Since the Federal
drastic reduction in spending is easier said than done. Government agreed to finance the vertical programmes
Fiscal austerity, critics7 say, in the past had failed in under the NFC accord, the pressure on its fiscal balance
reducing the debt burden of Pakistan. continued.
From 2007-2012, Pakistan's fiscal policy remained under According to the Fiscal Policy Statement for 2012-2013,
immense pressure owing to continued security related the provinces were unable to support the Federal
issues, greater than targeted subsidies, flood related Government as had been envisaged in the fiscal
expenses and global financial crisis.8 The government devolution process. More specifically, it is observed, the
borrowed heavily from external and internal resources in provinces' share in total expenditure increased from 31.5%
order to finance the fiscal deficit, due to which a huge in 2011 to 34.5% in 2011-2012, whereas their share in
amount of money was paid towards interest payments. All revenue generation remained almost the same at 6.0% of
these factors relentlessly affected Pakistan's fiscal the total (federal plus provincial) revenues.
capacity to finance the fiscal deficit.9 (please see
official data at Annex III & IV. ) It is revealed that the provinces posted surplus of Rs. 134
billion in 2010-2011 mainly due to upward revision in their
Fiscal Policy Statement for 2012-2013,10 released by the share (56%) in the divisible pool under the 7th NFC Award.
Debt Policy Coordination Office of the Ministry of Finance
in compliance of section 6 of the Fiscal Responsibility and It is, however, disturbing to note that in 2011-2012, they
Debt Limitation Act 2005 [FRDLA, 2005], while expressing registered a deficit of Rs. 39 billion. They did not make
grave concerns about overall fiscal scene, expresses any meaningful efforts to raise their own revenues and
dissatisfaction over failures of provinces in meeting the tax reduce unproductive expenditure. The deficit in 2011-12
targets. It says the efforts of provinces in collection of was driven by sharp rise in provincial expenditures.11

7. 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
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Pakistan: Fiscal Management & Accountability

Huge opportunities accrued to the Provinces in the wake levels around 3.5 times and debt servicing below 30
of the 7th NFC Award and 18th Constitutional percent of government revenue are generally believed to
Amendmentright steps towards fiscal independence, be within the bounds of sustainability. Government is
accountability and efficient decision making for the making concentrated efforts to increase the revenues and
provision of local services and financing thereofbut rationalize current expenditure to reduce the debt burden
they failed to convert them for well-being of masses. It is and improve the debt carrying capacity of the country to
high time that the Provinces should stop blaming the finance the growth and development needs.15
Federal Government for all their ills and fiscal
mismanagements. They should put their own houses in All economists are unanimous that during 2007-2012 both
order, exploit better opportunities available to them, at the Federal and the Provincial levels no concrete
exploit natural and human resources to the optimal level, measures were taken to foster fiscal discipline. No strategy
tax the rich for the benefit of the poor, reduce expenditure, was devised to mitigate risks of falling foreign reserves and
go for long-term projects yielding more and more increasing debt burden.16 Resultantly borrowings from
employments and ensure sustainable economic growth banks increased manifold to pay off liabilities of the PSEs.
with social justice for all. So far their performances in the According to the SBP, this has inflicted economy heavily
wake of the 7th NFC Award are not satisfactory at all. 12 and resulted in billions of rupees increase in the stock of
total debt & liabilities (TDL).17
According to the Debt Policy Coordination Office, under
the 7th NFC award, around 70 per cent of the total Pakistan has lost some US $ 12 billion forex reserve since
revenues are down-streamed to provinces both directly July 2011, when they stood at $14.8 billion. It has lost US
and indirectly. The Federal Government is left with only 30 $ 2.0 billion reserve since the signing of the IMF
per cent of the total revenues, whereas, expenditure on programme. The last five years of economic
interest servicing, security and subsidies on food and mismanagement brought the country to the verge of
energy constitute 60.9 per cent of the total revenues. default. The present government sought the assistance of
Furthermore, total revenues also include State bank of the IMF to prevent that. The IMF approved a new
Pakistan (SBP) profit that will start declining once programme amounting US $ 6.68 billion on September 4,
Government starts repayment of SBP debt as envisaged in 2013.18
the SBP Act and reduction in domestic interest rates. This
essentially means that the consolidated fiscal deficit of the The unabated borrowings to meet burgeoning budgetary
country will remain on the higher side till such time the deficit is sinking the economy. One of the major
revenue generation efforts bear fruits and the tax to GDP weaknesses of economic governance is unchecked
ratio is increased.13 wasteful spending on monstrous Government machinery
and inefficient PSEs. Our foreign debt is going to be US $
The Debt Policy Statement 2012-2013 issued by the Debt 75 billion in 2015 and domestic debt Rs. 20 trillion if
Coordination Office of the Ministry of Finance in immediate curative measures and tough decisions are not
compliance of section 7 of FRDLA 2005 concedes that taken.
the debt to GDP ratio has hovered around 60% since
2007-08. In 2011-12, public debt serving stood at Public Expenditure
Rs.1024 billion against Rs.856 billion paid during 2010-
11.14 The Debt Coordination Office claims that Fiscal consolidation must emphasise persistent
soundness of Pakistan's debt position, as given by structural reforms for resource mobilisation and
various sustainability ratios, remains higher than the expenditure rationalisation over temporary fiscal
internationally accepted thresholds. Total Public debt measures such as increasing tax rates and reducing

12. Ibid
13. Ibid
14. Debt Policy Statement 2012-13, Debt Coordination Office of Ministry of Finance http://www.finance.gov.pk/publications/DPS_2012_13_web.pdf
15. Ibid
16. 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.
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Pakistan: Fiscal Management & Accountability

expenditure across the board. Fiscal institutions including Experts are even critical of the present policies
the country's debt office can play an important role in emphasising that fiscal consolidation is not receiving due
locking any gains. Reducing public debt takes time; attention. There is no serious work being done to control
therefore, fiscal consolidation must focus on enduring the wasteful expenditure by right-sizing the government
structural changeDr Ashfaque H Khan, A nation's apparatus. They argue that for effective fiscal management
debt, The News, August 27, 2013. and accountability, substantial reduction in unproductive
current expenditure is required through the following
During the past few years, greater than targeted budget initiatives:
deficit together with deficit financing from domestic
sources, has resulted in a sharp increase in interest i. Twenty-five ministries can be either dissolved or
expenditures. Interest payments have increased from Rs. rationalised, thereby saving Rs 200 billion.
716.6 billion or 3.9 per cent of the GDP in 2010-2011 to ii. Rs. 400-500 billion on financing the losses of PSEs
Rs. 901.9 billion or 4.5 per cent of GDP in 2011-2012. can be eliminated by restructuring and privatising
those entities.
In terms of the current expenditure, it stood at 28.9 per cent iii. Badly targeted subsidies, consuming about Rs. 500
during 2011-2012. The rise in interest payments during billion should be withdrawn and some part of the
the period indicates the growing unsustainability of the saved money could be directed to expand coverage of
fiscal account. the social protection programme for the poor.
iv. The total public debt at Rs 30 trillion is unsustainable.
Another major revenue leakage relates to subsidies to Debt servicing cost has reached Rs.1500 billion,
loss-incurring PSEs and power sector, together amounting which is over 40 per cent of total government revenue.
to Rs. 700 billion.19 The Economic Survey 2012-2013 Drastic measures need to be taken to reduce the debt
says that share of current expenditures in total stock by retiring some of the debt with the proceeds of
expenditures has declined significantly from 84.0 percent privatisation of public sector corporations such as
in 2010-2011 to 79.3 per cent in 2011-2012.20 It further PIA, Pakistan Railways and the Pakistan Steel Mills;
declined to 77.0 per cent in 2012-2013. There was also a sale of some of the state-owned real estate which is
surge in defence expenditure that accounted for 16.2 per being used for unproductive purposes as perks for
cent of current expenditure in 2011-2012 against 15.5 per government officials.24
cent in 2010-2011.21
Tax Potential
Period from 2008-2013 was adjudged as 'financial hara-
kiri' by some economists.22 Never in the history of this The people have to understand that the tax money stolen
country has the nation seen such a fiscally irresponsible by the corrupt rich of the country represent the good
government. They have maintained a large budget deficit schools, colleges, hospitals, roads and many other
year-after-year over the last five years, and accordingly projects of welfare stolen from us poorThe Frontier
more than doubled the country's public debt ably assisted, Post, January 23, 2014
of course, by the exchange rate depreciation. Accordingly,
they damaged a relatively robust economy in a short span The government has relied on raising tax rates rather than
of five years without guilt and shame. Because of broadening the tax base. In other words, the government
unwillingness to mobilise resources on the one hand and has raised the tax burden of those who were already
reckless spending on the other along with an paying taxes. Those who are influential have never paid
unconsidered NFC Award, Pakistan's fiscal balance has taxes, and have once again remained out of the tax
been destroyed thoroughly in the last five years. The nation netHurting the poor, The News, June 14, 2013
will witness further instances of financial hara-kiri in the
last two weeks of the present regime the impact of which In recent years Pakistan became target of severe criticism
will continue to haunt the economy in the years to come.23

19. Economic Survey of Pakistan 2012-13, page 52

20. Ibid
21. Ibid
22. Dr. Ashfaque H Khan, Financial hara-kiri, The News, March 5, 2013
23. Ibid
24. Dr. Akmal Hussain, Creating the fiscal space, The Tribune, February 14, 2011
15
 DISCUSSION PAPER
Pakistan: Fiscal Management & Accountability

from many countries and donors for not collecting taxes immovable assets.
due, especially from the rich and mighty. It is an undeniable vi. Imposition of sales tax on all kinds of services by the
reality that both centre and provinces are not collecting provinces
taxes diligently. For fiscal year 2012-2013, the FBR
collected Rs. 1,939.4 billion against original target of Rs. Amending of tax codes each year through the Finance Bill
2,381 billion25 showing huge shortfall of Rs. 441 and in between, by way of statutory regulation orders
billion. The contribution of Provinces in overall tax (SROs) is not serving any useful purposethis is not a
collection is less than 6 per cent of the GDP. solution to improve tax administration.

Pakistan's tax potential at the Federal level is not less than The solution lies in converting the FBR into an autonomous
Rs. 8 trillion. There are 10 million individuals having annual body run by independent Board of Directors comprising
taxable income of Rs 1.5 million,26 total income tax professionals and answerable directly to the Parliament
collection from them at the prevalent tax rates comes to and not the headquarters of the ruling party. Taxes should
Rs. 3,750 billion. If we add income tax collected from be imposed by the Parliament and not any executive
corporate bodies, other non-individual taxpayers and authority.
individuals having income between Rs. 400,000 to Rs.
The FBR must be insulated from all kinds of political
1,000,000, the gross figure would be Rs. 5,000 billion.
influences. Enforcement of tax laws without any fear or
The FBR collected only Rs. 739.7 billion as income tax in
favour should be the first and top most priority of the
2012-2013.
Government if it wants to rescue the country from the
present economic mess coupled with expending taxes for
Similarly, due to leakages in sales tax, federal excise and
the benefit of masses and desisting from wasting funds on
custom duties, the total collection is not more than 30% of
white elephantsmonstrous public sector enterprises
actual potential. In fiscal year 2012-2013, the FBR
sleaze with inefficiency and corruptionso that public can
collected Rs. 841.3 billion under the head sales tax.
see that the elected Government is a responsible one and
Collection for customs and excise duties was Rs. 239
cares for them. This would promote tax culture and restore
billion and Rs. 119.4 billion respectively. The total indirect
people's faith in the tax system. Voluntary tax compliance
collection of just Rs 1199.7 billion was pathetically low. It
can be improved only through a strong deterrent system
should have been Rs 3500 billion. If this tax gap is bridged,
where the compliant taxpayers are respected and
the total revenue collection would not be less than Rs.
rewarded, while evaders are exposed and punished under
8500 billion without imposing any new taxes or raising
the law.
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:

i. 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

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
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 DISCUSSION PAPER
Pakistan: Fiscal Management & Accountability

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
 DISCUSSION PAPER
Pakistan: Fiscal Management & Accountability

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.

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 DISCUSSION PAPER
Pakistan: Fiscal Management & Accountability

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.

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 DISCUSSION PAPER
Pakistan: Fiscal Management & Accountability

Annexure II

Fiscal Operations

BUDGET AT A GLANCE
[FY 2013-2014]

Rs. in billion
RECEIPTS EXPENDITURE
Tax Revenue* 2,598 A. CURRENT 2,829
Non-Tax Revenue 822 Interest Payment 1,154
a) Gross Revenue Receipts 3,420

b) Less Provincial Share 1,502 Pension 171

I. Net Revenue Receipts (a-b) 1,918 Defence Affairs & Services 627

II. Net Capital Receipts (Non Bank) 507 Grants and Transfers 337

III. External Receipts (net) 169 Subsidies 240

IV. Estimated Provincial Surplus 23 Running of Civil Government 275

Provision for Pay & Pension 25

V. Bank Borrowing 975 B. DEVELOPMENT 762

Federal PSDP 540

Net Lending 50
Other Dev. Expenditure 172

TOTAL RESOURCE (I to V) 3,591 TOTAL EXPENDITURE (A+B) 3,591

*Out of which FBR Taxes: Rs 2,475 billion

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 DISCUSSION PAPER
Pakistan: Fiscal Management & Accountability

Provisional
Table 1
Pakistan: Summary of Consolidated Federal and Provincial
Budgetary Operations, 2013-2014
(In Million of Pakistan Rupees)
July-Sept. 2013
Total Revenue 829,712
Tax Revenue 537,056
Federal 494,948
Provincial 42,108
Non-Tax 292,656
Federal 281,960
Provincial 10,696
Total Expenditure 1,116,620
Current Expenditure 868,377
Of which : Mark-up Payments 301,141
Defence 146,464
Development Expenditure & net lending 170,149
Statistical Discrepancy 78,094
Budget Deficit 286,908
Financing 286,908
External (27,213)
Domestic 314,121
Non-Bank 116,086
Bank 198,035
Memo Items:
Total Revenue 3.2
Tax Revenue 2.1
Nontax Revenue 1.1
Total Expenditure 4.3
Current 3.3
Of which : Mark-up Payments 1.2
Defence 0.6
Development Expenditure and net lending 0.7
Budget deficit 1.1
GDP (Rs. in Billion) 26,001

Note: Figures based on information from AGPR/Provincial A.Gs./ SBP/EAD.

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 DISCUSSION PAPER
Pakistan: Fiscal Management & Accountability

Provisional
Table 2
Pakistan: Summary of Consolidated Federal and
Provincial Revenue 2013-2014
(In Million of Pakistan Rupees)
July-Sept. 2013
Total Revenue 829,712
Tax Revenue 537,056
Direct Taxes 160,777
Taxes on property 3,607
Taxes on goods and services 255,924
Excise duty 24,685
Sales Tax 231,239
Taxes on international trade 52,791
Other taxes 63,957
Stamp duties 4,431
Motor vehicles tax 3,156
Other taxes 30,620
Petroleum Levy 25,750
Nontax Revenue 292,656
Mark-up (PSEs & Others) 56,849
Dividend 3,719
SBP profit 80,000
Defence 1,956
Citizenship, Naturalization & Passport Fee 3,989
Development Surcharges on Gas 20,846
Discount Retained on Crude Oil 3,938
Royalty on Oil/Gas 19,173
Windfall Levy against Crude Oil 3,773
Gas Infrastructure Development Cess 3,046
Foreign Grants 10,115
C-01010 Others (Profit) 67,636
Others 17,616
Memo Items:
Total Revenue 3.2
Tax revenue 2.1
Direct Taxes 0.6
Taxes on property 0.0
Taxes on goods and services 1.0
Excise duty 0.1
Sales Tax 0.9
Taxes on international trade 0.2
Other taxes 0.2
Nontax Revenue 1.1
GDP (Rs. in Billion) 26,001
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 DISCUSSION PAPER
Pakistan: Fiscal Management & Accountability

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

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 2011-
12.). 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 2012-
13. In total expenditures, current expenditures were contained at 15.5 percent of GDP in 2011-12 from 17.4 percent in 2007-
08, 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 2012-
13. 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.
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 DISCUSSION PAPER
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Table 4.1: Fiscal Indicators as Percent of GDP

Year Real GDP Overall Expenditure Revenue

Total Current Development Total Rev. Tax Non-Tax

2006-07 5.5 4.1 19.5 14.9 4.7 14.0 9.6 4.4

2007-08 5.0 7.3 21.4 17.4 4.2 14.1 9.9 4.2

2008-09 0.4 5.2 19.2 15.5 3.6 14.0 9.1 4.9

2009-10 2.6 6.2 20.2 16.7 3.5 14.0 10.1 3.9

2010-11 3.7 6.5 18.9 15.9 2.8 12.4 9.3 3.0

2011-12 4.4 6.8 19.6 15.5 3.6 12.8 10.3 2.4

2012-13 3.6* 4.7 19.0 14.6 4.4 14.3 11.1 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 Expenditures
20
Total Revenues

18
16 Fiscal Deficit

14 Revenue
12
2010-11

July-Mar
2011-12
2008-09
2006-07

2007-08

2009-10
2005-06

2012-13

Fig 4.2: FBR Tax Rev as % of GDP

11.0
10.5
10.0
Percents

9.5
9.0
8.5
8.0
2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

2012-13
B.E

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 DISCUSSION PAPER
Pakistan: Fiscal Management & Accountability

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 2011-
12 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 (As % of GDP)

Year Total Current Interest Defence Develop Non Interest Fiscal Revenue Primary
Exp. (A) Exp. (B) Payments (D) ment Exp Non-Defence Deficit Deficit/Surplus deficit
(C) (E) Exp (A-C-D) (TR-Total CE)
(TR-NI

2006-07 19.5 14.9 4.2 2.7 4.7 12.6 4.1 -0.8 -1.2

2007-08 21.4 17.4 4.8 2.6 4.2 14.0 7.3 -3.3 -2.5

2008-09 19.2 15.5 5.0 2.5 3.6 11.7 5.2 -1.4 -0.2

2009-10 20.2 16.7 4.4 2.5 3.5 13.3 6.2 -2.7 -1.8

2010-11 18.9 15.9 3.9 2.5 2.8 12.5 6.5 -3.5 -2.6

2011-12 19.6 15.5 4.5 2.5 3.6 12.6 6.8 -2.8 -2.3

2012-13B 19.0 14.6 4.0 2.3 4.4 12.7 4.7 -0.3 -0.7

B: Budgeted
* Excluding Rs 120 billion in 2010-11 and Rs 391 billion in 2011-12 on account of debt Consolidation.
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 DISCUSSION PAPER
Pakistan: Fiscal Management & Accountability

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 Prov. Actual Growth

2012-13
July-March July-March July-March
2011-12 2012-13 2012-13
A. Total Revenue 3,378.5 1,747.0 2,141.9 22.6
a) Tax Revenue 2,614.5 1,393.9 1,557.6 11.5
Federal 2,534.5 1,336.2 1,448.0 8.4
of which FBR Revenues 2,381.0 1,280.4 1,352.3 5.6
Provincial Tax Revenue 80.0 57.6 109.6 90.3
b) Non-Tax Revenue 764.0 353.2 584.3 65.4
B. Total Expenditure 4,484.2 2,641.9 3,188.1 20.7
a) Current Expenditure 3,452.2 2,154.1 2,642.0 22.6
Federal 2,339.2 1,478.7 1,887.1 27.6
- Interest 925.8 624.5 772.2 23.7
- Defense 545.4 348.0 405.8 16.6
Provincial 1,113.0 675.4 754.9 11.8
b) Development Expenditure & net lending 1,032.0 428.0 445.8 4.2
PSDP 873.0 375.6 407.4 8.5
Other Development 154.3 45.4 37.3 -17.8

c) Net Lending 4.7 6.9 1.1 -84.1

C. Overall Fiscal Deficit 1,105.7 894.9* 1,046.2 16.9

As % of GDP 4.7 4.5 4.6 -

Financing of Fiscal Deficit 1,105.7 894.9 1,046.2 16.9

i) External Sources 134.9 47.4 -4.1 -108.6

ii) Domestic 970.8 847.5 1,050.3 23.9

- Bank 483.8 443.8 856.7 93.0

- Non-Bank 487.0 403.7 193.7 -52.0

GDP at Market Prices 23,655 20,091 22,909 14.0

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.
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 DISCUSSION PAPER
Pakistan: Fiscal Management & Accountability

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 (Rs. Billion)

Revenue Heads 2011-12 July-April % Change

2011-12 2012-13
A. DIRECT TAXES
Gross 607.9 596.7 -1.8
Refund/Rebate 79.0 43.0
Net 738.4 528.9 553.7 4.7
B. INDIRECT TAXES
Gross 943.6 989.3 4.8
Refund/Rebate 46.3 37.7
Net 1,144.3 897.3 951.6 6.1
B.1 SALES TAX
Gross 673.2 697.2 3.6
Refund/Rebate 38.0 27.8
Net 804.9 635. 669.4 5.4
B.2 FEDERAL EXCISE
Gross 95.8 91.2 -4.8
Refund/Rebate 0.2 0.4
Net 122.5 95.6 90.8 -5.0
B.3 CUSTOM
Gross 174.6 200.9 15.1
Refund/Rebate 8.1 9.5
Net 216.9 166.5 191.4 15.0

TOTAL TAX COLLECTION

Gross 1551.5 1586.0 2.2
Refund/Rebate 125.3 80.7

Net 1,882.7 1426.2 1505.3 5.5

Source: FBR
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 DISCUSSION PAPER
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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 (Rs Billion)
Items Punjab Sindh KPK Baluchistan Total
2011- 2012- 2011- 2012- 2011- 2012- 2011- 2012- 2011- 2012-
12 RE 13 BE 12 RE 13 BE 12 RE 13 BE 12 RE 13 BE 12 RE 13 BE
A. Tax Revenue 621.4 758 345.5 419.5 183.6 222.6 104.4 125.9 1254.9 1526
Provincial Taxes 44.3 55 64 73.1 3.6 4 5.7 5.4 117.6 137.5
GST on Services 36.6 40.5 25 32 8.9 8.9 3.7 4.1 74.2 85.5
Share in Federal Taxes 540.5 662.5 256.5 314.4 171.1 209.7 95 116.4 1 0 6 3 . 1303
B. Non-Tax Revenue 34.2 28.4 73.6 82.7 21.7 26 16.8 16.6 146.3 153.7
C. All Others -16.7 -10.6 24.8 48.3 31.1 34.8 33.5 52.1 72.7 124.6
Total Revenues 638.9 775.8 443.9 550.5 236.4 283.4 154.7 194.6 1473. 1804.
(A+B+C)
a) Current 468 532.9 309.5 315.3 161 191.6 85.2 107.3 1023.7 1147.1
Expenditure
b) Development 165.5 250 156 231 84.5 97.6 45.7 36 451.7 614.6
Expenditure
Total Exp (a+b) 633.5 782.9 465.5 546.3 245.5 289.2 130.9 143.3 1475.4 1761.7
Source: Provincial Finance Wing, Ministry of Finance
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 DISCUSSION PAPER
Pakistan: Fiscal Management & Accountability

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)

(Rs. Billion)

2008-09 2009-10 2010-11 2011-12 2012-13 BE

Divisible Pool 477.4 574.1 834.7 1,063.1 1,303.0
Straight Transfer 82.4 81.2 163.0 145.6 155.9
Special Grants/Subventions 40.6 82.0 54.1 53.9 56.7
Project Aid 26.3 16.0 21.9 47.8 66.0
Program Loans 0.0 0.0 0.0 4.6 10.8
Japanese Grant 0.0 0.0 0.1 0.7 0.8
Total Transfer to Province 626.8 753.3 1,073.7 1,315.0 1,592.5
Interest Payment 18.5 18.7 18.5 12.9 15.4
Loan Repayment 21.0 24.0 32.4 36.1 31.5
Transfer to Province(Net) 587.3 710.6 1,022.8 1,266.0 1,545.5
Source: Various issue of Budget in Brief

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 DISCUSSION PAPER
Pakistan: Fiscal Management & Accountability

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 (Rs. Billion)

Items 2007-08 2008-09 2009-10 2010-11 2011-12 July-March
2012-13 2011-12
A. Tax Revenue 498.2 571.7 688.3 1,063.9 1,197.1 1,002.8 819.8
Provincial Taxes 40.8 46.1 54.8 64.6 107.2 109.6 57.6
Share in Federal Taxes 457.4 525.6 633.5 999.3 1,089.9 893.2 762.2
B. Non-Tax Revenue 78.0 83.8 67.9 62.3 48.0 49.0 36.0
C. All Others 91.0 95.0 120.0 85.1 88.6 73.7 76.2
Total Revenues (A+B+C) 667.2 750.5 876.2 1,211.3 1,333.7 1,125.5 932.0
a) Current Expenditure 457.0 564.2 646.2 831.2 980.6 766.3 687.1
b) Development Expenditure 214.1 201.8 258.4 245.6 375.4 219.9 175.0
Total Exp (a+b) 671.1 766.0 904.6 1,076.8 1,356.0 986.2 862.1

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
 DISCUSSION PAPER
Pakistan: Fiscal Management & Accountability

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

Growth in Target Achieved Tax to GDP ratio

Year Targets Collection Collection (%) (%)

1996-97 286.0 282.1 5.2 98.6 11.6

1997-98 297.6 293.6 4.1 98.7 11.0

1998-99 308.0 308.5 5.1 100.2 10.5

1999-00 351.7 347.1 12.5 98.7 9.1

2000-01 406.5 392.3 13.0 96.5 9.3

2001-02 414.2 404.1 3.0 97.6 9.1

2002-03 458.9 460.6 14.0 100.4 9.4

2003-04 510 520.8 13.1 102.1 9.2

2004-05 590 590.4 13.4 101.8 9.1

2005-06 690 713.4 20.8 103.4 9.4

2006-07 935 847.2 18.8 101.5 9.8

2007-08 1.000 1008.1 18.9 100.8 9.8

2008-09 1,179 1157.0 14.8 98.1 8.9

2009-10 1,380 1327.4 14.7 69.0 9.0

2010-11 1,667 1587.0 19.6 95.2 8.8

2011-12 1952.3 1883.0 18.2 96.5 9.1

2012-13 2007 1939.4 03.0 96.6 8.5

36
 Pakistan Institute of
Legislative Development
A n d Tr a n s p a r e n c y

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