4

Introduction:

Fiscal Development
10 against the target of 4.9 percent. The additional burden on expenditure was not supported by commensurate increase in revenues, but weaker economic activity constricted revenue generation process. Resultantly, fiscal deficit deteriorated to 4.3 percent of GDP in the period July-March 2011 as compared to 4.2 percent in the comparable period of last year. The target for 2010-11 has to be adjusted upward from 4.0 percent of GDP to 5.3 percent of GDP. Even meeting this target requires massive adjustment in development expenditure and some additional revenue measures in April 2011. Major Developments A low and declining tax-to-GDP ratio and increasing public debt stock has imposed a constraint on fiscal stimulus to support revival of growth momentum needed for the economy. The Reformed General Sales Tax (RGST) is in the Parliament. Other major reforms like harmonization of tax administration have taken place and strengthening of Risk Based Audit is under process. The government has also announced various temporary tax policy measures through Presidential Ordinance to generate additional revenues of Rs 53 billion during the last quarter of 2010-11. The administrative measures and vigilance will be helpful in generating another Rs 24 billion. These steps will also be helpful in achieving the revised collection target of Rs 1588 billion. Major development was the announcement of 7th NFC award in budget 2010-11 and for the first time the distribution of funds has been made on multiple criteria of population, poverty and backwardness, revenue collection/generation and Inverse population density. In addition to the above, number of economic and financial reforms

Fiscal policy is an instrument of economic development that can have major impacts on income distribution and poverty through taxes, public borrowings and public expenditures. Nearly four years after the start of global financial crisis, the global economy is now recovering. In advanced countries, the crisis was accompanied by a rapid and deep deterioration of public finances. The sluggish pace of fiscal consolidation has caused fiscal sustainability risks in major industrialized countries. The need for fiscal consolidation and sustainability is one of the key macroeconomic issues currently facing many developed and developing economies around the world. The sustained adjustment in the fiscal balance covering both revenue and expenditure measures, is urgently required. Previous challenges of fiscal & financial repair, reforms and rebalancing of global demand remained outstanding. Pakistan’s economy mainly remained immune to global financial crisis because of its lesser exposure to international finance. Loss of growth momentum in the wake of high commodity prices, coupled with the peculiar law and security situation, and power outages has aggravated threats to macroeconomic stability. Intensification of war on terror put additional burden on public finances at a time when weaker domestic economic activity is taking its toll on revenue mobilization efforts. Fiscal balance deteriorated in 2009-10, and some adjustment is expected in fiscal deficit but it is far off than target. Key reforms for revenue mobilization have to be delayed owing to peculiar internal and external pressures. It widened fiscal imbalance from 5.3 percent of GDP in 2008-09 to 6.3 percent in 2009-

47

The composition of the current Progress has been made including restructuring Board of Directors of eight Power Sector Distribution Companies (DISCOs). Fiscal Policy Development Pakistan is confronted with the issue of stagnant tax to GDP ratio for more than a decade now. National Highway Authority (NHA). Pakistan Electric Power Company (PEPCO). The estimated power sector subsidy is expected to decrease substantially in the coming years. Trading Corporation of Pakistan (TCP) and Utility Stores Corporation (USC) The implementation of the power sector reform plan is in progress. and to move to a structural surplus and increased public sector savings. financial and managerial audits of DISCOs and GENCOs have been completed to identify weak areas and ensure financial transparency. Dissolution of PEPCO has been initiated to ensure autonomy to power sector companies and human resource transfer plan of PEPCO employees is on track. Pakistan is characterized having lowest tax-toGDP ratio not only in peer countries but even in the region as well.9 billion. Pakistan Steel Mills (PSM) and Pakistan Railway in line with the guidelines developed by the Cabinet Committee on Restructuring (CCOR). In order to address this. 48 . In this regard. Pakistan Agricultural Storage and Services Corporation (PASSCO).4 billion to Rs 227. National Transmission and Dispatch Company (NTDC). There have been regular increases in power tariff in the form of surcharge to narrow down the cost and revenue differentials of the power sector companies. Efficiency gains are likely to reduce cost differentials and tariff differential subsidy. work on NEPRA amendment to empower NEPRA to notify tariffs as determined from July 2011 is underway. Pakistan Railway (PR). Key issue of circular debt and receivables of power sector both current and previous are being addressed. Technical. The total power sector subsidy in 2010-11 is expected to be in the range of Rs181.Economic Survey 2010-11 were undertaken. Pakistan Steel Mills. monthly fuel adjustments are being passed on to consumers. as overall tax-to-GDP ratio fluctuated in a narrow band of 9-11percent owing mainly to structural deficiencies in the tax and administration system both at federal and provincial government level. An overall framework for restructuring of following eight PSEs has been devised:• • • • • • Pakistan International Airlines (PIA). which are briefly discussed below: Austerity Plan Main objective of the plan is to provide a road map to attain austere and cost effective fiscal governance through: • • • • Rationalization of Expenditure Optimization of Available Resources Process Re-engineering and Efficiency of Operation Power Sector reforms The power sector reform plan developed by the government requires the following: • • • • • • Improved governance structure Supportive legal framework Financial sustainability Supply side management Demand side management Promote private sector participation in the sector The salient feature of the Austerity plan is the rationalization of government size through a reduction in the number of Federal Ministries and devolution of subjects to the provinces Restructuring of Public Sector Enterprises Restructuring of PSEs has been initiated in order to improve overall corporate governance of PSEs and service delivery.

7 2007 3.7 18.8 14.4 2003 7.5 13.8 and 0.7 3.2 percentage points) and development expenditure (0.3 3.5 15. On the other hand.2 2. However in 2010-11.6 4.3 percent in 2008-09 on account of a drastic cut in development expenditures.3 20.5 9.6 percent in 2007-08 to 5.9 5.8 4.1: Trends in Revenue-Expenditure Gap 23 22 21 20 19 Expenditure % of GDP 18 17 16 15 14 13 12 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11* During the decade of the 2000s. Fig-4. implying massive under-taxation. .4 14. Fiscal deficit as a percentage of GDP has declined from 7. there is a limited fiscal space.5 14.5 13.3 percent in 49 Fiscal Deficit Revenue The fiscal position.4 10.7 5.5 2. The decline in total expenditure (1.9 2010 2.2 10.4 14.6 2001 18. Relatively.8 16.5 3.8 5.9 16.2 3.4 2. Tax 3.8 4.3† 17.Fiscal Development expenditure is narrowly based and offers little room to take burden of critical fiscal adjustment.9 16. The shocks are absorbed by development expenditure. Pakistan’s expenditure remained lowest among developing countries at the same level of development.1 hides many distortions.574 billion or 14.8 14.8 13.8 14.9 3.8 2000 1.4 3.3*† 18. total revenues are expected to rise by Rs 2. tax to GDP and hence revenue to GDP either remained stagnant or showed a secular decline. with total expenditures showing an overall decline since 2007-08.6 14.1 3.1 13.6 3. The lack of availability of external financing has further aggravated the fiscal predicament as the burden unfairly falls upon domestic financing. 3257 billion or 18.3 19.7 7.3† 16.6 4.5 2.4 4.8 6.8 4.2 18.6 percent of GDP.9 10.8 10.1 2009 3.4 15. respectively. Pakistan has undergone many tax and administration reforms but no major improvement in revenues is observed in the past 10 years because on the revenue side.6 22.0 percent of GDP.7 2.0 14.7 2.3† 2002 4.6 2006 6. Nonetheless.6 2.9 percentage points) during the past 3 years.7 3. Taxto-GDP ratio in the table-4.7 percentage point of GDP) is shared by current expenditure (1.0 10.1 10.8 11.4 18. the fiscal consolidation witnessed in 2008-09 evaporated with an increase in fiscal deficit by 6.5 5. expenditures and fiscal deficit indicate a notable change since 1990’s.5 percent of GDP for 2005-06 and 2006-07.3 3. Table 4.1 4.3*† 20.4 13.3 10.0 14.0 3.5 3. * Include earthquake related expenditure worth 0.4 2008 1. the total expenditure is expected to reach at Rs.6 10.0 18.2 4. Total expenditure and total revenue witnessed near stagnation and both items moved up and down in very narrow band.0 3.8 14.2 2004 9.1 4.5 13. viewed in terms of key fiscal parameters like revenue.8 2011(B) † Statistical discrepancy (both positive and negative) has been adjusted in arriving at overall fiscal deficit numbers. which is crucial for a sustainable economic growth. a similar pattern holds for expenditure to GDP. Consequently.1: Fiscal Indicators as Percent of GDP Expenditure Revenue Overall Financial Real GDP Fiscal Total NonYear Growth Total Current Development Tax Deficit Rev.3 16.8 15.0 3.3 2.7 2005 5. The debt and security related spending is taking almost three-fourth of the current expenditure and thus room for adjustment is very low.2 11.1 10.5 16.

4 9 124.4%)— —and represente less than 1 percent of GDP in Paki ed 12 istan (10.3} To otal 267.5 percent). thereb necessit by tating upwar adjustment in the fis rd scal deficit t target from 4 percent o GDP at th time of b of he budget annou uncement to 5. with th exception o Latin Ameri and the Ca g a as he of ica aribbean (11%) This ).0 0 9.8 8 Percents 9.5%) and Latin Am merica and Cari ibbean (16.3 percent of GDP.8 8 Table 4.5 per an der rcent.2: Structure of Federal Tax R Revenue (Rs. This explains very low ta tax T s axto-GDP r ratio and fai ilure of man tax reform ny ms going on for the last two decades because on s nly nistration’s eff fficiency is ta axindicator of tax admin to-GDP ratio.8 percen and l nt) Afghanista (7. Box-2: South Asian F Fiscal Consoli idation Dilemm ma South Asia has the large fiscal defic among deve a est cit eloping countr with the re ries egion-wide def ficit estimated at 8. Pet troleum secto accounts for around 2 or 27 percent of tax revenue.2 nt d percen as compared to around 15 percent in Sri Lanka and 16 perce in India. and Sri Lanka (25. b because of rev venue shortfall overrun on power sector subsidies and elevated secur expenditur as ls.2 percent). interest payments averaged 18.2 percent in 2009 by far the h t 9.2 pe ercent). rts consolidation h have been mis ssed in Pakistan. B Billion) Tax Rev as % of v Direct D Year Total (FB BR) Taxes GDP G 2000-01 392. a ent Fi ig-4. distribution h has proved t be distor to rtionary and incentivizin d ng massive t evasion.8 percent) Recent effor at budget c a ). Reformi taxation sy ing ystem for additional revenue mo obilization is critically impor c rtant for sparin more resourc for social s ng ces sector developm ment. On the exp penditure side. hit mmer of 2010. ia’s overnment tax revenues aver raged 14.1 {57.3 9.4%). Su Saharan A a sia ubAfrica (16. This unfair d f . Meanwhile. significant pressures ema anating from b both the revenu and expend ue diture sides.7 per rcent). reflects ele evated interest payments as a share of tot outlays in Bangladesh (1 t tal 17. reduce ed Pakistan in the sum growth and posed a further challenge to public finances by depressing budg b get reven nues and necessitat ting addit tional spend ding to me eet the hu umanitarian and recon nstruction needs.4} {18. the catas strophic floo which h ods.2: FBR Tax Rev as % o GDP of 10.3}^ Indirect Taxes Sales Excise E 153. which was 1.Economic Survey 2010 c 0-11 he 2009-10.6 49.2 2 9.3 perc cent as a share of GDP in 2009— e compared with Europe and Central As (21. tax mobilization in the x region is lo South Asi general go ow. Large size of inform economy is mal peculiar c characteristic of developing countries b but Pakistan’s case is mo serious as tax-to-GD s ore DP ratio is t the lowest not only in t n the developin ng world but also in the region as it h t hovers at a 9 9. Agricu ulture and s services sect tor accounts for three-fou urth of nation income b nal but its contri ibution hover red around 10 percent of GDP.3 percent) I India (17. arries a partic cularly heavy burden in the form of high interest paym e h ments.2] 50 .4 4 9.0 0 8. e Structure of Tax Revenue Pakistan h historicall a punctured tax base wi has ly ith some sectors are under-taxed and some are n not taxed at all.6 6 9. In particular. Nepal (11. The high fiscal defi h icits in the reg gion reflects a number of lon ngstanding stru uctural factors with s.5 percent more than th budget e estimate for 2009-10 due to larg r ge additional subsidies for the elec l ctricity secto or. well as floo od-related exp penditures. rity res. India’s tax base is broad at 16.6 [31. highest share a among developing regions and at least twice a high.7 [68. Pakistan (2 25. the region ca .2 percent in 2010.8]* Customs C 65 {24. Relative to total expend o ditures.

7} 148.6} 58.7 [60.9 [68.6 9.0 [60.5] *as % of total taxes . For Pakistan.4 [61.7 {65.8 {13.3 [60.6 518.7 9.3} 376.2 9. Extensive negotiations are underway to develop a consensus with the political parties.9} 47. ^ as % of indirect taxes B Budget estimates Source: Federal Board of Revenue The internal structure of taxation has undergone substantial changes as the share of income tax has risen significantly from around 31 percent in 1999-2000 to 39 percent in 2010-11 and indirect taxes are paving the way for direct taxes.9} 92. which are as follows:Reforms increase in the overall tax-to-GDP ratio of about 3-5 percent.4] 47.2} 44.2 142.4 {60.0 {63. Sales tax has becoming very important consumption tax and it accounts for two-third of indirect taxes.4 847.4} 121 {15.4 9.8] 353.6 [64.6 {60. Trade related taxes or customs duty has lowered its share in indirect taxes from 24 percent at the start of the decade and 20 percent at the end of the decade.9 {60.3} 180.5 [60.9] 657.9 {25.2] 165.0} 516.7 [39.5 {15.2} 294.3} 452.3 [31.1 {62} 235.6 {24.6} 674.6] 444.2] 529.9 460.0 [39.1] 411.4 713.0 {64.3} 132.8} 150.5 [35. Similarly excise duty is being replaced by sales taxes and thus its share in the indirect taxes has declined.5 [32.5] 513.6 {15.7} 205.3} 55 {11.4} 309. It has been recommended by the Senate and National Assemblies Standing Committees.9 [30.8 588. R-GST/VAT is envisaged to be a key structural reform in documenting the economy.0 {20.3} 71.0 {20.1} 153.4] 387.2] 1009.6} 162.4 [68.7 [39.4] 717.2 {14.7 {14. broadening of the tax base and improving the overall efficiency of the tax system.5] 333.4} 117 {28.9 9. The reforms needed to increase the tax to GDP ratio 13-15 percent during the next five years.2 1161.3] 148. The main culprit is the falling share of customs and excise duties mainly because of tax and tariff reforms.5} 138 {28.7] 312.9 {66.2 1007.8 9.2 8. The proposed Federal Reformed GST (RGST) Bill was tabled in the National Assembly and provincial R-GST bills were also tabled in the provincial assemblies.3 {25.6 [68.5 [39.9} 89.Fiscal Development 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11B 403.1 1327 1667 9.8 {17. Reformed GST It is evident by international experience that adoption of a VAT is associated with a long run 51 .5 {57.2} 261.6 [31.6} 117.9} 166.2 [67.1] 224. this level of taxation has to be increased through major overhaul of the taxation system and administration.9 9.9} 219.3} 59 {18.9] 487. Going forward.2 {18} 47. the provinces as well as the major stakeholders to ensure smooth implementation of R-GST.0 [38.6 {63.4 {16.8 {18.6] 619.6 {12.9] 176.1 8.8 799. a number of additional Tax Policy and Administrative Reforms initiatives have been announced.

machinery an nd equipmen including parts thereof has also bee nt p en withdrawn by amend n ding SRO N No. leathe rs er.230(I) )/2011. -06-2006 whe under sale tax ere es was b being charge on sugar at the asses ed ssable value of Rs 28. A one etime surchar of 15 percent has bee rge en impos on withh sed holding and advance tax xes payab during fina ble ancial year 20 011.549(I)/200 08. Moreover. Res FBR • Th number o members has been red he of duced fro 12 to 8.0 32. carpets. date 15-03-2001. Co ompliance an Enforcement Measure nd es • Fo ocused effor are bein undertake to rts ng en reduce non-file and shor ers rt-filers in in ncome tax and sales ta x ax. Special excise du rate has b uty been increase ed from 1 percent to 2. c.0 16. ge. All these m measures are likely to gen nerate additio onal revenue of Rs 5 billion d 53 during remain ning period of 2010-11 Measu ures to impro tax admi ove inistration an nd collection nt measures taken to improve tax s o Recen admin nistration and strengthen tax collectio are d on listed below: structuring o the Organi of izational Setu of up a. These good d ds are now liable for sa ales tax at t rate of 1 the 17 percent. date S ed 07. Domest ed tic supplies o these sect of tors will now be liable to w sales tax a different ra of 4 and 6 percent.0 0. n. dated 15-03-2011.231(I) )/2011. dated 11 1-06-2008.0 Direct Tax Cus D stoms 2009-2010 Sale es Excise 2010-11(Jul l-April) FBR h rescinded its Notifica has d ation SRO NO O. d. Bro oadening of T Base Tax • National Datab base and Registration Auth hority of Pakistan (N f NADRA) appr roached to he in elp id dentifying pot tential taxpay yers through datamining on 83 m m million CNIC holders based on C a taxpayer pro ofile which t takes into ac ccount ag education employmen residence type.5 percent on non-essenti 2 n ial items for the rem maining perio of tax ye od ear 2010-11.0 8. w ha been create by placing special emp as ed g phasis on skills that m n match FBR’s n needs. an l nd fertilizer both at domestic and import stage d es. FBR has c created a ded dicated Directorate General for pursuing these pot tential tax xpayers. th hrough Noti ification SR RO No. pesticides. throug gh Notific cation SR RO 09-06-200 No. The facility of zero-rat ting on plant. Now t these are subj jected to 17 p percent GST 2. and 3. O Member (Inland Rev om One r venue) ha as replaced two M d Member dom mestic op perations. NTNs i issued etc. (No and Sout The new team orth th). Th following tax measur Act he res have been taken throug these amen n gh ndments:1. amendme have been made in the Sales Tax A ents n e Act 1990. of refund cheque has bee centralize to es en ed . Through a combination of Presiden ntial Ordinanc ce and with hdrawal of SRO base exemption e ns. nt.564 (I)/200 dated 0506. travel patte ern. Sales Tax Refun nds • An expeditiou payment refund sy n us t ystem (E EPRS) has been setup in F FBR and rolle out ed all over Paki l istan since J July 2010 w where refund claims of manufactu urers/exporter are rs be eing processe online wi ed ithin 48 hou of urs fil ling of the r refund claim Issuance o all ms.88 p kg.Economic Survey 2010 c 0-11 Fig-4. Withd drawal of sales tax e exemption o on agricu ulture inputs like tractors. at ates 52 b. sporting goods and surgical goo ods) has bee en restricted to regist tered manu ufacturers-cum mexporters and exporte for export purpose on ers t nly by an amendment in SRO NO 509(I)/2007. Now s per sales tax at th rate he of 8 percent will be charged on the actual pr of e rice sugar. ba ank accounts. zero-rating o five major z on export oriented sector (textiles.3 %age of To tax 3: otal 40. Inc come Tax Or rdinance 200 and Feder 01 ral Excise A 2005.0 24.

food items (wheat & sugar) and cash transfers.3 percent of GDP in 2009-10 as compared to Rs 2. Petroleum exploration & refining Banking Sector. Private construction IT based forensic audit.2 billion or 20. however it is likely to decline to 18. e. To expand audit coverage of large and medium taxpayers gradually 2. thus it remained at 3. The expenditure overrun instead of reduction in development expenditures is a major cause of concern but equally important is revenue shortfalls. Consequently. the government resorted to limit the development spending below target level during 2009-10. Total expenditures (TE) rose to Rs 3. the government has disbursed Rs 30 billion under watan card scheme. Salient features of the policy are given below: 1. Customs Modernization Reform Under customs modernization reform. 2011.007.9 percent of GDP in 200809. Transport sector. f. and to increase much-needed social outlays over the medium term. As discussed earlier.8 percent during the same period of 2008-09. that fiscal consolidation could not be maintained in 2009-10 largely because of a sluggish growth in revenues. mainly due to the impact of higher salaries and allowances for federal government employees in 2010-11. is the development of a Pakistan Customs Valuation Gateway website containing data pertaining to commodities. In the current expenditure the decline is coming from non-interest-non-defence spending. Tax Audits 1. 2011. during July-March.0 percent in 2010-11 on account of slashing of development expenditures.7 percent of consolidated public expenditures. In order to 53 Public expenditure remained under tremendous pressure in the year under review as commensurate increase in revenues was not available. Current expenditures (CE) during 2009-10 not only surpassed the 2008-09 level but also the projected amount by a significant amount. persistence of security related pressure on public expenditures and greater than budgeted subsidies. 3. There is a need for . Insurance Sector strengthening the public finances in order to enable the government for higher spending on development and poverty reduction.531 billion or 19. Similarly. Hotel services. Expenses under the head of running of the civil administration increased by 23. To include with-holding agents and post-refund Sales Tax audit in the next Audit Plan. to alleviate the brunt of an increase in current expenditure and to ease the deficit pressure. a. To increase the professional capacity by creating sectors’ specialist in: • • • Textile sector. flood relief measures claimed an unbudgeted 1.Fiscal Development finalize refund to taxpayers within seven days of their claims being cleared.4 percent. Review of Public expenditure During July-April.5 percent of GDP as compared to 3. Directorate General of Intellectual Property Rights (IPR) has been established to enhance efficacy of customs in IPR related work and provide back-up for enforcement to Customs Collectorates. Audit Policy 2010-11 (Tax Returns 2009) The audit policy and risk criteria have been developed for the financial year 2010-11 (for returns of 2010). a major initiative taken up under the restructured TARP. The elevated current expenditures was primarily due to higher than projected spending on defense and security related spending along with a significant continuation of subsidies for energy. To devise risk based selection criteria rather than random method for audit for major sectors of economy. as available in various international bulletins in an effort to control under-invoicing.

04 -0.3 -4.9 0.2 -1. 18.3 -7.6 percent of GDP at the time of budget announcement.9 2.9 3.2 3.7 16. While as percentage of GDP it remained at 2.3 3.4 20.3 -6.9 6.3 3.1 0.6 2. Nevertheless the budgeted target is set at Rs 442 billion for the 2010-11 which is around 2. accounted for 15.4 12.5 0.9 percent in 2000-01 to 82.2 1. total revenues grew by 6.9 -3. According to the consolidated revenue & expenditure of the government.8 18.0 -3 -2. On the other hand defense expenditures.7 14.3 -2.5 2. The increase is mostly coming from higher tax revenues partially contributed by direct taxes on the back of advance income tax payments and growth in taxes on goods and services and international trade due to increase in rupee imports.4 3.3 -4. IMF released $450 million as Emergency Natural Disaster Assistance (ENDA).8 13.4 percent of GDP.2 18.5 11.0 16.7 8 9 10 9.1 3.4 1. Demand on fiscal accounts increased due to relief and rehabilitation support to flood victims.7 -5. Resultantly.8 3.8 5 4.5 17 18.5 18.5 18.3 : Trends in Components of Expenditure which was 3.5 3. Table 4.4 -0.5 percent in 2009-10.3 14.5 -0.5 4.2 2.0 16.6 6.1 percent of current expenditure in 2009-10.7 13.7 10.Economic Survey 2010-11 meet the fiscal target for 2010-11.4 -1.8 5.7 -1.1 5.9 17.7 2.4 -4.4 15.3 3.9 20.1 2.4 percent of GDP.9 billion in the same period of 2008-09.3 -4.1 4.6 -5.3 15.6 22. growth in non-tax revenues decreased by 5. . a significant part of PSDP for 201011 has been diverted towards rehabilitation activities.4 2.3 -3. Fiscal Performance: July-March. that in turn 54 had a bearing on revenue mobilization.4 7.4 16.1 13.2 19. the development spending is expected to remain conspicuously low at 3.3 -4.6 1. 2010-11 Pakistan’s economy was jolted by devastating floods at the start of the fiscal year and thus started weakening economic activity. and expected to decline further by 1.6 15.4 0.7 -0.8 4 3. (As % of GDP) Revenue Deficit/Sur plus (TRTotal CE) Primary deficit (TR-NI Exp) Year Total Expenditure (A) Current Expenditure (B) Interest Payments (C) Defense (D) Development Expenditure (E) Non Interest Non-Defence Exp (A-C-D) Fiscal Deficit 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11B B : Budgeted. in absolute terms.2 -1.489 billion as compared to Rs1.3 3.8 3. On the other hand.8 2.8 -1.4 3.5 2.3 -3.4 percent. mainly due to a substantial fall in interest payments.2 percent during July-March 2010-11 and reached to Rs1.7 2 1.2 4.1 16.3 13.1 The share of current expenditures in total expenditure has significantly declined from 89.2 13.5 percent in 2009-10 and likely to remain slightly below than this level in 2010-11. However.9 3.6 2.402 billion in the same period last year.7 percent mainly because of a decline in transfer of SBP profits.4 5.7 -2.3 0. defense expenditure rose to Rs 375 billion during 2009-10 against Rs 329.4 11.4 4.5 -2.

835 1.837 18.2 17.063 14.4 10.5 12.5 225 c) Net Lending 7 8 16. security related expenditure and delay in the implementation of tax reforms.9 746 i) External Sources 92 135 92.60 1139 Federal 1.6 0 23. Negative growth in non-tax revenues neutralized further total revenue growth to just 6. and insufficiency of the external financing shifted more reliance on domestic resources to finance the fiscal deficit during July-March 2010-11.025 1.Interest 699 727 473.Bank 166 418 210.9 6.2 percent.809 1.889 1. Fiscal deficit as a percentage of GDP stood at 4. However. Actual Prov.5 -4.1 18. Growth Jul-Mar 2010-11 6.Privatization Proceeds 0 0 0 0 GDP at Market Prices 18.2 -34.283.9 0 15.5 332 .6 percent during July-April. Actual Projections Estimate Jul-Mar Jul-Mar 2010-11 2010-11 2009-10 2010-11 A.Fiscal Development Within overall revenues.667 1. Total Expenditure 3. Overall Fiscal Deficit -683 -961 -625. change in composition of public spending can re-adjust public resources away from current consumption towards growth 55 .027. Total Revenue 2.4 Consolidated Revenue & Expenditure of the Government Budget Prov.5 505 .3 Financing of Fiscal Deficit 591 903 625.3 512 b) Development Expenditure & net 617 398 303 231 lending PSDP 610 390 286.00 1.Non-Bank 333 350 322.1 19.6 -5. while on expenditures side.80 2261 a) Current Expenditure 2.574 2.1 28. 2011 and reached Rs 1156 billion against Rs 1026.063 18.312 2.1 -23.4 2.60 1423 .710 994.5 percent during July-March 2010-11 and thus widened the revenue-expenditure gap.3 12.8 335 Provincial 750 810 437.90 1935 Federal 1.720.2 10.063 Slippages on Revenue & Expenditure during Last Three Years A well designed fiscal policy comprising of well articulated revenue and expenditure reforms is always supportive to promote economic growth.588 909.7 24.1 Table 4.3 percent during the first nine months of 2010-11 against the revised target of 5.891 2. An efficient revenue mobilization can help to condense fiscal imbalances and fund much needed public goods and services.5 -63. FBR taxes witnessed a growth of 12.7 11.8 -21.029.3 685 .2 1097 of which FBR Revenues 1.9 353 .641 2.Defense 442 442 269.4 351 B.351 1.4 67.5 6 d) Provision for flood relief 80 39 e) Unidentified Expenditure 0 -1 0 56 C. External resources for financing of budget deficit amounted to Rs 61 billion.8 -771 As % of GDP -4 -5.402.6 61 ii) Domestic 499 768 533. Total expenditure increased at much faster rate of 11.6 1020 Provincial Tax Revenue 80 66 35.6 10.2 7. other tax revenues neutralized this growth.4 42 b) Non-Tax Revenue 686 576 372.2 -4.776 1.257 3.489.3 percent for the whole fiscal year. Unsustainability of the fiscal balance emanates from the persistent growth in expenditure caused by flood relief activities.5 billion in the same period last year.00 a) Tax Revenue 1.

078 3.026. the devastation caused by floods during July and August 2011 obscure some of the optimism regarding economic activity and reforms.5 - Pakistan has experienced overwhelming fiscal challenges in the recent past in particular during 2007-08 on account of revenue-expenditure gap that lies in the structural weaknesses of Pakistan’s tax system.588 billion.007 -929 6. During the last three years expenditure overrun surpassed the revenue increases.3 percent but still higher than the target of 4. the revenue deficit improved considerably.6 percent growth over Rs 1. Total expenditures increased by 4.392 -582 4. 2007-08 witnessed massive slippage in fiscal deficit.5 billion collected during the corresponding period of last year.7 breaching fiscal deficit targets persistently. and persistent inflationary pressures etc. nevertheless. thereby resulting in Table-4. lower since 2007-08.6 percent of GDP against the target of 4 percent. fiscal deficit increased from 5. However. The task of fiscal adjustment became even difficult. IDP 56 related expenditures together with electricity subsidies.6 % Change 1. the government took various budgetary measures to attain fiscal consolidation.3 percent in 2009-10.531 -680 5. Consequently the target was downward revised to Rs 1. On the other hand 2008-09 observed a consolidation of the government’s fiscal position at the expense of development expenditures.3 percent of GDP in 2008-09 to 6.5 percent.875 -399 4. FBR exhibited reasonable performance during first nine months for current fiscal year.6 21. fiscal deficit declined to 5. Revenue collection of FBR stood at Rs1.3 5.156 billion during July-April 2010-11. In spite of this.809 2. Additionally.E 2. Despite unfavorable economic conditions.E 1.0 Actual 1.499 2.277 -777 7. deepening of the global financial crisis. security spending.9 2009-10 Actual 2.4 B. However. .3 % Change -3.3 % Change 2. FBR Tax Collection Tax collection by the FBR was targeted at Rs 1667 billion at the time of presentation of the budget for fiscal year 2010-11 under certain assumptions like higher growth trajectory.7 percent due to intensification of war on terror and over draft from the Punjab government. government’s effort for fiscal consolidation was relentlessly challenged by domestic and external sectors imbalances in confluence with deteriorating security environment. 2008-09 Actual 1. Acute energy shortages have eclipsed prospects of better large-scale manufacturing ⎯ the main source of tax revenues.877 -722 4.8 B. The government curtailed development spending in order to dilute the impact of higher than budgeted current expenditures. While it could not be sustained in 2009-10 due to multiplicity of factors including widening of fiscal deficit on account of current expenditure and lower revenue collection. aggressive taxation and tax administration reforms.Economic Survey 2010-11 promoting investment.6 4.5: Slippages in Revenue-Expenditures 2007-08 Items Total Revenue Receipts (Net) Total Expenditure Overall Fiscal Deficit as % of GDP B.476 1.851 2.E 1. Consequently. Hence. thereby reflecting 12. in 2008-09 under the IMFSBA. It was therefore.155 2. which was at 7.

0 -96.0 18.9 -28.2 130.156 % Change 521.7 percent during the first nine months of 2010-11.2 FEDERAL EXCISE Gross Refund/Rebate Net B.9 percent and 13.9 153.4 42. Rs Billion Achievement (Percentage) Revenue Heads A.3 482.4 1667 69.6 65. services.025 95.2 180. respectively. petroleum products and machinery. voluntary payments.5 460.9 516.2 billion and Rs 141.1 388.3 30.7 6.2 7. Indirect Taxes During July-April.6 141.9 billion and Rs 482.9 71.0 7.0 125.0 12.1 SALES TAX Gross Refund/Rebate Net B.6 percent. A growth of 7.3 Custom duty collection has registered a growth of 14.3 95.7 66.9 99.2 percent and 12.7 1.3 19 417.6 billion during July-April 2010-11.7 billion during July-April 2009-10 to Rs 149.E) July-April 2009-10 2010-11 430.4 799. DIRECT TAXES Gross Refund/Rebate Net B. On the other hand.3 1320.8 percent.2 52. The gross and net collection has increased from Rs 130.2 436. while the rest originate from imports.1 15.3 12. Of net collection.2 657.234 78.9 percent and 10.6: FBR Tax revenues during the period under review has been Rs 522.0 10.3 24 638. It has accounted for 62. major contribution has come from POL products.9 0.5 billion.9 billion in this 57 .2 0. INDIRECT TAXES Gross Refund/Rebate Net B.0 percent has been registered in the net collection of federal excise duty (FED) during July-April 2010-11 as the net collection stood at Rs 101.092. telecom.6 66. edible oil. almost half of total sales tax is contributed by sales tax on domestic goods and services.1 674.3 CUSTOM Gross Refund/Rebate Net TOTAL TAX COLLECTION Gross Refund/Rebate Net 2009-10 (Actual) 2010-11 (B. sugar and cigarettes. Within indirect taxes. Major revenue spinners of direct taxes are withholding tax.8 78.9 40.6 13.8 percent and 15.6 13.8 112. 2010-11. plastic resins. respectively showing growth of 19.2 1009.001 101. sales tax increased by 15.9 47.026. edible oil.3 161.3 1.7 5. the gross and net collection has witnessed a growth of 16.6 7.8 19. respectively over the corresponding period of last year.8 percent of the total FBR tax revenues. Within net domestic sales tax collection.6 percent.5 121. iron & steel and machinery have major contribution in the collection of sales tax from imports.7 16.Fiscal Development Direct Taxes The gross and net collection has registered a growth of 6.7 billion and 125. POL products. Major revenue spinners of custom duty have been automobiles.2 1. respectively. natural gas.5 101.9 726 522.6 1.3 71.6 percent in gross and net terms. The gross and net sales tax collection Table 4. vehicles. and collection on demand.9 149.3 662.3 430 773.0 14.

this reform will need 1-2 years to be fully functional.6 628.2 billion during last year.9 2010-11 BE 533. which is 29.7 116. Institutionalizing the MTBF in the Ministry of Finance Medium Term Budgetary Framework (MTBF) Main objective of MTBF program is to align public expenditures with government strategies in more predictable way.6 15. linkages with PIFRA and design of curriculum for civil services trading and induction courses.6 12.8 2. output monitoring function.2 90. POL products and Provinces have started MTBF initiative.1 29 7.5 79. capacity building within Finance Division.8 56.8 17.8 1232. building on the existing output based budgeting methodology. Transition from Financial Advisers to Chief Finance & Accounting Officers through a viable transition mechanism. • Adopting programmatic basis of budgeting.3 KPK 2009-10 RE 82.9 3. First step towards result based budgeting Clear identification of the cost of services (outputs) to be delivered. The major are cigarettes.8 322. Total Tax Revenue Provincial Taxes Share in Federal Taxes B.7 40 127.1 258.6 A.4 4.1 1.8 percent).9 422.3 31.5 308. The reform program is extending its domain to sensitive systematic issues such as working on Public Finance Act to allow MTF budgeting a legal cover.7 199.2 36. however. Preparation of ‘Medium Term Budget estimates for Service Delivery’ (GREEN BOOK). Non-Tax Revenue C. Supporting the embedding of MTBF in PIFRA-II through Financial Management Application and necessary training to help the line ministries to take the charge of compiling their detailed budgets. Need to create linkages with provinces at the time of development of Budget Strategy Paper and find avenues to create a unified approach of output based budgeting across Pakistan. • Provincial Budget The total outlay of four provincial budgets for 2010-11 stood at Rs 1. natural gas.4 percent in budgetary outlay followed by Sindh (30.5 148 3. • Further synchronizing the monitoring function with output monitoring (both financial and non-financial) which has become a regular feature of the Ministerial activities.4 percent).3 68.6 2010-11 BE 163. Punjab (28 percent) and KPK (26.6 569.3 13. cement.7: Overview of Provincial Budgets Punjab Items 2009-10 RE 359.2 870.2 2010-11 BE 1106 161.6 5. enacting budget preparation manual. 95.5 53.4 39. Balochistan buoyed by more expected resource flows from the federation witnessed the highest increase of 37. Strengthening the strategic process of budget preparation in each federal ministry. services. Following areas need attention under MTBF reforms. All Others Total Revenues (A+B+C) 58 .6 50.5 944. support will be needed to harmonize with federal initiative.9 20.9 Sindh 2009-10 RE 214.8 94.Economic Survey 2010-11 period as against Rs corresponding period of revenue spinners of FED beverages.2 32.8 72.9 245.7 1.4 36. • Major modification to the MTBF budget preparation implemented with effect from 200910 include the following: • • • • • Introduction of budget ceilings for all federal ministries.4 percent higher than the outlay of Rs 997 billion for the last year.8 187.4 123.9 Total 2009-10 RE 697.5 74 2010-11 BE 100.290 billion.1 26.1 339.5 Baluchistan 2009-10 RE 41. (Rs Billion) • • Table 4.8 2010-11 BE 308.1 443.8 26.

9 22.8 291.9 314 118.7 80.3 ‐7.9 497. which is up by 42 percent compared to last year.1 50. Non-Tax Revenue C.2 704.2 134.8 54 453 2010-11 BE 386. the consolidated fiscal balance deteriorated in 200910 since an exceptional growth in total expenditure has outpaced revenue growth.9 722.9 ‐8.1 162.6 628. On the other hand KPK managed to have a surplus balance on account of a large sum in received in the form of federal loans and grants along with the profit from hydro electricity.8 291.2 870. Total Tax Revenue Provincial Taxes Share in Federal Taxes B.3 KPK 2009-10 RE 109 46.3 2010-11 BE 127 69. Allocation of Revenues between the Federal Government & Provinces Fiscal decentralization or decision making at lower level is believed to be an effective strategy to promote economic growth and development. Account ii) Cap.9 403.2 113. Ministry of Finance The overall provincial revenue receipts for 201011 are estimated at Rs1233 billion.5 996.5 21.4 580.6 Despite a significant growth in total revenues.4 ‐2.9 19.5 996. involving devolution of powers to tax and spend along with arrangements for correcting the imbalances between resources and obligations.7 20.2 79.4 ‐0.1 38.1 21.8 196.8 36.8 193.5 155.3 Baluchistan 2009-10 RE 52.3 179.8 112.5 FY09 21.5 57.3 453.9 2010-11 BE 83.5 424. Account ii) Cap.3 11.3 68.8 19.7 9. All Others Total Revenues (A+B+C) a) Current Expenditure b) Development Expenditure i) Rev.9 2009-10 697.7 116.4 26. (Growth) 2007-08 A.8 Total 2009-10 RE 704.2 ‐2.Fiscal Development Punjab Items 2009-10 RE 318.5 19.1 195. Acount Total Exp (a+b) Source: Provincial Finance Wing.3 135.7 291.8 688.1 ‐4.0 FY10 13. Province-wise breakup reveals that the rise in overall balance was entirely generated by Punjab and Sindh.2 119.8: 3-Years Overview of Provincial Budget 2008-09.3 0 26.2 611.7 13.7 58 52.3 Sindh 2009-10 RE 224.8 83.6 48.8 56.8 61.2 0 27.3 9.9 1002.1 93. However.2 132.3 179.5 1289.7 27.6 2010-11 BE 865.5 100.7 308.2 20.9 759.3 32. Acount Total Exp (a+b) 504. The accelerated growth was mainly due to increase in provincial share in federal revenues under new NFC award and of combined with federal and foreign developmental grants to the provinces.3 2010-11 BE 268.5 2008-09 612 57.4 2. It is the empowerment of fiscal responsibilities to the sub-national governments.7 a) Current Expenditure b) Development Expenditure i) Rev. total revenue of the provinces registered a growth of 20 percent in 2009-10 as compared to 18 percent in Table 4.5 262 99.8 112.8 18.4 13.3 554.8 59. The 59 .3 109.

5 percent in the remaining period of the NFC award.4 40.4 0.6 25. an increase of 51.3 65.6 2008-09 477.0 753.9: Transfers to Provinces (NET) 2004-05 Divisible Pool Straight Transfer Special Grants/ Subventions Project Aid Agriculture Sector Loan-II Japanese Grant Total Transfer to Province Interest Payment Loan Repayment Transfer to Province(Net) 204.9 54. Billion) 2009-10 574. While the share of the federal government in the net proceeds of divisible pool stood at 44 percent in 2010-11.6 56.6 24.3 16.119.6 14.2 82.7%).0 16.1 1.3 during 2009-10 to 56 percent in 2010-11 and it would increase to 57.3 29.5 1.3%).9 2006-07 320.0 0.2 381.4 82. significant efforts have been made in order to restructure the balance between the federal and provinces.8 0.6 70.0 40.5 2007-08 391.1 439.9 33. However in Pakistan.1 0.0 626.1 385.5 35.8 19.0 Source: Budget in Brief.7 18.0 0.7 24.077. while it will remain at 42. the transfers to provinces has been projected to increase to Rs 1.7 244.3 18.Economic Survey 2010-11 distribution of resources and fiscal equalization transfers are a controversial issue around the world.5 21.8 40.4 0.8 63.1 1. revenue collection/ generation (5.6 billion in 2009-10.6 26.5 percent in 2011-12 onwards.6 2005-06 244.0 587. (Rs.5 16.1 297.0 710.8 167.4 465.1 81.9 25. Hence.9 1.0 0.5 2.0 0.3 15.6 percent in the 2010-11 over the actual transfer of Rs 710.2009-10 In the 7th NFC award.3 28.3 19.0%) and area or inverse population density (2. The 7th NFC award is the major development under which the share of the provinces increased from 45 percent Table 4.6 2010-11B 865.5 17.8 2.6 0.4 31.0 510.077 billion.7 348. the distribution of the resources has been made on a multiple criteria which consist of population (82%). poverty/backwardness (10. 60 .2 21.8 18.3 0.

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