S.

Batool Fatima
Mujtaba Siddiqui
Isra Imtiaz
Shariq Jawed
Muhammad Ahmed

Contents
INTRODUCTION........................................................................................................... 3
DEFINING FISCAL POLICY:........................................................................................ 3
Types of fiscal policy:............................................................................................... 3
OBJECTIVES OF FISCAL POLICY................................................................................3
COLLECTION OF REVENUES:....................................................................................4
EXPENDITURE.......................................................................................................... 4
1980s till present........................................................................................................ 5
Entering Musharraf’s Era......................................................................................... 9
Overview of Musharraf’s Fiscal Policy...................................................................9
Revenues........................................................................................................... 10
Impact on Industry............................................................................................. 12
Fiscal Performance during 2008............................................................................13
FBR Tax Collection and Refunds during 2008‐09...................................................14
Fiscal Performance 2009....................................................................................... 14
FISCAL PERFORMANCE 2010................................................................................. 15
FISCAL PERFORMANCE 2011................................................................................. 17
Pakistan Tax Revenue 2012-13.............................................................................. 19
Pakistan Tax Revenue 2013-14.............................................................................. 20
Pakistan Tax Revenue 2014-15.............................................................................. 20
Tax Evasion............................................................................................................ 22
Expenditures: 2008-present.................................................................................. 23

” In short fiscal policy refers to collection of resources including foreign aids and spend it for the public welfare and manage public debt.” OBJECTIVES OF FISCAL POLICY 1) Development in different sectors like education. Ministry of finance makes fiscal policies and implement it in order to stabilize the economy and make developments in different sectors of the country. which comes in the form of tax cuts. health. One form of expansionary policy is fiscal policy. “Fiscal Policy is concerned with all those arrangements which are adopted by the Government to collect the revenue and make the expenditures so that economic stability could be attained/maintained without inflation and deflation. Contractionary policies are enacted by a government to reduce the money supply and ultimately the spending in a country.” 2) Contractionary: “A type of policy that is used as a macroeconomic tool by the country's central bank or finance ministry to slow down an economy. . DEFINING FISCAL POLICY: According to Samuelson. Types of fiscal policy: 1) Expansionary: “A macroeconomic policy that seeks to expand the money supply to encourage economic growth or combat inflation (price increases). defense.INTRODUCTION Fiscal policy is a very important component of overall economic framework of country. the American economist. etc. infrastructure. rebates and increased government spending.

productive economy.2) Producing employment opportunities and support of poor sector 3) Economic growth by promoting industrialization and other sectors 4) Controlling inflation and deflation 5) Encouraging investment 6) Equal distribution of wealth and income in public 7) Optimum and efficient allocation of resources and stabilization of economy by reducing the size of the fiscal deficit and financing it to the extent possible by non-inflationary sources. doesn't have such a . EXPENDITURE Current expenditure: They are items that are used up in the process of providing a good or service.stationery. etc. late fees and registration charges. It is the purchase of items that will last and will be used time and time again in the provision of a good or service. In the case of the government. transportation. Current spending is short term and has to be renewed each year. bandages and so on. Current expenditure would include wages and salaries and expenditure on consumables . drugs for health service. (traffic and motorway fines. the purchase of new computer equipment or networks. however. 2) Fees and fines: these are small receipts from different sectors like education. examples would be the building of a new hospital. sales tax. Capital expenditure: Capital expenditure is spending on assets.) 3) Loans: bank borrowing and public debt 4) Aids: military and economic aids from us and other countries. COLLECTION OF REVENUES: 1) Taxes: Direct Tax: In taxes we have direct taxes such as income tax. building new roads and so on. Direct tax comprises about 70% of Pakistan’s total tax revenue. etc. and wealth tax Indirect Tax: Indirect taxes such as central excise. Current expenditure. and custom duty. Capital expenditure has a lasting impact on the economy and helps provide a more efficient.

the period came to be known as the ‘lost decade’. Fiscal policy has clearly become less expansionary. when the country had the first PPP government (1988 to 1990) and the first PML government (1990-1993). revenues also declined at a faster rate but the decline in revenues was not as sharp as it was in expenditures so that the budget deficit as a percentage of GDP declined sharply from about 7 percent in 1999 to about 3 percent in 2005. Until 1999. property and honor of individuals. On the basis of the trends that we observed above. but it also created difficulties in entering into contracts . at about 10 percent of the GDP. Since 1993. Fiscal policy is expected to remain less expansionary in the near future. Since then. Revenues also fell slightly but fiscal policy continued to be expansionary. The budget deficit had started to shrink even before the present military government took over. we observe a declining trend in government expenditures as well as in revenues. government expenditures remained high. 1980s till present During the period from1988 to 1999. The decline in government expenditures became sharper after the present military government took office of the chief executive of the country. the country experienced four changes in civilian governments. fiscal deficit remained above 5 percent of the GDP. Fiscal policy became relatively less expansionary during this period. The worsening law and order situation during the 1990s affected not only the security of life.lasting impact. it is gone and the effect on the economy is simply a short-term one. Until 1993. This reflects the government’s resolve to reduce fiscal deficit to zero by the year 2007 and maintain a surplus thereafter. Once the money is spent. This decline in government budget deficit perhaps also reflects the macroeconomic adjustments that the country undertook under the IMF restructuring program. but declined more rapidly over the six years of present government. In the 1990s the growth rate tumbled largely because of decline in capital inflows and a number of other factors6 including persistent lapses in implementation of structural reforms and stabilization measures. it appears that deliberate attempts to control fiscal deficit in Pakistan started only from 1993 when expenditures were cut. Thus in terms of economic growth.

1998. if the needed economic reforms to achieve macro balance and competitiveness had been initiated when the economy was in a relatively strong position it would have lessened the burden on the economy and the people of undertaking these reforms when the economy was in a relatively much weaker position. . Improvements in tax collection were sought by implementing a tax amnesty scheme and extending the general sales tax to the services sector. to remove price distortions. Tough decisions to end subsidies. which left a crushing debt burden on the economy. Withdrawals from foreign currency deposits of resident Pakistanis were suspended in May. over-reliance on taxes on imports. investors. eliminate discretionary controls. Tax administration reforms were focused on improving tax compliance. the result of a very large increase in government expenditure (including defense). Agreements signed by successive governments with the IMF and the World Bank were breached more often than implemented. but particularly among the International Financial Institutions and also domestically with the general public. could not exploit investment opportunities in the country. In the wake of internal instability and judicial lacunas. Superimposed over these negatively contributing growth factors were the shortcomings of economic management in the 1990s. widen the tax base. Frequent changes in governments in this period added to economic uncertainty and discontinuity in economic decision-making. and the legacy the economic managers of this period left for those who followed was not an enviable one. bad weather conditions which directly affected agricultural production and economic sanctions after Pakistan’s nuclear explosion in May 1998. the 1980s was a period of missed opportunities. were avoided with the result that the cumulative impact of these deferred decisions eroded the productive base of the economy and created a large credibility gap vis-à-vis the International Financial Institutions7.and their enforcement. the complexity of the tax regime and weak tax administration. There had been large fluctuations and a decline in cotton production which was persistently hit by pest attacks. the 1990s saw a slowing down of economic growth because of shocks beyond the control of economic managers. the Government tightened fiscal management and implemented structural reforms across all major sectors of the economy. which made matters worse. both domestic and foreign. First was the rising fiscal deficit. This antagonized an important class of investors In fact despite a high rate of economic growth. Rampant corruption and worsening standards of governance of almost all national institutions amounted to a prohibitive cost of doing business in the country. Second. Pakistan’s credibility was also on the decline externally in general. In 2000-01. Juxtaposed to a difficult and trying economic environment. continuing slowing down of remittance inflows. Changes in tax structure During the 1990s Pakistan was confronted with lower tax-to-GDP ratio primarily due to the existence of a narrow tax base. The foremost among them was the sequencing and pace of implementation of the economic reforms program. mobilize domestic resources.

2 12.0 4.5 4. despite massive tax system reforms.5% of the GDP over the last 3-4 decades. The resource mobilization had been much short of our requirements.3 13.6 1990s 2000s 13. Variables/Years Percent of GDP Tax Non-Tax FISCAL INDICATORS: REVENUES 1970s 1980s 11.0 . An inelastic.4 2.2 3.4 The tax to GDP ratio remained around 12. nonprogressive tax structure with narrow tax base and a big size ever developing black economy are the main structural weaknesses in the fiscal policy.The tax revenue has surpassed the target for the third year in a row but nominal GDP is increasing at a faster pace than tax collections therefore the tax-to-GDP ratio remained almost stagnant. in sharp contrast to industrial countries where this ratio is between 25% and 40% per annum on average.

4 Trends in Expenditure The Government is moving ahead on its agenda to improve expenditure management and fiscal transparency. During the last seven years the development expenditure improved from 2. One thing was common between these two decades that development expenditure was the victim of all sorts of fiscal consolidation and expenditure rationalization.3 percent of GDP during the last seven years. The current expenditure increased substantially in the 1980s but could not keep pace because of slowdown in the growth .8 percent of GDP in 1999-2000 to 11.1 percent to 3. Second largest component of the current expenditure.Revenues 13. the share of development expenditure more than doubled from 11 percent to 28 percent in the same period. In addition. Substantial decline in interest payments from as high as 7.5 percent of GDP in 1991-92 to 2. and Economic survey of Pakistan various issues 16.6 17. The Government is achieving the goal of fiscal stabilization without compromising spending on the social sector.9 17.7 0.6 0.3 Total Revenues 14. Resultantly the share of current expenditure in total expenditure declined from 89 percent of total expenditure in 1998-99 to 72 percent in 2006-07.4 0. defense spending remained stagnant at around 3.5 percent of GDP in 1998-99 to 2. This shows strong focus of the government on removing infrastructural bottlenecks and building physical assets. Non-defense-noninterest expenditure has improved from 7.3 17.8 17. The total expenditure remains more or less stable in a narrow band of 17 to 18.7 percent of GDP in 2006-07. has provided fiscal space to re-orient.2 percent of GDP in 2000-01 to 4.6 +Grants Sources CD _ ROM IFS [2006].5 percent of GDP by 1999-2000.8 percent of GDP during the last seven years.2 Grants 0. Expenditure in favor of development expenditure. The development expenditure bore the brunt of structural adjustment of the 1990s as it declined from as high as 7.9 percent of GDP in 2006-07. namely.7 16.9 percent of GDP in 2006-07.

All of these factors led to the governments liquidity crisis ultimately influencing the country’s fiscal position. The government embarked on the fiscal . Development expenditure grew by modest 2.7 percent per annum. cannot be overemphasized.7 percent on average in real terms but interest payments grew by 18. which was followed by threeyear Poverty reduction and Growth Facility (PRGF). real defense spending followed the higher growth path and grew by 8. There were wide ranging reforms in line with prescriptions of Washington consensus.5 percent in real current expenditure. Total real expenditure grew at a brisk pace of 7. The nondefense non-interest expenditure was persistently declining since the 1980s because of rising defense spending and interest payments. The importance of a sound fiscal policy therefore. remittances and foreign investments plummeted while there was an exponential increase in oil prices. Interestingly. It went through a military coup in 1999. on average. Trends in Real Expenditure The nominal monetary value of expenditure is a direct charge on budget but the composition of expenditure in real terms (after adjusting for inflation) provides real food for thought. A prudent fiscal management can mobilize domestic savings increase the efficiency of resource allocation and help meet development goals. in the 1980s owing to sharp acceleration of 10. all of which hamper growth and poverty reduction.9 percent on average. • In 1998. A lax fiscal policy on the other hand. Defense expenditure in terms of percent of GDP was rising in the 1980s but since then declined throughout the 1990s but stabilized during the last seven years. This has declined to just 32 percent and 43 percent. reflecting tremendous pace of accumulation of public debt. An analysis of real growth patterns in expenditure reveals some interesting facts. The combined impact of two committed expenditure items (defense and interest payments) went as high as 59 percent of total expenditure and 66 percent of current expenditure in 1998-99. Pakistan went nuclear. It was against this backdrop that Pakistan approached the IMF for stand by arrangement for 9 months in 2000. which is increasingly recognized as a critical ingredient for promoting strong and sustained economic growth and lasting poverty reduction. Pakistan had experience serious macroeconomic imbalances in the decade of the 1990s mainly on account of its fiscal profligacy and accordingly paid a heavy price in terms of deceleration in economic growth and investment and associated rise in the levels of poverty. Such a level of fiscal indiscipline in the past forced Pakistan to undergo a painful period of structural adjustment in the 1990s. can lead to higher inflation. respectively in2006-07 which indicate a paradigm shift in allocation of expenditure among priority sectors as a result of growing fiscal space. Entering Musharraf’s Era A sound fiscal position is an essential pre-requisite for achieving macroeconomic stability. put a freeze on foreign capital accounts. higher interest rates and crowding out of private investment.1 percent.and stagnation of revenues in the 1990s. The period of 2000-2004 witnessed moderate growth.

Going forward. The underlying fiscal deficit was targeted at 3. Higher deficit was targeted to finance higher public sector development program (PSDP). Overview of Musharraf’s Fiscal Policy The fiscal policy stance remained decidedly growth-oriented yet prudent and sustainable with a focus on declining debt service. On the expenditure side. The Provincial Governments will have to do much more to enhance their provincial taxto-GDP ratio from the current stagnant level of 0. The improvement in tax effort should not be limited to Federal Government alone.7 percent of GDP (excluding earthquake spending) for the fiscal year (2006-07) which was slightly higher than the deficit level of the previous year (3. .policy reforms by reducing expenditures. However. privatization of state owned enterprises to reduce budget deficit. total expenditure and its components also exhibit a secular decline as percentage of GDP.5 percent to at least 1. particularly towards financing infrastructure projects.0 percent of the GDP in the 1990s declined to 3. Pakistan needed to strengthen its physical and human infrastructure to sustain growth momentum. On the revenue side. Reduction in fiscal deficit since 1999-2000 owes partly to the improvement in revenue side and partly to the rationalization of expenditure – particularly in the shifting of expenditure from current to development and leaving the total expenditure to remain stagnant at around 18 percent of GDP. Pakistan made considerable progress in recent years on fiscal side.4% of GDP). The overall fiscal deficit that averaged nearly 7. a further reduction in fiscal deficit must come from improvement in revenue. the tax-to-GDP or revenue-to-GDP exhibits a secular decline over the last one and a half decade. The table shows the economic prosperity in terms of GDP growth during Musharraf’s term. reduction in fiscal deficit owes mainly to sharper reduction in expenditure – more so to development expenditure – rather than improvement in revenue effort.4 percent (excluding earthquake spending) in 2005-06. cutting down subsidies. A cursory look at the table below reveals important structural shift in patterns of revenue and expenditures. alleviating poverty and investing in infrastructure.0 percent of GDP in the medium-term. Fiscal deficit as percent of GDP also declined substantially during the period.

reducing the cost of doing business for trade & industry. improvement in resource mobilization. In Pakistan’s economic history until fairly recently. The tax and tariff reforms are aimed at simplification of tax system. Inadequacy of revenue generation directly affects the government’s resource position and the availability of socially desirable public goods. Within parameters of structural weaknesses of tax structure. Among the various tax policy reforms. Broadening of the tax base was intended to ensure the fair distribution of the tax burden among various sectors of the economy. boosting economic activity to ensure robust economic growth. the most significant are the continuous raising of the basic threshold of income tax.Revenues TAX AND TARIFF REFORMS Adequate level of revenue generation is a must for the public policy to meet expenditure obligations. re- . public. aimed at reducing tax rates. and shifting the incidence of taxes from imports and investment to consumption and incomes. reducing tax burden for lower income strata of the society and promoting a taxpayer friendly culture. the mismatch between revenue collection and budgetary requirement was a norm rather than an exception. broadening the tax base to hitherto untaxed or under taxed sectors. broad-based tax policy and administrative reforms were initiated by the Central Board of Revenue (CBR) to improve upon the resource mobilization effort and increase tax compliance by providing congenial environment to the taxpayers. The reduction in tax rates was intended to stimulate investment and production and promote voluntary tax compliance. Since the situation required radical changes. reduction of corporate rate to ensure parity between the rates applicable to private. the government began wide-ranging tax and tariff reforms and worked on fiscal transparency. and banking companies.

the implementation of universal selfassessment. However.0 percent and the overall fiscal deficit which averaged almost 7. and improving skills and integrity of the workforce. creation of database for management reporting. was narrowed from 2. elimination of exemptions.06. the revenue deficit was narrowed to almost extinction. public debt as a percentage of GDP declined and Pakistan moved towards fiscal consolidation. The organizational reforms include re-organization of CBR headquarter on functional lines. The administrative reforms aim at transforming income tax organization on functional lines. The revenue surplus was projected at 0. administrative reforms and Organizational reforms. The reform process for tax machinery was designed to churn out long term benefits through efficiency gains. substantial investment is being made in infrastructure development. statistical analysis. The primary balance (total revenue minus non-interest total expenditure) remained in surplus for the last seven years.4 percent of GDP in the 1990’s to 0. In the tax administration reform program. reduction in workforce from existing level with enhanced financial packages. creation of a functional organization.02 percent of GDP in 2006-07. the overall budget deficit as percentage of GDP declined. reducing dependence on withholding taxes. The policy reforms cover simplification of laws. and bringing equity and efficiency in the tax system by operating on functional lines to render efficient services to the taxpayers by ensuring uniform application of laws with integrity.2 percent in 2005-06. and effective dispute resolution mechanism. Simultaneously. the Government constituted a Cabinet Committee for Federal Revenue (CCFR) to provide functional autonomy to the CBR.4 percent in 2005-06 of GDP. and continuous reduction and rationalization of import tariff rates. An improved tax structure will reduce the deadweight loss associated with raising a given amount of revenue and a reduction in the relative share of trade taxes and increases in the relative shares of taxes on income and consumption could be taken as evidence of an improvement in the tax system. use of modern work layout for conducting tax administration. reengineering of manual processes of all taxes with the aim to reduce face to face contact between taxpayers and tax collectors. The revenue deficit (the difference between total revenue and total current expenditure). increasing effectiveness of CBR. Tax Administration Reform Program (TARP) include. tax collection increased by 81. Tax Administration Reform Program The Government channeled its efforts towards raising revenues. efficiency and high degree of professionalism.0 percent of GDP during the 1990s was reduced to 3. As a result of the wide-ranging tax and tariff reforms as well as reforms in the tax administration tax collection by the Central Board of Revenue (CBR) picked up. primary balance turned negative for the first time in 2005. audit selection. During the last seven years. building of a taxpayer service function. The tax administration reform strategy is concentrated on policy reforms. Consequently. reduction in number of tiers.introducing uniformity of GST rate. introduction of universal selfassessment. and automation in CBR and its field formations. end-to-end .

• Custom Duties lowered: In the proposed and implemented tax structure the Custom duties were reduced and the burder was shifted from custom duties to Income tax and Sales tax.automation of business processes. Such low prices facilitated the use of tube wells and led to major cost reduction in the agriculture industry leading to an increase in the competitiveness of the entire agro based chain of industries. streamlining of refund system of sales tax. The industries most benefitting from this subsidized oil price were mostly manufacturing industries. This project introduced computerized Processing of Customs documents (PACCS) under which the "Goods Declarations" can be filed by an importer "on line" without physical interaction with customs officials. KESC and PTCL were privatized. How is related to the Fiscal policy ? The main reason behind Privatisation was reduce the governments burden . and human resource development. • Electricity provided to Agriculture Industry at 3 per unit. and establishment of Large Taxpayers Units (LTUs) and Medium Taxpayers Units (MTUs) in the country. this meant that the revenue collected was being spent to regulate the oil prices and make it available to the public at cheaper subsidized rates. This step reduced the up-front the cost of doing business considerably. The industry benifitting from it the most was the textile industry as many dyes were imported from foreign markets. • As per policy Privatisation was given utmost priority. Furthermore the import of heavy machinery was made feasible giving a general uplift to the industries in Pakistan. The construction industry saw a boom. Impact on Industry • Oil prices kept low ( Construction boomed ) During this period oil prices were artificially kept low . Banks. intensification of GST management. whereas KESC continued performing poorly. In the case of Banks and PTCL it proved to be a great decision . Tax administration reforms in the CBR include among others. ensure growth and higher efficiency which later would lead to an increase in the tax revenues. . This new system revolutionized the working of Pakistan customs. This made imports cheaper and helped the industries that used imported inputs in the cost reduction. universal self-assessment system for income tax. which was then at par with the modern set ups. The processing has reduced the clearance time of goods to few hours from more than ten days. This was later increased in Zardaris era. promulgation of new income tax law. introduction of the DTRE Scheme. Another development that reduced considerable hassle of the taxpayers is the speedy clearance of goods at Karachi port under the CARE Project. This effect all the industries in terms of cost of business and this positive impact resulted in industrial growth which consequently led to high GDP.

• Sust Dry port : Government expenditure on the creation of Sust Dry port was of great economic significance as it lead to better trade between Pakistan and China . More income. The factors that contributed to the surge and then persistence of high inflation in 2008‐09 included monetary overhang from the previous years. More spending. supply shocks in commodity markets. • Employment: Unemployement figures were at an all time low of 7%. More jobs.0 percent which is relatively satisfactory. a weakening of external demand. a deteriorating law and order environment. Hence more economic activity leading to an increase in employement. and the gradual withdrawal of subsidies on gas. 1 • Tax Free Industrialisation : This was a major incentive to bring in FDI. A weak Rupee compounded the problem of inflation which also posed a serious threat to the economy and society at large during 2008‐09.0 percent in the last year. further giving an uplift to the industry in terms of easy of transportation and cost efficient logistics. Why ? The economic growth resulting from subsidies and government developmental expenditure gave rise to many job opportunities and the upward cycle was initiated. . The inflation rate averaged a substantial 20. when looked at in the context of the prevalent global financial crisis and economic slowdown. POL products and electricity. Both used as fertilizers in agriculture helped lower the cost of production which was passed resulting in competitive prices and agriculture/agrobased industry led growth. food and other commodities during fiscal year 2008‐09 resulting in modest GDP growth of 2. turmoil in international financial markets and high prices for oil. • Makran Coastal High way : A major infrastructural expenditure born by the government in this era was the creation of the Makran Coastal highway that link the entire coast of Balochistan to Karachi. an upward adjustment in the support price of wheat. As a result industries flourished with huge sums of money flowing in from abroad and from domestic investors to finance projects in a wide range of industries like IT and telecom.• UREA and DAP prices kept low : The government subsidized the UREA and DAP prices. More demand. depreciation of the rupee against the dollar. Fiscal Performance during 2008 Pakistan’s economy faced headwinds like political instability. This in the most basic sense was a pro for trade and hence industry but the venture itself gave way to employment and demand for construction materials and service leading to a boom in the respective sector.8 percent for the fiscal year as against 12. supply shocks.

has put at risk the fiscal sustainability of the country. it has however lagged behind the growth in nominal GDP.2 billion. to record Rs. defence related spending. The hard‐earned fiscal consolidation of 2008‐09 went missing in the ensuing fiscal year owing to a dismal revenue growth. the adverse impact on the economy disturbed revenue realization to a great extent during the course of the year. Tax revenue . despite best efforts. and debt servicing increased.8 percent in 2008‐09. except for custom duties. 1157 billion at the end of the fiscal year. Since revenue realization is linked with the macroeconomic framework of the country. which constitutes 98 percent of the revised target. the FBR fell short of this target. thereby exhibiting a decline in FBR tax‐to‐GDP ratio from 9. Total revenue for FY2009‐10 summed to Rs.FBR Tax Collection and Refunds during 2008‐09 Fiscal year 2008‐09 was a challenging year for the economy as a whole as most of the macroeconomic targets fixed for fiscal year 2008‐09 were missed. Strains placed on budgetary resources by subsidies.8 percent in 2007‐08 to only 8. 2. up by 12.078. whereas envisaged increases in revenue collection failed to materialize. A rise in fiscal imbalances throughout the year has been a major failing of the economy. It is relevant to mention that while the increase in the FBR tax receipts has been substantial in absolute terms. in‐spite of adjustments to development expenditure. 1179 billion. The FBR was assigned revised target of Rs. However. Sales tax has regained top position in the collection of federal taxes due to a better performance from the domestic sales tax component. The resulting high fiscal deficit.3 percent over the fiscal year 2008‐ 09. The following is an analysis of revenues and expenditure during 2009‐ 10: The government in the Federal Budget 2009‐10 focused primarily on improving the tax culture in the country and announced a firm commitment to increase revenues. Fiscal Performance 2009 Developments during 2009‐10 have undermined the gains realized in the preceding year. It is clear from Table‐5 that the performance of the FBR was broad based as all the taxes exhibited double digit growth during fiscal year 2008‐09.

4 percent higher refunds were paid back during 2009‐10. Reasons of shortfall are highlighted below:        General economic slowdown during the first half of the year has hampered resource mobilization. Likewise. 15 billion due to increase in the CVT rate from 2 percent to 4 percent.e. low GDP growth. adding Rs. Rs.4 was collected which is lower by 6. Negative growth in imports during the first half of the year resulted in less revenue realization on account of sales tax on imports. The shortfall in the collection is associated with continued problems at the economic front i. It may also be highlighted that during the period of high and stable economic growth (2003‐04 to 2006‐07).8 billion to the revenue side in 2009‐10. power crisis and law and order situation. 1. However. FBR has managed to collect a sum of around Rs. uncontrollable energy .3 percent higher than the collection of previous year. SBP took measures to contain aggregate demand in first half of 2010-11. Despite economic slowdown and declining imports.3 percent.1%..3 percent over original projections mitigated the impact of tax revenue shortfall to some extent in the context of meeting budget targets. but did not generate sufficient revenue to make up the losses. FBR was never able to generate an additional revenue of this magnitude in a single year. which negatively affected revenue realization by about Rs.3 percent against the 2008‐09 receipts. The fiscal year 2009‐10 was a difficult and challenging year for the government and FBR.4 billion which was 14.2 percent. GST on sugar was reduced from 16 percent to 8 percent from August.472.registered a growth of 22. 10 billion during fiscal year 2009‐10. 1. the FBR has collected Rs 1. 605. although 22. Capital Value Tax -CVT generated negligible additional amount of Rs. Energy crises throughout the year have badly affected the production process and ultimately revenue realization. imports did pick up during second half of the year. this healthy growth of 2. FISCAL PERFORMANCE 2010 The 2010-11 floods resulted in slow economic growth and lower revenue collection.1 billion against the projected amount of Rs. 1. Non‐tax revenue exhibited noticeable performance primarily owing to SBP profits by attaining above budget inflows during the fiscal year 2009‐10. However. 2009.327.5 percent negatively affected revenue realization by 11 percent. However. Negative growth in the manufacturing sector during the first half of the year has impacted revenue collection on account of FED. supply shocks due to floods. hike in international commodities and oil prices have contributed into inflationary pressure in terms of “cost push inflation”.558 billion and the target was achieved to the extent of 98. The overall target has been achieved to the extent of 96. Reduction of GST rate on telecommunication from 21 percent to 19. During 2010-11. gradual increase in the manufacturing sector was witnessed during the second half of the year.

1%. Zero-rating on five major export oriented sectors (textiles. The share of withholding taxes in gross income tax collection has declined from 64. However. The direct tax collection was affected by significant decline in collection from demand. sporting goods and surgical goods) has been restricted to registered manufacturers-cum-exporters and exporters for export purpose only.4 billion during 2010-11. In this context. A significant increase has been observed in collection from WHT and voluntary payments. 602.327. The net collection of Direct taxes has been Rs.3% recorded last year.5% over the collection of corresponding period last year. as compared to last year. 4. machinery and equipment including parts has been withdrawn. Zero-rating facility on plant. . The overriding existence of energy crises.5% for the remaining period of tax year 2010-11. 2011 took additional tax measures to achieve the revenue collection target for 2010-11. indicating a growth of 14.      Sales tax at the rate of 17% has been imposed on fertilizers.26. pesticides. have shrunk its share by 6. Following amendments have been made in the Sales Tax Act 1990.0 billion has slightly affected the overall growth in direct taxes. carpets. the government’s new taxation efforts total FBR collection is likely to be around Rs 1588 billion.issues and significantly low development expenditure etc. Despite. 1. the decline in CVT collection by Rs. Continued non-automation of business activities together with existing huge un-organized sectors in the economy further emphasizes the importance of withholding tax regime Recent Measures for Fiscal Consolidation Keeping in view the fiscal developments. the collection was 17. In view of low collection of total revenue and high current expenditure. Domestic supplies of these sectors will now be liable for sales tax at the rate of 17%. Income Tax Ordinance 2001 and Federal Excise Act 2005. higher interest rate and security issues have been the major hurdle in better performance of the economy and thus the tax revenue collection. stock exchange.9% in 2010-11.1% and 1.4% higher than the collection of Rs. three Ordinances have been promulgated through these Ordinances.2% in 1995-96 to 56. cash withdrawal and electricity bill. by amendment. a substantial reduction of Rs.6% respectively. leather.3 billion in collection from demand. A one-time surcharge of 15% has been imposed on income tax payable during the tax year 2011. The percentage share of WHT and VP has also increased by 4. Federal Government in March.4 billion during last year. However. This increased fiscal deficit would exert additional pressure on bank borrowings for financing. the overall fiscal deficit is expected to remain at 6% in 2010-11 against 6. However. tractors. and Special excise duty rate has been increased from 1% to 2.

FBR managed to collect Rs.1. The revenue foregone on this front has been targeted to be compensated through broadening the tax base and improving tax compliance. However. was a key reason behind International Monetary Fund Stand-by Agreement staying suspended since June 2010 until it finally lapsed in November 2011. abolished regulatory duties on 392 out of 397 items. particularly implementation of reformed GST.402 billion or 26 percent over the actual collection of Rs. Helped by withdrawal of general sales tax (GST) exemption on several sectors and levy of one-off flood surcharge. abolished special excise duties. Slippages in implementing fiscal reforms. Rs.1 percent in 2011-12(Fig-3). Additionally.1. reduced federal excises on certain items. This growth has increased the FBR tax to GDP ratio from 8. FBR was assigned a revenue target of Rs.25 billion collected by Sindh .550 billion of 2010-11.5 percent of the assigned target) showing a healthy growth of 21.4 percent over the actual collection of 2010-11. FISCAL PERFORMANCE 2011 The Government has taken several steps to provide relief to the common man. the government removed exemptions and zero ratings from the GST regime.6 percent in 2010-11 to 9. elimination of electricity subsidies and resolution of circular debt.A significant positive masked by overall weak fiscal numbers is the distinct uptrend in FBR tax collection since 4QFY2011. However. Despite slow growth in the large manufacturing sector and less tax realization from major sectors like cement. Moreover.881 billion does not include Rs. which was higher by Rs.881 billion (96.1. The General Sales Tax on goods was reduced from 17 to 16 percent. number of slabs for income tax was reduced from 17 to 6. the trend has continued into FY 2012 with FBR tax collection increasing by 21 percent during Jul-Dec 2011 despite shifting of GST collection on certain service to the provinces. FBR tax collection grew by 28. Persisting energy crisis is the common denominator adversely impacting key macroeconomic variables entailing huge social and economic costs in shape of lower GDP growth while being a major drain on fiscal resources. beverages and services.952 billion for 2011-12. and enhanced the exemption limit on income tax. At the same time. continuing energy subsidies and ensuing high fiscal deficit are inhibiting external inflows especially those from multilateral financial institutions.7 percent in 4QFY2011. The chronic intercorporate debt engulfing the entire energy chain and growing energy shortages are dissuading investment not only in the energy sector where it is most needed but in other industrial sectors as well.1.

Revenue Board (SRB) on account of General Sales Tax on services.906 billion showing a growth of 23 percent.1. A glimpse at the tax-wise collection and targets (Table-2) shows that customs duty has achieved the allocated target during 2011-12. Sindh collection need to be added which makes total collection to Rs. moving towards two taxes regime. − Reduction of FED rates on cement from Rs.146 billion. effective monitoring and risk based audit.3 percent higher than the 2010-11. The Government is taking measures to enhance revenues by broadening the tax-base.700 per Metric ton to Rs. However. 37.500 per Metric ton. − Reduction of FED rates of beverages from 12 percent to 6 percent. direct taxes and sales tax collection have marginally missed the target. Refunds by the FBR during 2011-12 were Rs. Federal Excise missed the target as well as witnessed a negative growth of 11 percent owing to: Abolition of Special Excise Duty (SED) both at import and domestic stages. . To make 2011-12 comparable with 2010-11. simplifying the tax structure.

3 percent). This is partially due to the tax base broadening efforts of the government by removing major sales tax exemptions and zero rating.7percent growth in collection from salary is due to increase in the pay package of employees. the reason of 25. bank interest (43.e.7 percent). Main reason of negative growth is attributed to decline in international price of oil during 201112 as compared to last fiscal year. exports (-3.7 percent). salary (25.633 billion in the comparable period of last year indicating a growth of 28 percent.The share of direct taxes in total federal tax receipts has increased from around 32 percent in 2000-01 to 39 percent in 2011-12 owing to improved tax efforts and effective implementation of tax policy and administrative reforms. dividend (46. Likewise.5 percent from imports is mainly on account of increase in the volume of imports. Similarly. The highest growth registered in collection from dividend is due to record growth in respect of disbursement of profits by the companies to their shareholders.5 percent).2 percent during 201112 mainly due to withdrawal of exemptions on certain commodities and 16 percent growth registered in the value of imports during the year.2 percent). The growth pattern of various components of WHT has been different i. telephone (33. Major 10 . imports (28. The collection of sales tax has posted an increase of 40. The higher growth of 43. growth of 28.809 billion has been collected under the sales tax head during 2011-12 over the collection of Rs.9 percent. Petroleum has been the top revenue generation source of sales tax domestic and contributed around 40 percent of the total sales tax domestic during 2011-12.2 percent in bank interest and securities is due to general reluctance in investing in industrial sector/commerce & trade etc. The main reason is that the investment opportunities are shrinking down due to economic uncertainty and deteriorating economic indicators. Its collection has negatively grown by 1.7 percent). An amount of Rs.

the tax rate on dividends was raised from 25 percent to 35 percent while reducing the minimum tax rates on company profits to 0. it aggravated the fading base of the federal excise duties. It also focused on full imposition of the petroleum levy to enhance the total revenue. Pakistan Tax Revenue 2012-13 It was decided to rationalize tax rates to make the taxation system more efficient and transparent. It is imperative to consider the tax revenue collection against the targets set which highlights the growing need for effective tax collection machinery.5 percent from 1 percent. the sales tax rate on certain commodities was reduced from 16 percent to 5 percent. reduction of FED rates of beverages from 12 percent to 6 percent and reduction of FED rates on cement from Rs. FBR managed to collect Rs.2. During 2012-13.500 per Metric ton. a slippage of 19 percent.700 per Metric ton to Rs. Government reduced the maximum rate of custom duty and aligned the tariff categories with the major trading partners such as United States and European Union to improve the efficiency of the custom duty collections. In order to reduce the smuggling of goods.381 billion.1. . Furthermore. Federal excise duty on construction was reduced from Rs.122 billion in 2011-12 as compared to Rs.936 billion in terms of the total tax collection against the target of Rs. Government removed the zero-rated products from the sales tax to expand the sales tax net. In addition. This amount represented a growth of 3 percent in the tax revenue when compared with previous year which was the lowest in 13 years showing a potential slowdown in the country’s tax collection. The income tax slabs were reduced to 5 and only the portion above the tax free threshold was subjected to tax providing relief to the income tax payers.commodities of sales tax import have contributed over 75 percent of the total sales tax collection. FED collection realized has been Rs.500 per metric tonne to Rs.137 billion in 2010-11 yielding a negative growth of 11 percent owing to abolition of Special Excise Duty (SED) both at import and domestic stages. however.400 per metric tonne with the aim to support the construction activities. to avoid multiplicity all sales tax rates were set at a uniform rate of 16 percent.

2. in essence only Rs.475 billion for 2013.49 billion.952 billion. 1. . however.883 billion were collected reducing the base of the target by Rs.) The macroeconomic projections of the government did not materialize as the real GDP grew by 3.6 percent against a target of 4 percent. As a result. This represented an achievement of around 92 percent of the target compared with only 81 percent last year. Pakistan Tax Revenue 2013-14 FBR collected Rs.2.69 billion.2.) The shifting of sales tax invoices to Punjab Revenue Authority and the suspension of section 153 A bred a combined reduction of Rs. 6. 5.266 billion against budget target of Rs. This restricted the economic potential to be translated into tax revenue.1.7 to Rs. FBR tax collection grew by 16 percent during 2013-14. 3.14.Host of variables that resulted in missing the original target are as follows. the tax to GDP ratio improved.) The government reduced the sales tax rate from Rs. which itself is a significant indicator of the government reforms agenda.5 percent on quantity. whereas. It also reduced FED rate on sugar from 8 percent to 0.4 per unit of electricity for steel melters and re-rolling units and on certain items to 16 percent from as high as 22 percent.) The tax collection target for 2012-13 was based on the estimation of last years’ budget target of 1. the large scale manufacturing grew by 11 percent against the target of 17 percent resulting in reduction of tax revenue. This had strong implications on the government’s tax collection potential.) The dutiable imports grew by 8 percent against the target of 15 percent. 4.) The lack of enforcement of the field staff coupled with a lack of audit and other management issues also led to a reduced tax collection.

grew by 20. Withholding tax. compared with the original target of Rs 2. it could not improve its achievements. Although FBR takes a number of measures every year to increase tax collection.3).4 Main economic activities contributing to the withholding tax are international trade and contracts. having largest share in direct taxes. As structural problems in the taxation system persist. Significant structural tax measures are needed to bolster the tax to GDP ratio.5 percent over the last ten years (Figure 5. Meanwhile.6 percent in FY15 – lower than the last year.Pakistan Tax Revenue 2014-15 Within tax revenues.588. tax collection from contracts showed a considerably . the FBR tax-toGDP ratio remained stagnant in the range of 8. Withholding tax from international trade showed a growth of 15.3 percent in FY18 by taking various measures to document the economy. FBR taxes were Rs 2.9 percent.0 percent in FY14. Direct tax Direct taxes posted a growth of 16. compared to 18.810 billion for the year. The government has envisaged this ratio to increase to 11.5 percent to 9. and to broaden the tax base. mainly due to sharp fall in commodity prices.2 billion in FY15.4 percent in FY15.

. and an uneven playing field for honest business. (ii) low social and economic cost of tax evasion. Sales tax Sales tax collection showed a modest growth of 9. which are the largest source of sales tax collection. compared to 18. constitute the black or underground economy. This indicates structural problems in the taxation system. high unemployment.4 percent in FY15.6 and (b) decline in sales tax collection on fertilizers and natural gas due to lower supplies. Moreover. narcotics. Tax Evasion A large number of economic activities are not reported to formal economy in Pakistan and thus remain out of the tax net.6 percent in FY14.high growth rate of 36.3 percent in FY14. This needs a national campaign for taxation by taking all segments of the society on board. Thus the term “black economy”1 indicates all those activities which are concealed from the tax authorities in an attempt to evade taxes. (iii) complexities involved in voluntary tax payments. The underground economy flourishes when cash transactions such as construction. Tax evasion refers to all the illegal actions taken to avoid the lawful assessment of taxes.1 percent in FY15 – more than double the growth in the last year. Mainly. such activities includes smuggling. as well as tax avoidance.3 percent in FY15. recession. These issues cannot be addressed by makeshift measures to increase revenues. compared to 23. and (iv) administrative issues in tax collecting authority. Main factors adversely affecting sales tax collection were: (a) an overall decline in the inflation rate largely due to sharp fall in prices of petroleum products. the growth rate of sales tax collection on imports also fell from 15.3 percent in FY14 to 12. unfair competition. reduction in government services. smuggling. the growth rate of sales tax collection on domestic goods & services was only 6. corruption. Likewise. and drug trafficking are common. black-marketing. illegal sale. Despite taking several measures to raise tax collection. etc. lack of documentation in retail trade activities continued to be a source of concern.0 percent in FY15. tax evasion. FBR could not achieve its target. self-employed persons are involved in tax evasion and underground economic activities because there is no formal system of documentation for selfemployed persons and . High tax rate. Despite the increase in sales tax rate. including: (i) large informal economy and lack of documentation. Further delay in such an allinclusive campaign may impede the growth momentum of the economy. The existence of a large underground economy results in high tax rates. and negative public attitudes towards government and taxes are some of the factors that lead to the spread of the underground economy.

8 percent during 1996‐1998 hit a low of 4. a narrow tax base with only 1. For example. Even industrialists and traders are known to have shown their income as their farming income and have been exempted from taxation. which is taxexempt. industrialists invest in purchase of land and then report the incomes from industrial and trade activity as farm income. another type of community works both in the formal as well as the informal sector (cash economy) and reports only formal income. skewed tax structure with two-thirds of the tax revenue being generated from indirect taxes (in FY 2013-14).6 percent in 2009‐2010. a complex and non-transparent tax system. Debt servicing which peaked at 5. Expenditures: 2008-present Total expenditure as percentage of GDP showed a relatively favorable trend over the past 20 years.1 percent during 2005‐2008 before increasing to 4. Pakistan falls close to the bottom in ranking of countries on the basis of revenue collection. Even more positive had been the declining trend in expenditure on defence and debt servicing as percentage of GDP. the tax policy provides the opportunity to conceal income because income in the informal sector is not recorded by government officials. This low ranking is due to the following: inefficient tax administration.5% of those employed paying tax3 . Since these earning persons work only in the cash economy. they can evade or avoid taxes. although the latter has started to creep up again in recent years. . and a non-supportive political environment. It decreased from a high of 21. Revenue inadequacy: With a very low tax-to-GDP ratio.3 percent 1991‐1995 to 2.8 percent in 2009‐10.6 percent during 1991‐1995 to a low of 18. Tax evasion is a significant determinant of underground economy largely due to the loopholes in tax policy.1 percent during 1999‐2004 before rising moderately to over 20 percent in the recent periods. Similarly. Again. Defence expenditure declined steadily from 5.their activities. Farming community exempted from taxation is part of the underground economy. corruption and tax evasion.

During 2011-12. government took various measures to boost economic activities and achieve fiscal consolidation. Medium‐term expenditure reforms will need to improve the composition and efficiency of expenditure. the 20‐year period could be divided into 5 intervals of unequal durations. Sizable savings are also possible in spending on subsidies. Expenditure policy must reflect the need for both intra‐ and intergenerational equity. Expenditure reforms should be guided by two objectives: Improving the efficiency of spending: Governments should seek to reduce the cost of producing existing public sector outputs. economic affairs. Better targeting of social welfare spending. Coordination with provincial government will be crucial for ensuring successful expenditure reform. The fiscal strategy was aimed at expanding the . spending should be allocated to activities that provide the greatest marginal benefits to society as a whole. These are: 1991‐1995 (improvement). This spending should be reexamined and replaced. In particular. not a tool. which reflected an attempt to provide funding for the projects and program for which the funding was reduced in 2010-11 due to shortage of finances. The freeze in real spending is an overall policy goal.e. where possible. Targeted structural reforms would be needed to achieve this goal. (ii) 39 percent increase in the size of Public Sector Development Programme(PSDP). Greater targeting of social spending may also be necessary to ensure that the poor are protected as spending levels are reduced. Reductions in general public services. 2005‐ 2008 (poor) and 2009‐2010 (consolidation). Pakistan’s fiscal performance during 1991‐2010 period exhibited periodic swings between stints of relative improvement and deterioration although some trends remained fairly persistent. could provide substantial fiscal savings. priority should be given to phasing out energy subsidies. 1996‐1998 (stability).In 2010 the following change in reforms occurred i. The large increase in development spending was due to: (i) 38 percent increase in development spending of the provinces reflecting both an improvement in provinces’ financial situation due to larger transfer of revenue from the federal government and passing down of additional responsibility due to the 18th Constitutional Amendment. and Ensuring equity: Growth without equity is less durable. including social benefits. and defense spending comprise an important element of adjustments. with more targeted instruments to provide income support. Based on the overall direction of change in fiscal deficit. 1999‐04 (improvement). In addition.

the provinces prioritized development projects and their development outlays grew by 52.13 particularly. within current expenditure.6 percent higher than 2010-11. The government followed austerity on the expenditure side and notable mobilization of taxes on the revenue side.6 percent in FY12. expenses with regards to general public service were budgeted at Rs.361 billion for 2011-12. The development expenditure witnessed a significant upward adjustment. The current expenditure exceeded the target by 5 percent mainly due to higher than budgeted expenditure on interest servicing and salaries & pension. domestic debt servicing and pensions increased significantly – by more than 30 percent in the year.6 percent as compared to 2010-11.6 percent in FY11.2 percent growth in total expenditures in FY14 was .resource envelope by tapping “tax buoyancy” and by containing the current expenditures. 6. The impact of increased salaries and relief to pensioners also contributed towards the increased public service expenditure. It was the first time in last five years that actual development spending exceeded the target in FY12.111 billion mainly on account of servicing of domestic debt. However. which was 44. have added to government expenditures the total expenditures increased by 14. pension increases of 15 to 20 percent. However.9 percent during the year. Provincial expenditures have been growing at an average of 27 percent during the last three years. In 2014.2 percent growth in FY14 against. was announced in the FY12 budget to give relief to retired civil and military employees. However. compared with 21.226 billion or 44. mainly due to sharp rise in debt servicing and public sector development spending. the policy of not passing the entire burden of oil and electricity prices and to preserve the safety nets for vulnerable groups. this category ended up with an increase of Rs. The 9. Development spending was enhanced for fiscal year 2011-12 by Rs. on the other hand. While the increase in debt servicing is the result of excessive borrowing from banks. General Public Service: Originally. showed a subdued growth of 7. Current expenditures. posting a 46.2 percent a year earlier. development expenditures recovered strongly. however after showing sluggish growth last year.2 percent.1.

Moreover. While the increase in debt servicing reflects growing stock of domestic debts. Encouragingly. they increased by a growth of 10. like the Benazir Income Support Program (BISP). defence spending.4 percent in FY14 to 2. and subsidy to TCP for the import of Urea. Development expenditures & net lending recorded growth of 8. declined during the year. and remained considerably lower than the target set for the year. growth in pension also declined significantly from 4.8 percent in FY15. This growth in development spending was expected as the Election Commission had put a freeze on development expenses before the May 2013 elections. During FY15. total expenditures show a rise of 14. against a 9.4 percent and 15. development spending still missed the FY14 target.4 percent last year. which increased sharply with a growth of 18. This was mainly due to growth in provincial current expenditures.8 billion versus the budget target of Rs 700. and grants.0 percent.0 percent over last year to reach Rs 241.2 percent rise in FY13.9 percent increase in FY13. Adjusting for the expense relating to settlement of the circular debt during the last two years.5 percent in FY15. compared to 15. compared with 7. Excluding net lending. against 9. compared with 15. as the government raised power tariffs for all categories of consumers.2 percent compared to a meager 6. compared with 9. total expenditures (federal and provincial) grew by 6. This was mainly due to sharp reduction (53. Despite higher growth in debt servicing. PSDP fell short of target. compared with 24.8 percent in FY13.2 percent in FY15.5 billion. Historically.236.1 percent in FY14.9 percent respectively – nonetheless. defense expenditures are the second largest item in the federal current outlays. Although current expenditures also were slightly lower than the target.6 billion in FY15 (0. power subsidies were much higher than target. Citizen Damage Compensation Program.9 percent of GDP) 10 – especially electricity subsidies. Public Sector Development Program (PSDP) showed marked improvement at both the federal and provincial levels. the government also spent on its development programs outside PSDP. Despite this strong growth.1 percent in FY15.1 billion. the increase in grants & transfers were on account of larger than budgeted payments to Pakistan Railways and the Pakistan Remittance Initiative. Defense spending also slowed down in FY15 with a growth of 12. Subsidies. and lower net lending to public sector enterprises (PSEs). subsidies have declined by 21. development expenditures rose by 46. Similarly.5 percent last year. Development expenditures & net lending to PSEs11 fell by 7. on the other hand. Expenditures on PSDP also could not maintain the growth momentum witnessed during the last year: they showed a growth of 14.5 percent to reach Rs 1. Textile Policy 2009-14.3 percent growth witnessed last year. Although expenditures under PSDP. both by the federal government and provincial .0 percent. which remained broadly in line with the FY15 budget: Rs 697. 12 Nevertheless. the growth in current expenditure in FY14 remained low compared to the previous year. posting an increase of 34. mainly due to a decline in subsidies.6 percent) in development spending outside PSDP. Instead. Pakistan Poverty Alleviation Fund.considerably lower than the 24.5 percent last year. electricity tariffs for commercial and industrial users were revised upwards through the imposition of surcharges.8%.2 percent.2 percent increase recorded in FY13.

governments. were 14. they remained short of their respective targets .1 percent higher than the previous year.