Sound fiscal policy fosters macro-economic stability. A poor or deteriorating fiscal position limits the options open to government to support economic recovery, sustainable growth, and poverty alleviation. The importance of a prudent fiscal policy, therefore, cannot be over emphasized. For Pakistan, the current fiscal challenge is difficult as the fiscal sector is buffeted by competing claims. There is a pressing need to increase government spending for development programmes. This item had to absorb the brunt of severe cuts in government expenditure that were instituted as part of the stabilization programme in recent years. Today, the poor state of physical and human capital severely constrains the country's growth potential. There is also a need to expand social services and to provide adequate safety nets to protect the mospt vulnerable groups from the burden that comes with the stabilization and structural adjustment that must take place if growth is to be sustained. Unless, steps are taken to improve government revenue performance, rationalize government spending and allocate government resources more efficiently, there is likelihood that the country can remain in a vicious cycle of low growth and high fiscal deficits.

A well designed revenue and expenditure reforms may directly promote growth as well as enhance the economy's supply side response. More efficient revenue mobilization for example, can fund much needed public goods and services and help cut fiscal imbalances as well as promote investment and growth by reducing the adverse allocational effects of the tax system. On the expenditure side, more cost effective public programmes free resources for better uses, and change in composition of public spending can re-orient public resources away from current consumption towards growth promoting investment in physical infrastructure and social and human capital.

Fiscal deficit has emerged as one of the major source of macro-economic imbalances in Pakistan. Persistent slippage on both revenue and expenditure sides has contributed to mounting financial imbalances. The serious macro-economic imbalances that persisted in the 1980s in terms of large fiscal deficit (7.1% of GDP) continued in the first half of the 1990s despite several revenue measures introduced in the successive budgets on the one hand, and cutting development expenditure on the other. Fiscal deficit remained, on average, at 7.1 percent of GDP in the first half of the 1990s. It declined slightly to 6.4 percent of GDP in the second half of the 1990s, mainly by further reducing the development expenditure [see Table 5.1]. In other words, the quality of little fiscal adjustment has been poor as it was not achieved by enhancing tax efforts (tax-to-GDP ratio), but mainly at the cost of future growth potentials.

Revenue deficit (total revenue minus current expenditure) is another indicator of fiscal position of the country. It is also called public sector dis-saving. Revenue deficit continued to deteriorate in the 1990s. It increased from less than one percent of the GDP in the 1980s to 1.4 percent in the first half and further to 2.8 percent in the second half of the 1990s. This is one of the main factors responsible for low savings in Pakistan.

Primary surplus/deficit is yet another indicator of the state of fiscal situation in the country. It remained in deficit during most of the time in the last two decades despite several budgetary and post-budgetary measures taken every year. Primary deficit averaged 4.7 percent of GDP in the 1980s but declined to 1.4 percent in the first half of the 1990s. In the second half, the primary balance turned surplus, particularly during the last two years [ see Table 5.17]. In other words, it suggests that Pakistan's fiscal deficits in the last two years were interest payment driven. Total expenditure net of interest payments declined by about 3 percentage point of GDP during the last six years -- declining from 17.2 percent to 14.5 percent of GDP [see Table 5.7]. This also suggests that Pakistan's revenue was more than sufficient to finance non-interest expenditure during the last two years.

Although successive governments have made attempts to narrow the revenue-expenditure gap by taking new fiscal measures in federal budgets, little improvement has taken place in the overall fiscal deficit. Why is it so? Pakistan's tax system is still characterized by a narrow and punctured base, over reliance on distortionary import-related taxes, high tax rates on the one hand and tax concessions and exemptions on the other, and weak tax administration. The combined effects of these structural weaknesses resulted in low and stagnant tax-to-GDP ratio on the one hand, and tax elasticity and buoyancy on the other. Such a tax system has severely hampered resource mobilization efforts in the past despite a series of discretionary measures taken in almost every federal budget to reduce the widening gap between revenue and expenditure.

Pakistan need to push forward with tax reforms to develop and effectively implement a broad-based, buoyant, and equitable tax system, which will improve incentives and competitiveness in the private sector as well as reduce the fiscal deficit to a sustainable level. It is in this spirit that the present government is accelerating the pace of tax reform with a view to broadening the tax base, minimizing tax evasion, restructuring the tax administration, listening to the grievances of the tax payers, improving the refund process, documenting the economy, and reducing smuggling through anti-smuggling measures.

To minimize tax evasion, the government has eliminated all whitener schemes, however, the existing investment will remain protected. The tax exemptions given to the foreign currency account have also been withdrawn. To encourage documentation, a one time tax amnesty has been provided to declare hidden assets by paying 10 percent tax on all these assets. The government, for the first time, has launched a tax survey in 13 big cities to broaden tax bases and plug in many loopholes, and establish equity and fairness in the tax system. The tax survey is being carried out under a new law called "The Survey for Documentation of the Economy Ordinance 2000" which was promulgated by the President on May 24, 2000. Several attempts were made in the past to impose the GST at the retail level, but without success. Since the GST is the main instrument of documenting the economy, its immediate extension at the retail level is inevitable. The on-going tax survey will help in broadening the net for the GST at the retail level as well as for direct taxes.

The success of revenue mobilization over the medium-term will depend on the quality and strength of the tax administration. The government has already initiated programme to restructure and strengthen the tax administration. Reforms of the tax administration typically include elements, such as wider registration of tax payers, the simplification of procedures, the establishment of large-taxpayers units and staff training and computerization. Tax administration reforms typically have long gestation lags and, therefore, cannot be utilized as short term revenue measures.

Expenditure reforms are necessary for ensuring macro-economic stability, promoting growth and enhancing the efficiency of public expenditure. It is in this spirit that the government is pursuing prudent expenditure policy. Public spending would be made more efficient through improvement in budgeting and expenditure management.

All these measures will help in broadening the tax bases, minimizing tax evasion, reducing smuggling, enhancing the efficiency of public expenditure, and above all, will help improve fiscal balances over the medium term.

The main indicators of public finance since 1990-91 to 1999-2000 are tabulated in Table 5.1.

Source: Budget Wing, Finance Division.
* Budgetary data from 1997-98 onward are as on May 30, 2000.
** SAP proceeds are included in total revenue but not in its break-up by tax/non-tax revenue upto 1995-96.

Major tax reforms in the recent years have improved the tax structure but these were not translated in higher tax-to-GDP ratio. The share of direct taxes has almost doubled during the 1990s, increasing from 18 percent to 34 percent and accordingly the share of indirect taxes declined from 82 percent to 66 percent during the same period [ see Table 5.2]. Within indirect taxes, the shares of custom and excise duties have declined while that of the sales tax have gone up. These changes are in line with the stated objectives of the tax reforms, i.e., reducing the dependence on import-related taxes on the one hand and increasing the reliance on consumption based taxes on the other. It may further be pointed out that the desired effects of tax and tariff reforms may not immediately be visible in term of large resource mobilization. However, over the medium term, the enhanced buoyancy of the more broad-based tax system, will definitely improve the revenues. The respective shares of various federal taxes since 1990-91 to 1999-2000 are shown in Table 5.2

* Revised Estimates
Source: Central Board of Revenue
Note: Figures in square brackets [ ] are shares in total taxes while the figures in parentheses ( ) are shares of the individual taxes in indirect taxes.

Federal Budget, 1999-2000
The revised federal gross revenue receipts of Rs.510.9 billion for 1999-2000 are 9.8 percent higher than 1998-99. These revenue receipts comprise: tax revenues (Rs.362.0 billion), non tax revenue (Rs.112.2 billion) and surcharges (Rs.36.7 billion). After paying Rs 146.0 billion as provincial share, the net federal revenue receipts are estimated at Rs.364.9 billion. In addition, the federal budget includes capital receipts (Rs.80.7 billion), self-financing of PSDP by provinces (Rs.3.9 billion) and external resources (Rs.104.4 billion). The federal resources are thus estimated at Rs.553.9 billion which are 18.6 percent lower than the previous year while expenditure of Rs.664.3 billion are 8.0 percent higher than 1998-99, thus leaving a budgetary gap of Rs.91.4 billion to be financed through bank borrowing and non-bank borrowing. A comparison of the Federal Budget, 1998-99 and 1999-2000 is given in Table 5.3.

P.A: Provisional Actual
R.E: Revised Estimates
* Budgetary data as on May 30, 2000
Source: Finance Division, (Budget Wing).

Provincial Budgets
The size of the four provincial budgets for 1999-2000 is Rs. 226.0 billion which is 8.4 percent higher than last year. The overall provincial revenue receipts for 1999-2000 are estimated at Rs. 194.4 billion which are 12.2 percent higher than last year. Of which, tax revenue amounting to Rs. 181.7 billion is higher by 12.3 percent and non-tax revenue is estimated at Rs.12.7 billion or 9.5 percent higher than last year's level. Out of total expenditure (Rs. 226.0 billion), 85.8 percent account for current expenditure and 14.2 percent development expenditure. The overall provincial current expenditure as per original budget estimates is 12.5 percent higher than 1998-99 while development expenditure is 10.7 percent lower than 1998-99. The main components of the Provincial budgets, 1998-99 and 1999-2000 are presented in Table 5.4:

Source: PF Wing. Finance Division.

Consolidated Budget (Federal & Provincial)
In the consolidated budget 1999-2000, the total revenues have been estimated at Rs.520.1 billion. Of these, Rs.420.6 billion are to be collected from taxes and Rs. 99.5 billion from non-tax sources. The total expenditures have been projected at Rs.703.8 billion, resulting in an overall fiscal deficit of Rs.183.7 billion. This budgetary gap is to be financed through external borrowing (Rs 79.3 billion) and domestic borrowing (Rs 104.4 billion) which includes bank & non-bank borrowing. As shown in the table, fiscal deficit was as high as 7.7 percent of GDP in 1997-98 but was reduced to 5.8 percent in the outgoing fiscal year-- an adjustment of about 2.0 percentage points in two years. A summary of the consolidated budget is given in Table 5.5.

P.A: Provisional Actual
R.E: Revised Estimates
* Budgetary data as on May 30, 2000
** The overall deficit has been worked out on the basis of financing, rather than expenditure minus revenues.
Source: Finance Division, (Budget Wing).

a) Consolidated Expenditure
Out of the consolidated expenditure of Rs.703.8 billion for 1999-2000, the current expenditure are estimated at Rs.602.6 billion (85.6%) and development expenditure at Rs.101.2 billion (14.4%). As shown in the Table 5.6, the current expenditure as percentage of GDP declined in 99 but remained unchanged in 1999-2000. The development expenditure, on the other hand, continues to exhibit a declining trend. Thus, the reduction in development expenditure was partly responsible for at least 2.0 percentage points reduction in fiscal deficit during the last two years.

As shown in Figure 4, the structure of expenditure has undergone considerable changes in the last one decade. Major changes have taken place in defense and interest payments with the share of former declining by almost one-half and the share of later increasing by almost one-half. Defense on the other hand, witnessed roughly 4 percentage points decline in its share in total expenditure.

R.A : Revised Actual
R.E : Revised Estimates
Source: Finance Division (Budget Wing)

Interest payments have emerged as the single largest item of expenditure. Its share in total expenditure has increased from 24.3 percent in 1994- 95 to 34.7 percent in 1999-2000. Similarly, its share in current expenditure has increased from 30.1 percent to 40.6 percent during the same period. Without interest payments, expenditure as percentage of GDP has declined by almost 3 percentage points, i.e, from 17.2 percent to 14.5 percent during the last six years. In other words, non-interest expenditure has declined substantially during the last six years suggesting that development expenditure, defence and civil administration had to face the brunt of adjustment. Table 5.7 depicts the situation clearly.

Source: Budget Wing, Finance Division, Islamabad

i) Current Expenditure
The main components of the current expenditures are: defence, debt servicing, economic, social and community services, general administration and current subsidies. Defence expenditure for 1999-2000 has been budgeted at Rs.143.4 billion which remains at the last year level. However, as percentage of GDP, it has declined from 4.9 percent in 1998-99 to 4.5 percent in 1999- 2000. Defence expenditure accounts for 20.2 percent of total expenditure, 23.8 percent of current expenditure and 34.1 percent of the tax revenues. The interest payments in 1999-2000 is estimated at Rs.244.5 billion which is 8.9 percent higher than the last year and constitutes 40.6 percent of the current expenditures. The budgeted expenditure on general administration is Rs.65.9 billion which is 3.7 percent higher than the last year. The structure of current expenditure is given in Table 5.8.

* Budgetary data as on May 30, 2000
Source: Finance Division, (Budget Wing)

ii) Development Expenditure
A sum of Rs.116.3 billion was provided for the Public Sector Development Programme (PSDP) at the time of budget announcement for the fiscal year 1999-2000. However, due to resource constraints, a cut of Rs.14.3 billion was imposed which reduced the size of the PSDP for 1999-2000 to Rs.102.0 billion. However, the revised PSDP of Rs.102.0 billion for 1999-2000 is still 4.0 percent higher than the earlier revised allocation of Rs.98.1 billion for 1999-2000. The sectoral allocations made in the PSDP 1999-2000, indicate the highest priority for the water sector followed by transport & communication, health & nutrition and rural development sectors respectively. A break-up of the PSDP 1998-99 and 1999-2000 with respective percentage shares are depicted in Table 5.9.

P.A: Provisional Actual
R.E: Revised Estimates
Source: Planning & Development Division, Islamabad

Out of the PSDP, 1999-2000 (Rs.102.0 billion), Rs 40.5 billion (39.7%) have been allocated for Federal Ministries/Divisions, Rs.28.8 billion (28.2%) for provincial programmes and Rs.32.7 billion (32.1%) for corporation's development programmes. Agency-wise comparison of the PSDP, 1998-99 & 1999-2000 is depicted in Table 5.10.

R.E: Revised Estimates

b) Consolidated Revenue Receipts
The consolidated revenue receipts (tax and non tax) were projected at Rs.520.1 billion for 1999-2000 which constitute 74.0 percent of the total expenditure. The tax revenues have been projected at Rs.420.6 billion, showing an increase of 2.7 percent over 1998-99. Out of Rs.520.1 billion revenue receipts, Rs.482.6 billion (92.8%) are to be collected by the federal government and Rs.37.5 billion (7.2%) by the provincial governments.

i) Tax and Non tax Revenues

a) Tax Revenue
Tax revenue constitutes 80.9 percent of the total revenues while the share of non tax revenues is 19.1 percent. Tax revenue consists of direct and indirect taxes. The direct taxes have been projected at Rs.125.8 billion, reflecting an increase of 11.2 percent whereas indirect taxes at Rs.294.8 billion, reflecting a decrease of 0.6 percent over the preceding year. Direct and indirect taxes constitute 24.2 percent and 56.7 percent of the total revenues respectively. The main components of indirect taxes are : excise duty, sales tax and taxes on international trade (custom duties).

b) Non-Tax Revenue
Non-tax receipts have been projected at Rs.99.5 billion or 49.6 percent higher than the last year, constituting 19.1 percent of total revenues. The main components of non-tax revenues are: interest earnings, dividends and receipts from civil administration. Non-tax revenues from interest earnings and dividends have been projected at Rs.50.1 billion (50.4 percent) and Rs.49.4 billion (49.6 percent) from the civil administration and others. A break-up of tax and non-tax revenues since 1997-98 to 1999-2000 is given in Table 5.11.

* Budgetary data, as on May 30, 2000
Source: Finance Division (Budget Wing)

Tax Strategy

The tax strategy of the present Government on the one hand is to address the problems of weak tax administration in a bold manner and on the other to plug in all the loopholes in tax collection and establish equity in the tax system. The areas that are covered under the reforms include: i) reduction in number of taxes, both at the federal and provincial levels; ii) reduction in tax rates and penalties; iii) simplification of assessment and collection procedures; iv) reforms in labour levies; v) efficiency in dispute resolution; vi) broadening the tax base; and vii) honesty and efficiency in tax administration.

Fiscal Measures, 1999-2000
- Simplifying Tax System: A number of taxes in force will be phased out gradually. At the federal level, primary source of revenues will be income tax, sales tax and customs duties. Similarly the provincial governments will be encouraged to minimize the number of taxes:

- Tax Ombudsman: A Tax Ombudsman will be appointed to hear and decide complaints against tax authorities:

- Revenue Benches: In consultation with the respective Chief Justice, the Revenue Benches will be established in the High Courts and Supreme Courts to deal with tax disputes.

- Tax refunds: Tax refunds will be allowed by the CBR within a specified period. In case of delay, the tax payer will be entitled to a return on the refund.

- The 10% withholding tax on income from national savings schemes has been withdrawn and the refund will be made to those who had encashed their saving from September, 1999 onwards.

- Old age pension of the workers have been increased by 48% from Rs.425 per month to Rs. 630 per month.

- Death grant of the workers has been increased from Rs. 50,000 to Rs. 75,000 to the family of deceased workers.

- A marriage grant of Rs. 20,000 has been provided to the surviving daughters of the deceased workers from Worker Welfare Fund.

- Low paid employees of the public and private sector have been provided Rs. 100/- per month as adhoc relief.

- To achieve the objective of documentation of economy under the "Survey of Documentation Ordinance 2000", a registration survey work has been started from 27th May, 2000 in 13 major cities of the country.

Retail GST
- Government has decided to strictly enforce this tax w.e.f 1-7-2000 as under:

- No GST will be applicable for retail establishments with a turnover of upto Rs.1 million.

- For retail establishment with turnover of upto Rs.5.0 million, 2% GST will be applicable. They will be required to maintain simple accounts of their sales and purchases

- For retail establishment with turnover of Rs 5 million and above, the GST on VAT mode will be applicable. However, they will have an option to continue to pay a 2% GST on turnover for one year and after that the GST on VAT made will applicable.

- There will be simple record keeping requirement for establishments with turnover between Rs.1-5 million . No invoice will be required for sales, but record of daily total sales, each purchase and closing inventory will be required on a quarterly basis.

- For establishments with turnover in excess of Rs.5 million, invoices will be needed for sales together with the record of each purchase and closing inventory on a quarterly basis.

- Those who would want to opt for the VAT mode, complete record keeping of sales, purchases and expenses will be required.

- Previously, unregistered persons who register under the GST will not be liable to sales tax prior to 1-7-2000. However, compliance is mandatory from 1-7-2000 even if the survey team reaches any person after that date.

Tax Measures by CBR

Direct Taxes
a) Income Tax
- The excess reserves of the listed public companies, which exceed 50% of the capital have been subject to 10% tax.

- The Rate of withholding tax on the issuance of bank drafts, cheques & other instruments of transfer of funds by non-NTN holders has been raised from 0.2% to 0.3% while the transaction threshold has been reduced from Rs.50,000 to Rs.25,000/-

- The income of brokers through commission is subject to 10% of withholding tax. Similarly, the commission received in foreign currency from Foreign Principals is also subject to 10% presumptive tax.

- The income of indirect exporters who supply goods to the direct exporters would be taxed at the rate and conditions applicable to the direct exporters.

- The new rate of tax withholding on prizes and prize bonds, raffles and lotteries etc. shall be @ 10%.

- Tax shall be withheld at source alongwith the gas bills relating to industrial and commercial consumers. The rates for commercial consumers range from Rs.150 to Rs.500 and for industrial consumers from Rs.250 to Rs.3000, depending upon the quantum of the bill.

- The income threshold for filling of wealth tax return alongwith the return of income has been raised from Rs. 100,000 to Rs.200,000.

- A universal Self Assessment Scheme has been introduced from which more classes of taxpayers would benefit.

- The income by way of royalties received by non-residents have been brought into the presumptive tax regime while withholding tax rate remains 15%.

- The scope of minimum tax on the turnover has also been extended to individuals, association of persons, un-registered firms and Hindu Undivided Families.

- The tax rate slabs for higher personal incomes have been rationalized and new rate bands of 25%, 30% and 35% have been introduced whereas there is no change in the rates for incomes upto Rs. 5 lacs. The maximum tax rate for salaried persons is 30%. The 10% surcharge on salary income has also been withdrawn.

- The dividend income of the insurance companies has been made taxable at the tax rates applicable to such companies.

- The persons who provide services to manufacturer-cum-exporters have been exempted from withholding tax.

- The persons making payment to National Investment (Unit) Trust and the mutual funds or a unit trust scheme have been exempted from tax withholding provisions.

- The exemption from withholding tax has been extended to the income from TFC's derived by companies and registered firms in respect of TFC's issued on or after the first day of July, 1999.

b) Wealth Tax
- Limit for filling of wealth tax return alongwith income tax return has been raised from one hundred thousand rupees to two hundred thousand rupees.

- Limit for advance wealth tax on owners of certain motor vehicles has been reduced to 1500 cc. Now the advance wealth tax US 14 D shall be payable on motor vehicles of engine capacity of 1500 cc and above at the following rates:

Engine Capacity
1500 CC to 2000 CC Rs. 10,000 per annum 2001 CC and above Rs. 20,000 per annum

- However, the vehicles which have been manufactured more than seven years earlier would remain exempted.

- Section 23, 24, 25 of the wealth tax Act, 1963 have been amended to rationalize the rates of appeal and revision fees.

- A new clause (32) has been inserted in part-I of the second schedule to the wealth tax Act, 1963 where in exemption from payment of wealth tax has been allowed for a period of five years in respect of houses built on land area not exceeding six marlas or apartment with covered area not exceeding twelve hundred square feet, constructed under Prime Minister's Programme for Economic Revival (Housing Sector).

c) Capital Value Tax
- Capital Value Tax is no more chargeable on registration of immovable properties.

- The CVT is not payable on imported vehicles falling heading No.87.03 of the first schedule to the customs Act, 1969, on which single consolidated duty has been paid in foreign exchange. Passenger bus, imported under N.R.I scheme will be exempted from the payment of CVT.

Indirect Taxes
a) Central Excise
- To discourage smoking, the price slab of lower Brands has been raised from Rs.3.71 to Rs.4.15/10 cigarettes and the rate of duty has been raised from Rs.1.58 to Rs. 1.77 per 10 cigarettes.

- To provide protection to the manufactures against import, the central excise duty has been levied on sugar, cement, calcium carbide, formic acid, detergent powder and other cheaper imports.

- Central Excise Duty on all firms of cheques have been withdrawn.

- Duty on the services provided by telecommunication has been reduced from 25% to 15%

- In pursuance of the policy to withdraw central excise on the sales tax bearing items, the central excise duty on polypropylene bags and sacks has been withdrawn.

- The concept of Electronic Cash Register (ECR) introduced during budget, 1998-99 has been extended to all hotels, paying excise duty of Rs. 800,000. Moreover, central excise duty has been withdrawn from the services provided by these hotels.

- Central excise duty (@ 1.5%) on services of credit cards levied during budget has been withdrawn on 16th December, 1999.

- Central excise duty on import of polyester chips has been reduced from 15% to 5% and duty on import of kraft paper has been withdrawn. Central excise duty on import of polyester filament yarn has been reduced from 10% to 5%.

b) Sales Tax
- For making prescribed records more objective-oriented and meaningful, accessibility of Sales Tax Officers to record maintained under other enactments has been ensured; and the documents like utility bills, labour bills, rent, sales and purchase agreements have also been included in the list of prescribed records.

- For conducting special audit of record of registered persons, provisions have been made in the law for appointing Chartered Accountants and Cost and Management Accountants. For speedy disposal of cases under adjudication, powers of Collectors (Appeals) to remand the cases for denovo consideration have been withdrawn.

- For affecting recoveries from defaulters certain measures like stopping clearances of goods and attaching the accounts of defaulters have been enacted.

- Exemption on import of plant and machinery is now confined to only such plant and machinery which are not manufactured locally and are used for manufacturing of taxable goods by a registered person.

- Special procedures and action plans are underway for bringing into tax net all non-complying sectors and for effective implementation of sales tax at retail stage.

- On taxable supplies made to non-registered persons, the rate of further tax has been enhanced from 10% to 30%.

- The scope of turnover tax has been enlarged by bringing into its ambit the producers, manufactures and retailers. Similarly, threshold limits have also been revised.

- For encouraging documentation, input tax credit has been dis-allowed in cases of further tax, extra tax and on account of goods purchased by registered persons working under the erstwhile Fixed Tax Schemes.

- For broad basing the sales tax regime, exemption has been withdrawn on packed food served by restaurants and hotels etc.

- Similarly admissibility of exemptions available on imported pharmaceutical raw materials and packing materials have been made dependent on simultaneous concessions from customs duty.

- All fixed sales tax schemes have been abolished.

- For promoting exports, the condition of export within stipulated period of 30 days from the date of filing of the bill of export has been relaxed. Now goods actually exported under the provisions of Customs Act are deemed to have been zero-rated irrespective of the time period.

- Exemptions have been granted on cattle feed, phosphatic acid imported for use in manufacturing of phosphatic fertilizers, CNG kits and import of chemical inputs for agricultural pesticides.

c) Customs
- Maximum tariff has been reduced to 35 percent with the exception of automobiles.

- Custom duties non-zero slabs have been reduced initially from thirteen to five in 1997-98 [10%, 15%, 25%, 35%, and 45%] and further to four in 1998-99 (35%, 25%, 15% & 10%).

- Tariff rates on smuggling-prone items have been brought down to 10 percent and 25 percent.

- A minimum tariff of 10 percent has been imposed across-the-board, excepting essential items like wheat, fertilizer and life saving drugs.

- Duty concessions have been extended to Aviation, Shipping, Investment and Petroleum Industry.

- Overseas Pakistanis have been allowed from their own earnings to send goods worth 10,000/- US Dollars, without opening a letter of credit but no duty tax exemption will be granted on such imports.

- Powers of the Central Board of Revenue to grant customs duty exemptions through SROs have been withdrawn and shifted to Parliament.

- Entire tariff related notifications and declared values of imported goods have been placed on the internet.

Tax Collection by CBR, 1999-2000
The annual target of federal tax collection for the fiscal year 1999-2000 by the CBR was fixed at Rs.362.0 billion. Provisional tax collection during the first ten months (July-April) of the current fiscal year amounted to Rs.270.0 billion which is 17.6 percent higher than the net collection, made during the corresponding period of last year (Rs.229.7 billion) Direct taxes have increased by 6.8 percent and indirect taxes increased by 23.2 percent on net basis Within indirect taxes, sales tax has increased by 69.5 percent mainly because of increase in the sales tax rate from 12.5 to 15 percent, increase in the sales tax rate for non-registered tax payers from 1 percent to 3 percent, broadening of the tax base of sales tax (sales tax on electricity, POL, distribution of gas, food served in restaurants, etc) and drive to collect arrears. Custom duties on net basis have increased only be 1.9 percent over the same period of last year, mainly because of little growth in dutiable imports in rupee term. However, central excise have witnessed a decline of 6.8 percent over the corresponding period of last year on net basis, because some of the high yielding revenue items, such as, distribution of gas, food served in restaurants, etc have been shifted from central excise to the sales tax.

The CBR has so far collected Rs.270 billion or 74.6 percent of the tax target (Rs.362.0 billion) set for the current fiscal year and the remaining Rs.92.0 billion or 25.4 percent of the target have to be collected during the remaining two months of the current fiscal year. Considering the impact of expenditure cut, exchange rate stability and import reducing measures taken to protect the country's balance of payments, higher tax collection by 17.6 percent on net basis can be regarded as satisfactory. Besides, during the period under review, the Government has provided 15.5 percent more rebate/refund (Rs.46.3 billion) than the last year (Rs.40.1 billion).

(Rs billion)

R.E: Revised Estimates
Source: Central Board of Revenues

Domestic Debt
Persistence of large fiscal deficit over an extended period has resulted in the rapid growth of public debt since the mid-1980s, which, in turn resulted in exponential growth of debt servicing, threatening the macroeconomic stability of the country. The public debt has grown at a faster rate since 1984-85 -- both in absolute number and in relation to GDP. Total domestic debt which was Rs.203.1 billion in 1985-86 rose to Rs.381.3 billion by 1989-90, showing an increase of almost 88 percent in four years. The fiscal deficit as percentage of GDP also averaged annually at 7.7 percent during the same period. In absolute terms, the revenue surplus turned for the first time into deficit in 1984-85 to the tune of Rs. 6.4 billion and thereafter, it quickly quadrupled to Rs.23.9 billion by 1989-90. The growth in public debt would have been more steeper had the government not been borrowing from the banking system at the highly subsidized rates, ranging from 0.5 percent in the case of the State Bank of Pakistan to 6.0 percent from Commercial banks. The low cost of borrowing coupled with concessional foreign assistance enabled Pakistan to finance large budgetary deficits on the one hand and kept the debt servicing burden relatively low on the other. The domestic debt grew at an average rate of 16.2 percent in the first half and 15.0 percent in the second half of the 1990s.

The domestic debt in relation to GDP averaged at 44 percent during the first seven years (1990-97) of the 1990s. It rose to 48.8 percent in 1997-98, 49.9 percent in 1998-99 and further to 51.1 percent in 1999-2000. The trend in domestic debt over the last five years is reported in Table 5.13.

Source: Finance Division, Islamabad
* i) Figures in parentheses ( ) are percent shares in total debt.
ii) Permanent Debt: Government Bonds, FEBCs, FIBS, Foreign currency Bearer Certificates and US Dollar Bearer Certificates.
iii) Floating Debt: Treasury Bills and Prize Bonds.
iv) Unfunded Debt: National Saving Schemes, G.P. Fund and Deposits (Net).

Domestic debt, which comprise of permanent debt (medium and long-term), floating debt (short-term) and unfunded debt (completely non-bank) rose from Rs.920.3 billion in 1995-96 to Rs.1622.4 billion by end June 2000, depicting an annual average increase of 15 percent. The acceleration in domestic debt in the second half of the 1990s was spearheaded by unfunded debt followed by floating debt. Permanent debt remained, more or less, close to the 1995-96 level even at the end of 1999-2000. The unfunded debt grew at an average rate of 24.7 percent followed by 17.1 percent growth in floating debt mainly because of the increase in the borrowing from the national saving schemes (NSS).

The composition of the debt has undergone considerable changes in the last five years. As a result of the rapid increase in unfunded debt, its share in total domestic debt increased from 29.1 percent in 1995-96 to 41.2 percent in 1999-2000. The share of floating debt remained more or less stable at 39 percent. The share of permanent debt on the other hand declined drastically from almost 32 percent 0 to 19 percent during the same period. The attractiveness of the returns on the NSS was basically responsible for the astronomical growth of unfunded debt. The rapid growth of unfunded debt also contributed to the rising interest payment burden.

Reducing debt burden is on the top of the agenda of the present government's economic strategy. The government has already set up a high level Debt Reduction and Management Committee which is formulating a medium-to-long run strategy to reduce debt burden. As part of the strategy to reduce debt burden, the government has already reduced the interest rates on the various instruments of the unfunded debt. The weighted average rate of return of Market Treasury Bills has also come down from 13.0 percent in June 1999 to 7.6 percent in May 2000. The decline in interest rates would gradually reduce the interest payments.

Interest Payments
The burden of interest payments has emerged as the most serious fiscal problem because it not only consumes large government resources but also reduces the government's ability to spend on key development activities like social and physical infrastructure and alleviation of poverty. During the decade of 1990s, the interest payments on both domestic and external debt have risen by about five times from Rs 50.0 billion in 1990-91 to Rs 244.5 billion in 1999-2000. In other words, the interest payments during the decade have grown at an average rate of 18 percent per annum. Consequently, the interest payments have emerged as a single largest item of current expenditure (40.6 percent), consuming 47.0 percent of the total revenues and 58 percent of tax revenue. As percent of GDP, the interest payments rose from 5.0 percent in 1990-91 to 6.3 percent in 1995-96 and further to 7.7 percent, as per revised budget estimates of 1999-2000. The ever growing interest payments since 1990-91 to 1999-2000 are given in Table 5.14.

P.A: Provisional Actual
R.E: Revised Estimates
Source: Finance Division (D.M.Section)

The interest payments on domestic debt have increased from Rs.37.0 billion (3.6% of GDP) in 1990-91 to Rs.186.5 billion (6.4 percent of GDP) in 1998-99 and further to 194.0 billion in 1999-2000 but as percent of GDP, these are likely to decline to 6.1 percent. During the first 8 years of the 1990s, interest payments on domestic debt grew at an annual average rate of 22.6 percent. However, the pace of acceleration slowed to an average of 5.7 percent in the two years (1998-2000). The interest on foreign debt during the 1990's has also increased by almost four times, rising from Rs.13.0 billion (1.4% of GDP) in 1990-91 to Rs.50.5 billion (1.6% of GDP) in 1999-2000, or at an annual average rate of 16.2 percent. However, as percentage of GDP, it has remained stable at around 1.4 to 1.6 percent.

Fiscal vulnerability of Pakistan can also be judged from the fact that more than 81.5 percent of tax revenues or 65.9 percent of total revenues is consumed by debt servicing (both interest and principal), constraining government's ability to spend on key development activities. Consequently, it has mounted a great pressure for higher resource mobilization. Being a single largest item, the debt servicing now accounts for 56.8 percent of current expenditure and 48.7 percent of total expenditure in 1999-2000. The domestic outstanding debt and debt servicing as percent of total revenue & expenditure since 1990-91 to 1999-2000 are given in Table 5.15 and in Figure 5.

* Budgetary data as on 14th April, 2000
Source: Finance Division (Budget Wing)

Excluding principal payment, i.e., only interest payments were 29.1 percent of total revenue and 38.6 percent of tax revenue in 1990-91, increased to 47.0 percent and 58.1 percent, respectively in 1999-2000. As percentage of expenditure, the interest payments had also risen from 19.2 percent of total expenditure and 33.2 percent of current expenditure in 1990-91 to 34.7 percent and 40.6 percent in 1999-2000, respectively. In other words, it has emerged as a single largest item of expenditure. The annual trends of interest payments as percentage of revenues and expenditure are given in Table 5.16.

Source: Finance Division (D.M. Section)

Primary Deficit/Surplus
Primary deficit/surplus is defined as total revenues minus total expenditure adjusted for interest payments. Another way to define primary deficit/surplus is to subtract interest payments from the overall fiscal deficit. Primary deficit indicates the gap in resources generated by the current polices of the government because interest payments are "committed expenditure" on the stock of debt. The primary deficit/surplus since 1990-91 to 1999-2000 is given in Table 5.17.

Source: Budget Wing, Finance Division, Islamabad

As shown in Table 5.17, the primary deficit has declined sharply from Rs. 39.2 billion in 1990-91 (3.8 percent of GDP) to Rs.2.1 billion in 1995-96 (0.1 percent of GDP) but turned surplus during 1996-97 (Rs.5.5 billion or 0.2 percent of GDP), as well as, in the recent two years, 1998-2000. This suggests that during the last two years, fiscal deficit in Pakistan was interest payments driven. As shown in Table 5.7, the non-interest expenditure has declined significantly and the total revenues were sufficient to finance non-interest expenditure. While a primary surplus is a pre-condition for stabilizing public debt, reducing its size would require substantial increase in the primary surplus on a sustainable basis.

Pakistan has succeeded in reducing fiscal deficit in the 1990s from 8.7 percent of the GDP in 1990-91 to 5.8 percent in 1999-2000, an adjustment of about 3 percentage points during the last 10 years. However, this fiscal adjustment has taken place primarily at the cost of development spending which has declined from 6.4 percent of GDP to close to 3.2 percent during the same period. Achieving substantial progress towards fiscal consolidation through cuts in development expenditure is no longer a viable option. Therefore, any fiscal adjustment will have to rely mostly on revenue raising measures with focus on taxation. Thus, increasing the Tax-to-GDP ratio and improving resource allocation for development activities should be the means of achieving fiscal consolidation. Further tax reforms must focus on: i) reducing the share of trade-related taxes; ii) increasing the share of consumption-based sales tax, and iii) increasing the relative contribution of direct taxes. These objectives may be achieved through broadening the tax bases, rate reduction, and strengthening the capacity of the tax administration. On the expenditure side, more cost-effective public programmes may free resources for better use, and structural changes in the composition of government spending can re-orient current consumption towards growth-promoting investment in physical, social and human infrastructure.

There is no quick solution to reduce debt burden. Two pronged strategy will be required to reduce debt burden. Macro-economic stability, good governance, and market-friendly policies will be the essential ingredients to further restore investor's confidence, keep real interest rates low and renew growth. On the other hand, concerted efforts will be needed in other areas including maintaining primary surplus of at least 2 percent of GDP in the next several years, containing off-budget losses, speedy privatization to retire public debt and building capacity to manage debt.