Report No. 1924-PAK Pakistan: Development issues and rolicies (In Two Volumes) Volume II: Public Sector Resource Mobilization April 7, 1978 South Asia Region FOR OFFICIAL USE ONI.Y Document of the World Bank This document has a restricted distrikiution and may be used by recipients only in the performance of their otficial duties. Its contents may not otherwise be disccosed without World Bank authorization. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
Report No. 1924-PAK
Pakistan: Development issues and rolicies(In Two Volumes)
Volume II: Public Sector Resource MobilizationApril 7, 1978
South Asia Region
FOR OFFICIAL USE ONI.Y
Document of the World Bank
This document has a restricted distrikiution and may be used by recipientsonly in the performance of their otficial duties. Its contents may nototherwise be disccosed without World Bank authorization.
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
CURRENCY EQUIVALENTS
Effective February 16, 1973
Rs 9.90 US$1.00Rs 1.00 US$0.1Rs 1.0 million US$101,000
May 12, 1972 to February 15, 1973
Rs 11.00 US$1.00Rs 1.00 US$0.09Rs 1.0 million US$90,909
Prior to May 12, 1972
Rs 4.7619 US$1.00Rs 1.00 US$0.21Rs 1.0 million US$210,000
Note: Historical data in the report, including the Statistical Appendix,refer only to the present nation of Pakistan, i.e., the formerWest Pakistan, unless otherwise specifically noted.
EQUIVALENTS
Seer = 2.057 lbs.Maund = 82.286 lbs.
Bale (raw cotton) 392 lbs.
FISCAL YEAR
july- to june 30
FOR OFCIAL USE ONLYPage I of 2 pages
COUNTRY DAA - PAkTSTAN
ARE, POPULATION DENSITY 2803,943 km 73.6 million (mid-1976/77) 92 per km2
224 per km of arable land
POPULATION CHARACTERISTICS (1973) HEALTH (1976)Crude Birth Rate (per 1,000) 47 Population per physician 4,070Crude Death Rate (per 1,000) 17 Population per hospital bed 1,720Infant Morcality (per 1,000 live births) 113
INCOnE DISTRIBUTION (;970/7i) DISTRIBdUTION OF LiAD ONWNERSHIP% of national income, highest quintile 42 X owned by top 10% of owners
lowest quintile 8 % owmed by smallest 10% of owners..
ACCESS TO PIPED WATER (1976) ACCESS TO ELECTRICITYX of population 59 % of population - urban
- rural
NUTRITION (1974) EDUCATION (1975/76)Calorie intake as Z of requirements 93 Adult literacy rate % 21Per caoita protein intake 56 Primary school enrollment % 47
GNP PER CAPITA IN 1976: US $170-
GROSS NATIONAL PRODUCT IN :.976/77-" ANNUAL RATE OF GROWTH (Y, constant prices)
US $ Mln. 1960-65 1965-70 1972/73-76/77
GNP at Market Prices 15,131 100.0 6.6 6.8 4.5Gross Domestic Investment 2,741 18.1 14.7 0.6 4.5Gross National Saving 3/ 1,634 10.8 17.1 4.5 5.2Current Account Balance- -1,052 -7.3Exports of Goods, NFS 1,bO5 9.6 8e 6
1/ Based on Vorld Bank Atles methodology and calculated at average 1974-76 prices and exchange rates. All otherconversions to dollars In this table are at the average exchange rate prevailing during the period covered.
2/ Proviisional.
3/ Inclusive of net factor service income.
4/ GDP at current factor cost.
5/ Estimated labor force as on January 1, 1975i unemployed are allocated to sector of their normal occupation.'Unallocated: consists mainly of unemployed workers seeking their fira;t job. Distribution of labor forc^ in
1974/75 is estimated on the basis of an average of Labor Force Survey results of 1970/71 and 1971/72.
6/ Consolidated revenues an! expenditures of Central nd. Provinci,l Govern.ments (excluding center-prov'ncialGovernment transfers).
7/ Excluding principal repa:ments of foreign loans. Capital expendituresl as defined in Government budget includecertain current expenditures also.
Not available.
Not applicable.
March 10, 1978
This document has a restrictedl distribution and may be used by recipients only in the performanceof their Omci&;al duties. Its cor.:ent m,;y not othewise be discLsed withnut Warid ank authoriation.oi .ni omolut .13WIZ.UM
Page 2 of 2 pages
COUNTRY DATA - PAKISTAN
MONEY, CREDIT and PRICES 1972/73 1973/74 1974/75 1975/76 1976/77(Million Rs outstanding end period)
Money and Quasi Money-2 31,497 32,658 35,669 43,142 53,066
Bank Credit to Public Sector 14,099 14,297 16,928 22,110 28,327
Bank Credit to Private Sector 16,259 18,378 19,983 23,407 30,298
(Percentages or Index Numbers)
Money and Quasi Money as % of GDP 47.4 37.9 32.1 33.2 36.4
General Price Index (1960 = 100) 179.7 229.1 288.9 321.8 357.1
Public Savings /d (0.7) (-0.4) (-0.5) (-C.2) (--0.6) (0.7) (2.0)
/a Budgtet estimates./b Curr-ent revenues less non-development revenue expend:Ltures./c Cap:Ltal account receipts less-non-development capital expendituresi.
/d Adiusted for non-investment outlays in deveLopment expenditures, investment in non-developmenltexRenditures, etc.
Source: Ministry of 'Finance, ]?lanning, Development and Provincial Coordination.
- 3 -
2. Pakistan thus enters the next Plan period with a weak resource baseand a public sector which has assumed the leading role in development. Whether
the public sector will continue to play this role and account for as much as
70% of total investment in the economy as it has done during the last 2-3years is not yet known as a detailed plan framework remains to be finalized.
But, even if public sector investment over the next few years were to be less
than this level, 1/ it will still require a substantial improvement in publicsector savings to attain these investment targets without depending excessivelyon external and domestic borrowing.
3. This study seeks to identify the causes of the financial weakness
of the public sector and the problems to be resolved in improving publicsavings in the future. In the next section it reviews the taxation struc-
ture and recent expenditure policies of the Government and the financialDerformance of public enterprises. Tentative projections of domestic resource
requirements of the public sector on the basis of assumptions regarding net
external resource inflows, domestic bank borrowing, likely output growth, etc.
are made in the following section, and throw some light on the dimensions ofthe additinnal resource mobilization effort that may be required. The final
section deals with possible improvements to the taxation system and policychanges that Will be no sry to im.prove nihlir scrtnr rpeAsorcp mnhiIi7ation.
TT. Recent Performance - ntributory Factors
4. Much of the explanation of poor domestic resource mobilizationsince FY1971 can be found in weaknesses in the Government's structure ofrevenues, expenditurle ------licie, weak resource- psi ofIthe prvirce.s, ar.-
unsatisfactory financial performance of public enterprises. The Government's
arising from its commitment to a wide range of objectives. The resourceproDlem nas been compounded by the 'LaIure of provincial gUVr.L-IntLL t
meet their own current expenditures, and by the inability of public enter-prises, which undertake much of the development spending, to contribute more
than token amounts towards their financing.
Government Revenues
5. Pakistan's revenue performance in recent years has not been impres-sive; Government revenues increased by 2i% annuaily in current prices between
FY1971 and FY1977, while non-development expenditures rose by 23% and totalexpenditures by 26%; in relation to GNP, tax revenues stagnated at around
11-12% and total revenues at around 14-15%, while total expenditures rosefrom 19% to 27%.
1/ Various drafts of the Fifth Plan up to now have assumed that the public
sector will make up 75% of total investment in the economy over the Plan
period; the present Government, however, has declared its intention to
restrain the growth of public development spending and has opened up
areas which were reserved for the public sector to private investment.
-4-
6. Pakistan's revenue effort has been below the level of otherAsian countries; a survey of 22 Asian countries indicates an average ratioof about 17% for total revenues as a share of GNP, well above that ofPakistan. 1/ Pakistan's performance has been significantly below that ofcountries fike India, Sri Lanka, Malaysia and Thailand (see Table 2).
Table 2: SHARE OF GOVERNMENT REVENUES IN GNP OF SELECTED COUNTRIES, 1971-1976(percent)
Tax Revenues Total Revenues1971 1973 1976 1971 1973 1976
3UULL.~. In L.UJLaLL±V .L Uy scal4 JV VLUjJLUtLLL. LLL LLL= 1JCVC.LUF.JLLLr =LH1WUCSource: 'Amparative Study of Fiscl DeveloM=ent irte"vlpn *br
Countries of Asian Development Bank," ADB Staff Paper No. 9; Gov-ernment Finance Statistics Yearuook, IMF; StafL Estimates.
7. Even though tax revenues kept pace with GDP growtn in currenu pricesduring the seventies--the observed buoyancy has been about 1.04--the underlyingelasticity of the revenue system has been quite low. Consequently, a substan-tial new tax effort has been required each year merely to prevent the ratio oftax revenue to GNP from failing; new taxes contributed nearly half ot the in-crease in revenues in recent years (see Table,3). If these are excluded, theratio of taxes to GNP would have been only about 9% in FY1977, and the elasti-city of tax revenues in respect of GDP no more than 0.85 during the seventies.
1/ According to a recent study by the Asian Development Bank, Pakistanranks 12th out of 22 countries in the Asian region in terms of taxrevenue to GDP ratio, and 13th in terms of total revenue to GDP.
As ^r.nounced in. Budgets 424 412 1,386 617 551 317 1,215Post-Budget Meastires - - - 800 596 368 -Effects of Tax Concessions -29 - -120 -20 -2,171 -25 -130New Taxes 'Net' 395 412 1,266 1,397 -1,024 660 1,085Actual Increase in
Tax Revenues - 476 1,376 2,990 2,351 2,706 2,159
/a Excludes other mesaures which do not add to tax revenues--e.g., tariffs increases of pub-…-terpris…s, *age and price increases which affect expenditures.
Sources: Ministry of Finance, Planning, Development and Provincial Coordination;1-.nual Plans: Staff Estimates.
8. The inelasticity of the tax system has been due to several reasons.A major factor has been the low yield of direct taxes which contributed only17%, the equivalent of 2Z of GDP, to tax revenues in FY1977; the share ofdirect taxes in tax revenues has fallen steadily from over one-fourth inFY1972 to about one-sixth in FY1977, and their elasticity in respect of in-come growth has been only about 0.50. Consequently, the revenue system hasrelied heavily on indirect taxes for the bulk of the revenues; nearly 85%of revenues in FY1976 were from direct taxes (see Table 4).
Table 4: THE STRUCTURE OF GOVERNMENT TAX REVENUES, 1970/71 AND 1976/77(million rupees)
Surcharges onPetroleum,Fertilizerand Gas 126 2.2 1,045 5.9 919 7.9
Total Tax Revenues 5,645 100.0 17,703 100.0 11,658 100.0
/a Excludes Rs 400 million from amnesty on undeclared incomes, wnich isa one time increase.
Source: Ministry of Finance, Planning, Development and ProvincialCoordination.
9. The income tax, which is levied on both personal and corporate in-coes s the major direct tax; the personal inCeta a sfeedfu J L A.M-U~LL~M~ LCL& LCL aDU.LLLCJ.U .LLIW CL
very narrow tax base as major sources of income have been exempt. Incomes.LrLU agiLLULLtur WhicLLJ gtn1eraLte JU3 VI ValUe addUdC in LUe econumy nave beenexempt until-last year; although an agricultural income tax was introducedthis year, it is yet to be implemented. Capitai gains from immovaDie property,again the major source of such gains in an economy where there is limiteddealing in financial assets, as well as incomes from housing, and interestand dividend income from approved investments up to Rs 20,000 are alsoexempt.
i0. Much of even the incomes liable to tax has been exempted from itby a high threshold limit for the personal income tax and generous allowances.The thresnoid iimit, currently Ks 12,000, is too high, given Pakistan's incomestructure, and by the standards of other developing countries in the region.Taxpayers also enjoy a multiplicity of allowances which are again high:(a) personal allowances, currently Rs 5,000 for salaried persons; (b) earnedincome relief, currently 30% of incomes up to a maximum of Rs 7,500 forsalaried persons; (c) family allowances, currently Rs 750 per dependent upto a maximum of Rs 1,500; and (d) an investment allowance, currently 30% ofincome up to a.maximum of Rs 30,000, with respect to approved investments ingovernment securities, life insurance, provident funds, postal savings,debenture/share capital of public companies, etc. In addition, (e) dividendsand interest earnings on such investments are also tax-exempt up to Rs 20,000(see Appendix Table 4).
11. Excessive deductions and exemptions have plagued the tax system formany years: the Taxation Commission accordingly recommended the removal orreduction of many of them in 1972. Some of these recommendations were car-ried out in 1972 when earned income relief, charitable donations and invest-ment allowances were reduced. These efforts, however. have been undone insubsequent years, and the tax base undercut by the Government through suc-cessive increases in the threshold limit and allowable deductions. as itsought to compensate taxpayers for inflation and encourage savings and invest-ment. The threshold limit was doubled between FY1973 and FY1975j the invpst-
ment allowance enhanced by 50% and personal allowances by 67% in FY1977,earned income relief bv 200%. and interpst and dividpnd Pypmnliinng hb 0nn%
in FY1975, while tax holidays on capital gains and housing were introducedin the same evar (see Appendiv Tahl L4)
12. aa rT1, a--hnes hvire han 1little success i-r -4 s and
investment; despite these concessions private savings mobilized throughgoverrment sch ees a .Ad t-he capita 1 m a,rket have nro- rise. i n re tems;
some of them, e.g., the tax holidays on housing, have had little justifi-caton,since in the absence of othler ri.vestme. ---- ortur.i.i-es private~..aL ~ a ~ . L- A J JS LL .LU LAU1L1LLIjjFJUL L.ULIJ..L LE0 PJ I LL
capital may have been attracted into housing even without tax holidays.IThy haVe, mUULOrVtL, sILiIiEaLiLy LeUUCdU irncume tax yielus by enablingincomes as high as Rs 35,000 or more, taking advantage of legitimate deduc-tions, to pay little or no taxes at all; they have also prevented the taxbase from growing with inflation and income growth, and have actuallyreduced the number or existing taxpayers since FY1973. Tnus, aithougnan additional 115,000 taxpayers have been discovered since FY1973 as a
result of the Central Board of Revenue's efforts to identify new taxpayersand reduce tax evasion, the total number of taxpayers has remained around367,000, less than 3% of all households, during the last few years.
13. Excessive exenptions and deductions also characterized the corpora-ration income tax until the early seventies: the more important ones weretax holidays, generous allowances for depreciation and dividend incomes andcharitable donations (20% of income without any ceiling on amount). Theseconcessions were ineffective in promoting industrial dispersal, encouragedthe setting up of uneconomic units and led to considerable tax evasion andloss of revenues; The tax holiday scheme was therefore, abolished in FY1973,and replaced by a tax credit scheme, while charitable donations were reducedto 5% of income subject to a ceiling of Rs 200,000. Unlike the case ofpersonal income taxes, no major concessions have since been granted tocorporate taxpayers apart from an increase in the income tax rebate onexports from 25% to 50% in FY1977.
14. The wealth tax, gifts tax and estate duty are the other directtaxes levied by the central Government. Revenues from these taxes havebeen low for much the same reasons discussed above. As with income taxes,several exemptions have been allowed in arriving at taxable net wealth!agricultural land, a major form of wealth-holding in Pakistan, was exemptfrom the wealth tax until FY1970; although it was brought within the npiruiew
of the wealth tax in that year, only those landowners who paid income tax ontheir non-agricultural incomes were in fart lianlhp trn h tnaed. Even thelatter have been effectively exempt as tools and implements, animals, jeepsused fnr narirultural purnAose stnnAning crnno, farm buildings, and a furtherRs 100,000 were allowed as deductions from taxable wealth. 1/
15. Secondly, the valuation of land for levying all three capitaltaxes--at a flat rate of Rs 10 per produce index unit (PIU)--has been veryconservative. At this rate, even the most productive land is valued at nomore thar. RDs 2nn-onn per acre, resultir.g in __ co.serable undervaluation o'cLuuno~JL J~ ~ a.. ,J-CU L Li&L& ±11 -LUII ±LUC au ± ULI~ VIUL LU! U
property and reduced revenues from all three taxes. The Taxation Commission4 107'7 o . t-uC -L2 - -. n nfl nrr -!._
ir. ±., yproposeduu a doubliIng ' LtLh LraLU t Ib 20 per rPIu LU bring it cioserto market values, but this was not done. In recent years the Government hasalso raised the threshold limit cor th-e wealth tax fromw Rs 200,000 toLOLOt ~LA L.LZLCOI L U .L LULL tUBIL taic WC4.LL L JA LU ab UU UU LU
Rs 300,000 and halved wealth tax rates from 1% to 5% to 1/2% to 2-1/2% (seeAppendix Table 7). *-eanwhile, the size of individual land holdings hasbeen progressively reduced as a result 'f -the Government's land reform policy,andU Lthis CoUbineLd WILL! LOW rates or vauatLion or rana ana otner exemptionshas considerably reduced the revenue potential of these capital taxes.
1/ The other major exemptions are compensation bonds issued under LandReforms, provident funds, pensions, annuities, interest on insurancepolicies, personal and household effects excluding jewelry, trustproperties of a charitable or religious nature, and with effect fromFY1977 investment up to Rs 100,000 in industrial public companies fora period of two years. One house owned by the taxpayer is also exemptsubject to the condition that the threshold limit is reduced byRs 100,000--from Rs 200,000 to Rs 100,000 until FY1977 and fromRs 300,000 to Rs 200,000 from FY1977.
- 8 -
i6. Indirect taxes consist chiefly of excise duties on domesticallynroduiced goods and customs duties on imported goods, while sales taxes and
export duties form a less important source of indirect taxation (see TableA) The buonanrv of maior indirect taxes--excise and imDort duties--has
been only about .8, while revenues from sales taxes and export duties havebeen a; cb 1L nar -rrnAtir
17. Excie duties ae npreentlu lpuipd on ALL manuifarturpd itpms nro-
duced by the large scale sector and on two services (hotels and advertisements).TjDlespi.e th..e large number of ime covered ci duty rceipes incra by
only 16% annually while large scale manufacturing output, in current prices,ir,creasedI by_ 20f%/ --.-ally Aduring the seventies. Even this limit-ed increaseLnc LCa0CU iUy LUV@ MLLIL~"- L -L-A k* O- V -flL~*1O
has been derived from a few items--manufactured tobacco, sugar, vegetable
ghee, natural gas arnd cement; revenues from other items have been very inelas-tic (see Table 5).
Table 5: REVENUES FROM EXCISE DUTIES, 1971/72 /a AND 1976/77'ImlLUL1 rupees)
/a Detailed breakdown for 1970/71 is not available.
Source: Ministry of Finance, Planning, Development and ProvincialCoordination.
18. The low yield of excise duties has been due to several reasons.iFrnong much of the seventies the Government pursued a policy of lowering and
sometimes eliminating indirect taxes in order to stabilize domestic prices to-rAtert cAn-ITnn1- on nrnvi,ip rhpan innuts to agriculture and to encourage
import-competing domestic industries. As import prices rose, due to deval-uation in 1972 and the rise in interuatioal commuoUity prices subsequently,some excise duties were reduced to prevent domestic prices from rising--e.g., cotton yarn ana rabrics, and kerosene--while several others weremaintained for long periods at prevailing levels (see Appendix Table 9). Itwas only during the last two years that some efforts have been made to raiseduty rates. Duty rates on sugar, vegetable ghee, cement and natural gas weresubstantially increased during FY1975 and FY1976, and on manufactured tobaccofrom FY1974 onwards; these tariff changes explain much of the increase inexcise duty receipts noted in Table 5 above.
19. Secondly, excise revenues have been held back by the low growth ofmanufacturing output in recent years due to depressed markets abroad, risingdomestic costs, etc.; no new products have been brought under excise regula-tions during the present decade. Thirdly, most excise duties have been leviedon a specific rather than ad valorem basis and have not responded to changesin prices and value of output. Among the major exciseable'commodities, onlymanufactured tobacco has been subject to ad valorem duties; sugar, cement,vegetable ghee, POL products, cotton yarn, cotton textiles, etc., are stilltaxed on a specific basis.
20. In a number of' commodities where specific duties were levied,revenues have not increased even with output growth. This was because exciseduties were linked in many instances to output "capacity" rather than toactual output. Although output capacity was reassessed from time to time asmodernization, extension or obsolescence altered capacity, production overand above predetermined capacity was exempt from tax. Capacity taxation alsoprevented the extension of excise duties to new product lines which developedwith the diversification of industrial output. By the early seventies, mostof the major industrial products--sugar, cement, vegetable ghee, soda ash,cotton yarn and cotton fabrics--were taxed on a oanacitv basis.
21. The capacity tax was introduced in 1Q66 mainly t-n enrniirage thefuller utilization of existing capacity (at a time when excess capacity wascoommn) and to minimie rncrriuptinn by reoA.cng contacts between taxpayersand excise officials. By the early seventies, however, capacity utilizationimpnrnod (exrnpt in the rasp nf rextiles) and tho main fiication for capa-
city taxation disappeared. The Government has therefore, gradually shiftedback tn ouitniit rantrinn by remnving theo pnin-ty tax nn uvertnhal ghee
FY1972 and cement and soda ash in FY1975, and permitting manufacturers ofcotton yarn arLd textilles. t o -a ___is dty either Ln I---t - -4 co productiA o
capacity or actual produiction as from FY1976. Thus, sugar is the only industrycurrentlIy taxed o. a product-.LL c.apacity Ubai.-
L. LLpUL L UL LCC iivc UC Xa L U UIL iy iCU IIUL UULLL ELUL LCVCLIUC
purposes, but also to limit imports and to protect domestic industries. TheGovernment's concern with stabilizing domestic prices to protect consumptionand to provide cheaper inputs for agriculture and investment prevented importduty receipts as well as sales taxes on imports from rising faster tnan theyactually did. In order to soften the impact of devaluation in 1972, existingrates of import duties and sales taxes on many items were either reduced or
- 10 -
removed. In several instances, the absolute level of post-devaluation importdutl-ie pth fell elo pre-devaluation levels. The effective incidence ofimport duties declined from 40% in FY1971 to 19% in FY1973 (see Table 6),while t-he star.dard rate f sales tax was also lo-were A from 20%w to 10%.
Imports 43.0% 40.2% 25.4% 25.1% 31.9% 33.2% 37.0% Ia
/a Estimated.
Source: Ministry of Finance, Planning, Development and Provincial Coordina-tion; Central Board of Revenue.
23. In the years after FY1973, import duties were again raised, mainlyon a selective basis. But a large number of items--principally food itemsand inputs for agriculture and investment, such as wheat, edible oil, tea,fertilizer, crude POL and pesticides--have been exempted from import dutiesin order to keep down their prices; some other imports like machinery andtractors have been taxed at less than average rates. One-third of importswere exempt from import duty in FY1976 compared with one-fourth in FY1973and only 6% in FY1971. As discussed in pages below. this policy has resultedin a highly differentiated tariff structure and distortions in resource allo-cation. It has also resulted in lowering import duty receipts below what mighthave been collected had the Government been less concerned with keeping downprices of imnorted food and inputs.
24. The sales tax has been riddled by exempntisns which have cnnAid-erably narrowed the tax base. Thus "necessities" and capital goods, bothimbrMrrtot 2nd r1nrnoct-r:2l lv prrilodued afreb ooon r.hilo 1
acOm--o-oorae;oo@t
are taxed at low rates. Products of cottage industry, defined as employingless than 10 people and/or pnnitIa f Rs 10,0e n are also exempt Th. 1i-
of exemptions, moreover, has increased in recent years, partly due to theremoval of the sales tax on cspnrcific itemFs from te to time to msnta indomestic prices. The exemption of cottage industry has also encouraged the
spi tting of businesses into small units inorder to evade taxes. In con-sequence, the tax has essentially become a surcharge on imports, and itselasticity i of growth and diversification of domesti. manufacturingactivity has been low.
25. Export duties were introduced after the devaluation of 1972 fora variety of reasons; to stabilize domestic prices of exportables whichhave a significant impact on the domestic cost of living, to raise governmentrevenues, to continue for certain manufactures the preferential treatment theyenjoyed before the devaluation and so on; 1/ they were also viewed as a devicefor siphoning-off windfall profits accruing to exporters both as a resuit ofthe devaluation and the rise in commodity prices and for taxing agricultureindirectly in the absence of direct taxes on agricultural incomes.
26. After 1972, export duties were levied on a number of products;however, their impact fell mainly on cotton, rice, and hides and skins. 2/Export duties were an important source of revenues until about FY1975 (seeAppendix Table 1); in FY1974 they provided as much as 20% of Governmenttax revenues, and compensated to some extent for the loss of revenues resultingfrom reductions in import, excise and sales taxes after the devaluation.
27. Export duties, however, constituted a potential hindrance to theexpansion of productiort and exports. They depressed producer prices andreduced incentives to farmers at a time when production costs tended torise as a result of the devaluation and the subsequent rise in internationalcommodity prices. Since most exports enjoyed a substantial premium over theofficial exchange rate due to the bonus voucher scheme in pre-devaluationdays, export duties also reduced the benefit of the exchange rate adjustmentfor these exports. 3/ Although high international prices made exportsprofitable for a time, as commodity prices began falling sharply in FY1975,export duties became a serious disincentive to exports. Consequently, mostexport duties were eliminated during FY1975 and FY1976 (see ADDendix Table12); the resulting loss of revenues was a major factor contributing to thelow growth of revenues during the last few years..
1/ Prior to 1972 manufactured exports generallv received a Dremium over theofficial exchange rate through the bonus voucher scheme, see Annual Plan,1973/74, jp 35.
2/ Dtutv rares were differentiated between raw ortton (taxed at 35-407% ad
valorem) and cotton yarn and grey cloth (taxed at 20-25%) in order toencuralao- dnmeoStic' nrAr0Oc 4 nq hb7 malrinq r.aw cotton wir:ilmh1 t1n ArnmDtip
industry below int:ernational prices.
3/ Thus, effective extchange rates, in March-June 1973, were only 8% higherthan their pre-devaluation levels for all exports, 23% higher for pri-mary exports and 3% for manufactured exports.
28. At present, there are export duties on staple cotton, rice, andhid es anA skins, at substantially reAuceA rates. Moreover since the Gov=ernment has a monopoly of rice and cotton exports and sets domestic procure-ment prtces, even these duties have become super.luous a8amethod of raisingrevenues; the surplus of sales revenue over procurement and handling costsaccrues to the Goverr.ment either as traUding profls or expOLrt uULies, ana thelatter is used primarily as a nominal accounting device to estimate likelyadditions to government revenues from rice and raw cotton exports.
Tax Administration
29. The inability of the tax administration to collect taxes due hasreduced the yield of both direct and indirect taxes. Numerous exemptionsand allowances, particularly tax holidays and the exemption of agriculturalincomes, have facilitated the concealment of incomes and made tax adminis-tration more difficult.
30. Tax administration has been deficient in staff, and has sufferedfrom poor morale. The Central Board of Revenue is responsible for collectingover 90% of consolidated government revenues; its staff, however, has notbeen sufficient to perform effectively its various functions, particularly thetimely assessment of tax returns and the investigation and detection of poten-tial taxpayers. Senior supervisory staff as well as facilities for trainingnew staff also have been inadequate.
31. Due to frequent modifications the existing income tax law is com-plicated; it is not easily understood by taxpayers and has given rise tofrequent litigation over its interpretation. Tax assessment procedures arecumbersome. A self-assessment scheme was introduced in 1964 but has beenlittle used. At present, tax liability of each taxpayer is determined bythe Central Board of Revenue on the basis of scrutiny of ind-ividual returnsand business records. Often several hearings are required for this purpose;the Income Tax Act also provided for an assessment to be completed in fouryears. This elaborate procedure has led to several problems. Firstly, muchof the staff time is spent on tax assessment and the effort and mannowerdevoted by the Central Board of Revenue to survey and identification of newtaxnapars has suifferpd. Sernndlv bec2tiAs nf Plabnrate nroediurep and tainff
shortages the number of tax assessments which could not be processed withinthe sam.e year rnos sharnlu in the earl,u gpuenrie; arrear assessments were as
much as 300,000 in FY1972. Thirdly, even where assessments were completedin t hr wa a cosdeal tim la bewe in omegneration (taxreturns are based on the previous year's income) and actual tax collections.i;nally, it has; given rise to freqent .-lit Fain A ndappeals n1 a X vzr> L f^M- -- 6 r - - -'-. -_
tax postponement device taking advantage of the long drawn-out tax appealsprocedures
. Due 'Lo tLhLese reasons, tax evasio ua .aen fiUrl wespread in
Pakistan. High marginal tax rates on both personal and corporate incomesfurther provided nigh returns to tax evasion. Until recently tax rates onpersonal incomes have been steeply progressive, rising up to 70% of incomes
- 13 -
(see Appendix Table 6). This apparent progressivity of the tax system, how-ever, has been misleading as only those sections of the community which areeither not prepared to or not in a position to evade taxes have borne the
brunt of statutory rates.
33. Corporate incomes have been subject to two taxes--a 30% corporationtax and a 30% "super ta.x,t with rebates of the super tax given to differenttypes of businesses at different rates. 1/ While the levy of two taxesunnecessarily complicated the rate structure, high marginal rates encouraged
the splitting of businesses into smaller partnerships to take advantage oflower nersonal taxes. The lower rebate rates to insurance, mining and foodprocessing companies as well as higher tax rates on banks also have little
eronomir juiifiratinn
'A3L. As witfh incnnke taxpsn tax evasion has been a nroblem with indirecttaxes. Excise duties are levied on manufacturers. Earlier the duty wascollected from manufatiirers at the tmne the goods were rele1aed frtm the
factory for sale. This required an army of excise officials as each produc-tion unit had to be su--ervAsed. In view of the large n-ber of products and
production units involved, the tax collection procedure was simplified in1963 by permitting proclucers of some items to pay excise duty on a self-
assessment basis. In order to administer the tax effectively even the pres-ent systCem rrequir=es rgla -audit of productio -- A -1-e -an thescpefo
tax evasion, as well asi corruption, is considerable. Tax evasion is moreallilicult with i mport dluties, but a complicated customs tariff whlci unneces-sarily differentiates between similar products provides considerable latitudeto customs orrilclas Lo ueciue oi uuty rates applicaule LU udLfferet gUuUsand has led to collusion and underpayment of duties; thus the actual incidenceof duty in FYi975 was i2% wnen the weighted average duty on Lthe bass VI cus-
toms tariffs ought to have been close to 55%.
35. Some improvetaents in tax administration have been made in recent
years. An intensive anti-tax evasion drive was launched last year as a re-sult of which 71,000 new taxpayers were discovered. A tax recovery organi-zation was set up in 1968 to expedite recoveries, and its performance has
1/ Thus, until FY1972, a 10% general rebate was given to public companiesand a 15% rebate on distributed dividends in order to encourage thegrowth of public companies and the stock market (see Appendix Table 6).In FY1972, the rebate to public companies was reduced to 5%, but incomes
from foreign sources, insurance and mining and food processing continuedto receive rebates of 15, 12-1/2, and 10% respectively. In order toencourage companies to retain profits and build up reserves, the rebateon distributed dividends was discontinued; instead, undistributed profits,intercorporate dividends received and bonus shares issued by companieswere altogether e:xcempted from the 30% corporation tax. The intercorpo-rate dividends received and bonus shares issued by public companies
were also made eligible for 15% rebate and by private (closely held)companies for a 10% rebate.
- 14 -
improved in recent years. Arrear assessments have been reduced by devotingmore staff to assessment work and curtailing the statutory assessment periodfrom 4 years to 2 years. Collection procedures have been improved by extend-ing the praccice of withholding at source to cover salaries, public sectorpayments to contractors, and private sector imports. Financial allocationsto tax administration have been increased last year and some senior postsupgraded. Finally, maximum tax rates on both personal and corporate incomeshave been reduced to 50% this year to discourage tax evasion.
Government Expenditures
36. While revenues suffered from low buoyancy and elasticity, govern-ment expenditures, both development and non-development, increased rapidly;total government expenditures rose from 19.2% of GDP to 27.0% between FY1971and FY1976. Development expenditures increased particularly rapidly, bynearly 500% in current prices over the same period and their share in totalgovernment expenditures rose from 29% to 42%. AlthouRh non-developmentexpenditures increased less rapidly, their growth considerably exceeded thegrowth of GDP and government revenues and absorbed almost the entire increasein current revenues, leaving little surplus for financing development spending.
Table 7: GOVERNMENT EXPENDITURES, 1970/71-1976/77(million rupees)
Source: Ministry of Finance, Planning, Development and Provincial Coordination
- 17 -
39. As discussed itt pages below, these policies also added to non-development expenditures, e.g., through higher debt service and subsidies(see Table 9). Debt service had already become an important charge oncurrent revenues by the e!arly seventies as Pakistan relied heavily on foreignaid to finance investment, during the sixties; during the Second and ThirdPlans, the resource gap averaged 4% of GDP, and foreign aid financed over afourth of gross domestic investment. The 1972 devaluation further increasedthe rupee cost of this debt by the full extent of the devaluation, i.e., 108%.There was a further substantial increase in foreign and domestic borrowingfrom FY1973 onwards as the Government sought to raise the level of publicinvestment sharply without a corresponding increase in public savings. Thus,while public investment rose from 5.5% of GDP in FY1971 to 11.2% in FY1977,the public seccor resource gap financed from domestic and external borrowingrose from 3.5% of GDP in FY1971 to 10.2% in FY1976 and 9.3% in FY1977 (see
Table 1).
40. Consequently Pakistan's external debt, excluding undisbursed amountsand loans of less than one vear' s maturitv, increased by over 60% between
FY1973 and FY1977, while domestic debt including short-term borrowing from the
State Bank went up almost: as rapidly. The resulting debt service burdenwas moderated to some ext:ent by the debt relief arrangement of FY1973 withrespect to external longer-term debt (see Table 10): nevertheless, the total
debt service has risen steadily as the Government continued to borrow heavilyat home and abroad on increasingly less f-avorable !erms, and amounted to as
much as a fifth of all non-development expenditures during the last two years.
Table 10: EKXT:FNAL AND DOu-nSTIC DEBT, DEBT RELIEF AND DEBT SERVICE
CHARGED TO THE GOVERNMENT BUDGET, 1972/73 - 1976/77(million rupees)
External Debt Debt Service Charged to the Budget
External - Domestic Gross Debt Debt Net Debt External FoodDebt Debt Service Relief Service Debt Credits Domestic Total
/a Excluding undisbursed and loans of less than one year's original maturity.
41. Government policies during the seventies contributed to the growth
of non-development expenditures in several other ways. The Government'sefforts to redress the imabalances associated with the growth strategy of theprevious decade and ensu-re greater equity in the distribution of the benefits
of economic growth led to accelerated development spending on the neglectedsocial sectors to build more schools and hospitals and provide much needed
- 18 -
facilities in the provinces. While these programs were long overdue they
nevertheless created a permanent need for larger current expenditures on
education, health, etc., in order to staff and maintain the newly created
facilities. As a result, current expenditures on the social sectors more
than trebled between FY1981 and FY1977.
42. The Government also tried to protect consumption and real incomes
of low income groups in several ways; as mentioned earlier, reductions in
import, excise and sales taxes and larger allowances and exemptions from
the income taxes reduced tax revenues, while wage increases and direct
subsidies to consumers added to government expenditures. Wage increases
were granted to government employees on several occasions after FY1973 to
compensate them for high rates of inflation which eroded their real incomes,
both absolutely and relative to other income groups, e.g., industrial labor,
during much of the seventies; most of these increases were limited to the
lowest paid employees, and were generally accompanied by tax and rate in-
creases which added substantially to revenues. More recently, in April 1977,
a general pay rise to Dublic sector employees was announced, averaginR 26%
to all employees, and substantially more for the lowest paid, which has added
nearly 8% to non-development expenditures in FY1978.
43. Subsidies have been another maior burden on the budget in recent
years. There are several subsidies--on agricultural inputs, food, fuel,
transport, etc.--which are not readilv anparent as thev are shown under dif-
ferent expenditure heads in the current account; thus, agricultural input
subsidies on fertilizer, pesticides, tuiwells and seeds are shown under
development expenditures, while subsidies on food, transport, etc., areshown under current non-develoemm.ent expenditures (see Tnhlp 11)i
a/ Includes post-budget allocation of Rs 270 million for addition imports.b/ From FY1977 onwards these are netted out agains surcherges levied on refineries and are not
separately shown under subsidies.ct Includes post-budget subsidy of Rs 520 million to textile industry.
V-ource, Ministry of Finance, Pl-nning Dev.lopment and Provincial Coordination
-19 -
44. The rapid grol'th of subsidies nas been largely due to the Govern-ment's efforts to insulate the domestic economy from the effects of the 1972
devaluation and the comnodity inflation which followed. Over two-thirds ofsubsidies shown under non-development expenditures have been on wheat. Until
FY1973 the wheat subsidy was negligible as ration issue prices were maintainedin line with domestic procurement prices and somewhat above average importprices. Import costs more than quadrupled between FY1973 and FY1976 due to the
devaluation and higher international prices; the Government also raised localprocurement prices by 120% to encourage domestic production while handling andincidental charges on both domestic and imported wheat nearly doub,led due to
domestic inflation. But, because of its concern with maintaining real incomes
and consumption of low-income groups, the Government was unwilling to effecttimely and sufficient adjustments to domestic issue prices; even though theissue prices were raised by 50% as the budget came under heavy strain inApril 1975, the overall increase between FY1973 and FY1976 was onl.y 88%. Thus,issue prices were sufficient to cover less than 50% of the cost of importedwheat and 70%-80% of domestic wheat for much of the period (see Table 12).
/a Estimated./b Based on an import price of $125 per ton assumed in 1977/78 budget.
7T7 Federal Government's only. Incidental charges borne by the Provinces
on imported wheat, which averaged Rs 6 per maund irn FY1977, are notincluded because cf unavailability of data for earlier years; the sub-
sidy on imported wheat is understated to this extent.
Source: Ministry of Finance, Planning, Development and Provincial
Coordination; Budget Documents, Staff Estimates.
- 20 -
45. A rapid increase in the utmand LUf rdLtUoI wlteaL also contirbDute
to the growth of the wheat subsidy. Several factors led to this increase.Firstly, although the subsidy program, in principle, was aimed at iow-incomegroups in practice there was no attempt to differentiate it according toincomes. Subsidized wneat was available indiscriminately to all residentsin the localities serviced by ration shops irrespective of their incomelevels; the ration shops were located mainly in urban centers, and in somefood-deficit areas, so that the subsidy mainly benefitted urban dwellers.Secondly, the potential market tor ration wheat expanded steadily, as urbanpopulation grew at close to 6% per annum through the early seventies accordingto census data. Thirdly, the large differentials between the ration-issueprice and the free-market price for wheat which the subsidy created helped todivert demand in urban areas from the free market to the ration shops; thus,there was a huge jump of 85% in the ration offtake during FY1973 and FY1974when significant differentials between free market and ration prices firstemerged (see Table 13). Finally, the Government doubled the ration issue inDecember 1976 and this led to a 54% increase in the ration offtake 1/ duringthe next six months, following a period of three years when the ration issuesremained more or less stable.
46. Domestic procurement, however, did not keep pace with this rapidincrease in ration demand. While the free movement of wheat from surplus todeficit areas in response to market prices has been permitted from time totime, market prices remained substantially above procurement prices even thouRhthe latter were raised on three occasions since FY1973 (see Table 13). Thus,much of the ration demand in recent years has been met through expensiveimports, except in FY1977 when an exceptionally good harvest enabled a highlevel of procurement and a substantial reduction in wheat imports.
47. Apart from wheat there have been several other subsidies which haveadded to current expenditures. The subsidy on vegetable ghee was eliminatedhv raisinog issup nrices adenuatelv in April 1975 Siuhsidies on kerosene anddomestic air fares on certain routes, however, still remain; from FY1976 onwardsthey are not shnwn iindr dirpet expendituirPs hut, thp rpfinpripe whirh supplykerosene to domestic consumers and aviation fuel to Pakistan InternationalAirl in.es (PTA) for Aemeatic opeatinsa bealonw Cnot are nllowed to Aadeidt
these losses from the surcharges they pay to the Government, thereby reducingreve itues .
l/ The increase for the full year FYi977 was 28zo.
- 21 -
Table 13: RATION ISSUE, FREE MARKET AND PROCUREMENT PRICESAND RATION OFFTAKE, LOCAL PROCUREMENT AND IMPORTS
, A 1ctuai -ports Awe4e different to t-he ext-n-t f releases Frnn,/AAtinn
to stocks.
Source: Ministry of Finance, Planning, Development and ProvincialLooULUination; oLuLI ge:tL DoumenitsL StLaff o.LLMates.
48. Muchn of the inLCrease ir.n oLnUlevelo-eLtL CexpeCnditure, hLL0wevCer,
been clearly due to defense and internal security. The military involvement
in former East Pakistani and the war witn inaia rncreaseu defense speadinlg
sharply from 5.6% of GDP in FY1970 to nearly 7.0% in FY1972, and was the main- i i~~~~~~~~ a~~~~~~ - 4reason for tne increase in n01-ueve`upmetiL spetLutLg uuI urg LLitL peC uVu. tiLnce
then defense expenditures have been cut back slightly, to about 5.6% of GDP inFY1977; 1/ in the meantime, expenditures on- police and border forces have been
substantially increased. As a result, expenditures on defense and internalsecurity taken together increased somewhat faster than GDP in current market
prices, pre-empting nearly 7% of GDP annually and over 40% of the increase in
current revenues since FY1971.
1/ Estimates of defense spending are subject to considerable reporting lags.Thus, final accounts of defense spending for FY1975 showed a 10% increase
over revised estimates for that year and a 24% increase over original bud-get estimates; for FY1976, final accounts are 8% higher than the revised
estimates and 15% higher than original budget estimates; for FY1977,
revised estimates (Rs 8,181 million) are about the same as original budget
estimates (Rs 8,103 million), while final accounts are not yet available.
- 22 -
49. Defense and internal security, interest payments, subsidies and
education and health expenditures have accounted for nearly 75% of non-
development expenditures. As a result, the Government has been forced to
curtail rigorously other expenditures, particularly on general administration.
This has proved to be difficult as periodic wage increases as well as the
expansion of the role of the public sector have created pressures for enhanc-
ing financial allocations for administration. Inevitably these enforced
economies have interfered with efficiency through inadequate provision for
current exnenditures in some key areas--e.g., tax administration, export
promotion, statistics, etc.
Provincial Resource Problem
50. The provincial governments' resource position has been very weak;
provincial revenues have been sufficient t_o finance less than 60% of their
current non-development expenditures since FY71. As a result, transfers
of LeUerally collected Laxes lave been required to cover their revenue
deficits, 1/ leaving little or no surplus for financing development spending
(see Table 14) IThe cer.trali governmrent Lhas therfr a ofnneams
all the development spending of the provinces.
Table 14: PROVINCIAL GOVERNMENT CURRENT REVENUESA ffl D flI fthIT flN MM rED TTUV1M- 1i, INUr-Lfl2 -D"Vz1i.v ri~IrA i~ I r £Alr E.i'4LT. U aj;. SJ
Share of FederalTaxes 45.2 39.9 37.2 31.4 36.9 47.4 50.4
Source: Ministry of Finance, Planning, Development and ProvincialCoordination; Budget Documents. Staff Estimates.
1/ Tn nddition, arants and special allocations have been made to cover revenue
deficits of NWFP and Baluchistan.
- 23 -
51. The provincial budgetary situation mirrors much the same factorswhich have brought about the deterioration in the federal budget--the rapidgrowth of expenditures against a background of inadequate revenues. When thefour provincial govermnents were set up in July 1970 a host of functions ofmainly local interest were assigned to them--education, health, maintenanceof internal security, irrigation and road systems, administration of statetrading schemes, etc. Given the Government's growing concern with socialdevelopment these expenditures increased rapidly. Thus, the implementation ofthe new education and health programs fell mainly on the provinces which alsohad to bear about a third of the costs of maintaining internal security andfood subsidies; nearly two-thirds of the increase in provincial expenditureshave been due to these (see Table 15). The growth of provincial expenditureswould have been even greater had not the central government provided debtrelief, and occasionally absorbed the costs of wage and pension increases.
Table 15: PROVINCIAL GOVERNMENTS' CURRENT NON-DEVELOPMENTEXPENDITURES, 1970/71 AND 1976/77
1,212 73.7 4,201 76.8 2,989 78.1Current Non-Dlowa ent
Expenditures 1,644 100.0 5,470 100.0 3,826 100.0
Source: MinLstry of Fianc, PLlaning, Development and ProvincialCoordination.
52. Provincial tax revenues, however, have been low; they constitutedonly about 30% of current expenditures in FY1977. This mainly reflects thenarrow tax base and the lack of incentives for provincial taxation. Underthe 1772 Constitution, the major sources of tax revenues nave been pre-emptedby the Federal Government; thus export and import duties, sales taxes, exciseduties ana direct taxes on income (otner tnan agriculturai incomes) and weaitnhave been reserved for the center. The provincial taxes consist mainly ofrelatively minor indirect levies e.g., provincial excises, stamp duties,entertainment taxes, etc. (see Appendix Table 3). The provinces have had thepower to tax agricultural incomes and urban and rural property which arepotentially important sources of revenues, but which they have not effectivelyused up to now.
- 24 -
53. Because of their limited tax base the Constitution provides for thesharing of some federally collected taxes with the provinces; at present 80%of the net proceeds, after deducting the cost of collection from grossreceipts, from the sales tax, income tax, and the export duty on raw cottonare distributed among the provinces on the basis of their population. Althoughthis arrangement compensates the provinces for their narrow tax base and pro-vides them with much of their revenues, it has created a permanent dependenceon the Federal Government for resources and discourages the provinces frommaking serious efforts to raise additional tax revenues. Thus, areas withpotentially high revenue yields, e.g., direct taxes on agriculture, urbanproperty and water rates. remain either untapped or lightly taxed.
54. The failure to tax the azricultural sector has also been due toother reasons. The difficulties of implementing an agricultural income taxwhen ntumerous small farmers keen no farm records and the scone for tax eva-sion and under-declaration of incomes is high have been one reason. A moreimnortant reacon has been the lark of nolitiral will to do it. I,n adHition-inter-provincial consultation and coordination about the nature, extent andtfmlng of any levies on noriultuiire haue boon inrlkin Arrordingly, theprovinces have been unwilling to impose such levies independently, withoutthe others folloaing suit, .ia consensus for collective action ha. beenhard to find. 1/
55. The low yield of the land tax, the major provincial direct tax toAale, "-as also b-een Aue to the legal ar.d admir.istrativre complex-tes of
tSOL A,a as % UCL UfA t ..t, Uv a -j t IZ ~. LLa. Live L.uF~aA '3t
the tax. The tax was levied on the basis of net returns from land, while_ _ _ _ __~~~' _ : _ - __. _ 1 __ :1,__ _ _- - - 1) r , _1 V_ _ _,_nYt____,:__,L_. __tnie maximum tax laiU iiLy waS 1ILLULLCU uy IaW LU LJ.. InI pLaLLct Ltle tax
charged was lower, and varied according to the type of irrigation, soil andthe crops grown; it could also Ue reduced or renMitteed due to crop failure,flood damage, etc., at the discretion of revenue collecting officials. Thetax, therefore, was flexible downwards, but not upwards. Moreover, accord-ing to land tax laws, net returns could be reassessed only every 25 years,while the tax could be increased by no more than 25% of the amount previouslyassessed. The Sind Government in FY1973 introduced a modified system underwhich the tax rate was fixed on the basis of estimated productivity of theland (measured by Produce Index Units--PIUs--per acre) and reduced thestatutory period of assessment to not less than five years; but the restrainton increasing the tax demand by more than 25% over the previous amount hasbeen retained.
56. Water rates are currently levied in Punjab on the basis of areacropped, crops grown, mode of irrigation, etc. In Sind they are levied onthe same basis as the land tax, i.e., combined with the land tax and relatedto the assessed productivity of the land. They have suffered from much the
1/ In order to improve revenues and progressivity of rate structure thePuniab Government announced a revision of water rates in June 1975;however, it had to be withdrawn because of public protests and theunwillingness of other provinces to make similar increases.
- 25 -
same limitations as the land tax, by the lack of regular reassessment of pro-ductivity and rate adjustments; the general rates of water charges in non-SCARP areas were not raised for several years until January 1978, when a 25%increase was announced. Thus, both water rates and the land tax--the prin-cipal direct provincial taxes--have been extremely inelastic in respect ofinflation and agricultural income growth.
Public Enterprises
57. Another source of weakness in regard to public sector resourcemobilization has been the poor financial Derformance of nublic enternrisesand utilities. These enterprises - government commercial departments (e.g.,Telephone and Tplegrapnh'J: semi-autononmotu bhndiep (eg, WAPDA, Rnilwnus);
and public sector industrial corporations - have on average spent nearlytwn-fifths of the QovPrnmrentr' dvpulnnment hbuedapt sinra WY 971. Thair owncontributions towards financing these investments out of internally gen-erated funds, hweauar, have beon vrremaley low - on avernaa only nabot- 7°
(see Table 16).
58. The tariff structures of these enterprises have been generallyLtfoo low A tJ o provide an adequate return on Ctheir asseLts. Rates Ut return o
assets, valued at historical costs, have been only 4.0% for WAPDA, 2.1% forRailwys, .0n fo FITA nd 5.9 'or public sector ir.dustrial ------- on iRaatwayso WJor tJ 1LL an,'s ..J f0 ttpU.LOLU LIUL G U1LLUL L
FY1976. While several, rate increases have been made in recent years theGUovernmer,t, wilIc' cIrlLtLrols pUublic eriterprite LaLLLis, ttsb ueen cautious in
raising them adequately mainly because of their impact on domestic prices.Iile bUverrLLentL nas altiU conslistentily proviueu loW rates, sometimes below cost,for particular consumers--e.g., power rates to domestic consumers and tube-wells, passenger trainl fares to third class passengers and domestic airfares--which have kept: down the average level of tariffs, and led to crosssubsidies and distortions.
59. Public enterprise revenues have also been kept down by low levels ofefficiency which have taken several forms. In WAPDA, over 37% of the powergenerated is lost, partly due to poor transmission and distribution facilitiesand partly to theft: it is estimated that only a little more than one-eighthof the power consumed by tubewelis is actually paid tor. In Railways, althoughthe bulk of revenues is generated by freight traffic, much line capacity untilrecently was taken up by passenger traffic; the volume of freight trafficcarried by the Railways as well as its share of total freight traffic carriedby road and rail declined due to this reason, even though the Railways are themost economical means of long distance bulk transport.
60. These ineff-iciencies have also led to increases in operatings costs.In Railways, for instance, these operational problems contributed significantlyto a rise in wagon and engine turnaround times and to consequent increases inoperating costs and outlays on additional motive power and rolling stock. Inpower, high power losses have had to be offset by additional investment in gene-ration capacity in order to meet consumer demand. Many public enterprises alsocarry surplus labor wlhich is not warranted by the level of their operations andequipment. In Telephone and Telegraph and Railways, programs have been insti-tuted recently to reduce such surplus labor over a period of several years.
-2=
Table 16: DEVELOPMENT EXPENDITURES AND SELF-FINANCING OF PUBLICENTERPRISES, 1i970/1 - 1976/77
/a Additional expenditures not included in line 1. financed bv domestic andforeign borrowing.
Source: Ministry of Finance, Planning, Development and Provincial Coordi-nation-
61. Another common weakness has laln been nnnr finanrial management.In WAPDA, for example, financial organization has been inadequate. Sufficientattention has not been given to financial planning, cost controls and economicoperation of projects. Billing and collections have been weak in several
agenci;this has been a problem for instance, wituh mu--n;pal irrigation and
sewerage authorities, some of which are heavily subsidized, and also with the'Le 'lephIone andl Telegraph Department..
62. VLrtuadlly all pULic enterprises hIave suLLfLrU LLVro prL aoULILn.Lg
practices. Assets have been valued at historical costs and in many instanceshave little relation to current markeet values or replacement costs. IThe
problem of asset valuation of these enterprises has been complicated by thedevaluation of 1972; many enterprises still carry assets acquired prior to1972 at their original rupee cost calculated at the pre-depreciation exchangerate. Consequently, the asset base, in domestic currency, is substantiailyundervalued; thus the rates of return calculated on a more realistic asset
- 27 -
base would be even lower than the present low rates. Moreover, since depre-
ciation charges have been calculated on assets based on historical costs they
are insufficient to provide for replacement of investment and this has led to
the consumption of capital.
III. Prospects and I3sues
63. Given the present low level of public sector savings and future
financing needs an important issue is the extent to which resource mobiliza-
tion has to be improved over the next few years. The Government's investment
plans for the public iand private) sector as well as the overall macro-
economic framework for the Fifth Plan period were still to be worked out at
the timp nf writing thiR renort, and consequently it has not been possibleto outline the precise magnitude of the public savings effort that may be
needed. However, some very rough estima-tes nf nblic sector financing needsare made for illustrative purposes in table 17 below, on the basis of assump-
tions regardir.g t1he glrowth of GDP, i.n.vtrestment levels, and their distributionbetween public and private sectors, availability of external resources,
extent of domestic b1ank borrowing, etc. While these eastimates are in no waU
indicative of the targets in, or intended as a commentary on, the Government'sforthcomming F fh lan, th1ey nevertheless highlight the problems- and issuesJ. L. LLtUi i r .LA. Lii I £. a L, .nny nn L .nn ~ ii
5f..
5i .i
which are likely to persist over the next few years in moblizing domestic
resources to finance public investmLntL.
It. Th,e Udeaile ass-mpi L LunlU yinutese proJLections are given in
Appendix Table 14; br:iefly, however, it is assumed that GDP grows by 5.4% per
annum from FY1979Lto FIO19083, the ratio Of iLnvestment to GPJJre minsa abl oul
18.5% through FY1979 rdith much of the incremental investment taking place in
the private sector, external financing in real Lerms remains at current
(FY1978) levels through FY1979, and domestic borrowing from banks for budget-
ary support is kept to 1% of GDP through FY1983. Tnree different scenarios
are provided for FY1983; in alternative I investment remains at 18.5% of GDP
but real external inflows decline substantially reflecting an improved current
account deficit; alternative II retains the assumption of reduced externalcapital inflows, but investment is reduced to 17.5% ot GDP, with a correspond-ing reduction of public investment; alternative III combines this lower
investment rate with the assumption that the current account deficit, in real
terms, could be maintained at current (FY1978) levels.
65. These tentative projections bring out clearly several important
issues. Firstly, a substantial improvement in public savings will be required
over the next few years even if real external inflows continue at present
levels; public savings will have to rise to over 5% of GDP by FY1983 under
Scenario II (total investment reduced to 17.5% of GDP and ADP expenditures to
8.8%, with lower real external inflows) and to 6% under Scenario I (investment
at present levels withl lower real external inflows); this increase, moreover,
is without counting the needs of public sector enterprises for financing in-
vestments outside the Government's development budget, which are now funded
almost entirely from external and domestic borrowing.
Table 17: INVESTMENT FINANCING, 1976/77-1982/83
(In 1976/77 million rupees)
1 Q82/83
1976/77 1977 /78 15178/79 Alternative I Alternative II Alternative Ifl
GDP at Market Prices 145,623 155,250 166,100 205,800 205,800 205,800
a/ FY1978 budget estimates include a further $300 million for financing ADP expenditures from a Eurodollar loan.b/ Including private savings directly mobilized by the Government, e.g. through postal savings.
Source: Staff Estimates
- 29 -
66. Secondly, whether or not external resources continue to be avail-able at current levels, the marginal domestic savings effort that will berequired will be high; mnarginal savings ratio is over 16% under ScenarioIII and nearly 29% under Scenario I. While the task of achieving these mar-ginal savings ratios wiLl be eased if output were to grow at over 5.4% annual-ly, it nevertheless, highlights the need for a much better public savingsperformance than at present.
67. Thirdly, even if private investment rise rapidly, potential privatesavings will exceed likely private investment; the rapid growth of workers'remittances will accentuate this development. To ensure that these privatesavings will in fact take place, and to attract them into the public sectorcalls for more effective policies and measures than at present if theyare to be channelled so as to finance the larger investment program whichthe Government contemplates.
Conclusions
68. An improvement in public savings to 5%-6% of GDP by FY1983 from thepresent levels of around 92 is a fnrmidanbl challenge; ton nchinee it, action
is required on several fronts: (a) to raise revenues through additionaltaxation and/or morn affricint tax collection and administration; (b) resranhnnon-development expenditures; and (c) increase resource generation by publicenterpriss tbhrn.gh higher tariffs and operational improvements. In each ofthese areas there are specific issues which require the Government's immediateattention.6o. Fir sItI mobliz4n additional resources wnil ranter wll-
ingness by the government to impose restraints on personal consumption. Whileth.e governrent 'as taken ur.popular measures in difficult ci'rc-umstarices toLIL1 5 YC L .I sIL 'a L.NL UtjIJJLL -cou b i U L L .LLCU L CL ILLC5 t
mobilize resources in recent years, this task will be more difficult if out-put and incUmeS grow bignificantly more slowly tnan tne Government nasassumed in the various drafts of its Fifth Plan. Since population may growat over 3i. annually, this will leave little room for improving per capitadisposable incomes and consumption. Thus, in- order to mobilize more domesticresources WL-ilCe impuoving tble livin1g sLandUarUS O the poorer sections or tnecommunity, cuts may be required in consumption of those groups with above-average incomes; this will also help to improve tne distribution of incomes.
(U. Secondly, in order to differentiate between richer and poorerincome groups while augnenting revenues greater reliance has to be placedon direct taxes; from an equity viewpoint the latter generally are superiorto indirect taxes since they fall on clearly identifiable income groups.This will mean that the present policy of undercutting the direct tax basewill have to be changed; existing allowances and deductions from income,wealth and property taxes, should at least be maintained at present levels,if not reduced, so that the tax base and revenues can grow with the recentincreases in wages, and future income growth and inflation.
- 30 -
71. More effective taxation of agriculture incomes is also called forto attain these objectives. There are several related aspects of this issuewhich are discussed under subsidies in pages below. Until recently agriculturewas taxed mainly through export duties, while farmers also paid a land tax andwater rates. With the removal or reduction of export duties due to fallingworld prices during the last two years and with the deferment until next yearof the recently introduced agricultural income tax there is now very littletaxation of agriculture. 1/ Both to raise revenues and to ensure greaterequity in taxing agricultural incomes, the income tax on agriculture shouldbe implemented efficiently and quickly. Water rates also will have to beraised substantially, not only to cover operations and maintenance costs butalso to recover at least a part of the capital costs of providing irrigationwater.
72. To successfully implement the agricultural income tax, severalsteps remain to be taken. The administrative arrangements for levying thetax including the valuation of produce index units (PIUs), should be finalizedquickly; the latter is particularly important since it Drovides the onlv prac-tical basis for levying the tax given the difficulties of ascertaining actualincomes, both because of the absence of detailed farm records and the unwil-lingness of farmers to submit to scrutiny and investigation by the tax author-ities. While a low value for PIUs may be set initiallv to encourage theacceptance of the tax, substantial increases in revenue will not be forth-coming unless PIUs are reassessed to adenuately reflect the current produc-tivity of the land, and net income per PIU is realistically valued to reflectcurrent incomes.
73= A related i i8 i-he threshold limits and exemptions for the agri-cultural income tax (and the future of the land tax). The tax as now envisagedis to be levied on farms of over 25 acres of irrigated, and 50 acres of unir-rigated land. This limit, however, may be too high. On the basis of currentir.put and output pr4ces, avgerage yields an' cropping intensities, the netreturns for a 25 acre irrigated farm from wheat and basmati rice are roughlycomparable to, and from coarse rice, cottorn and sugarca,.e, exceed the presentexemption limit of Rs 12,000 for the income tax on non-agricultural incomes. 2/fL course, gLven the Large variations in water availaDility, yields and crop-
ping intensities which exist in Pakistan, there are 25 acre farms which earnlower net returns t'nan these, but there are also many smaller farms whichearn substantially more. Even as currently envisaged, however, the agricul-tural income tax will exclude over 60% of farm area and over 90% of farms;
1/ In January 1977 the Government abolished the land tax and replaced itwith an income tax on agriculture. The latter, however, could not beimplemented in FY1978 due to administrative problems, and the Govern-ment reintroduced the land tax, presumably on a temporary basis, inJanuary 1978.
2/ For net returns from different crops, see Chapter III, Table III.4"Pakistan: Development Issues and Policies", Volume I, main report.
- 31 -
the case Lor reCduciLng tLh e proposedU thres LreshoLUL M.Lit andC UctionL.L,LLO oI aLLL.e
natively continuing the land tax. for farms of somewhat smaller size (e.g.12-1/2 to 25 acres) therefore is worth serious consideration.
74. Tnere is also a need for reassessment or the present structure ofindirect taxes, for revenue as well as other reasons. Apart from its inelas-ticity the tax system contains many elements of inequity. As mentioned earlierthe burden of generating tax revenues has fallen mainly on indirect taxes whichare much less progressive than direct taxes, as they cannot easily differentiateamong taxpayers according to their capacity to pay. 1/ No studies of theincidence of indirect taxes in Pakistan are available. Staff estimates basedon Household Expenditure Survey data, however, suggest that the structure ofexcise duties 2/ is not markedly progressive; the natural regressivity of theexcise tax tends to be offset to some extent by the imposition of higher taxeson better quality goods which are consumed in larger amounts by upper incomegroups--e.g., on tea, cloth, yarn and cigarettes (see Table 18 below). But formost income groups, excise taxes have been fairly proportional with some slightoverall progression at the upper end; the income tax adds some further progres-sion, but since so few people have been required to pay income taxes theoverall progressivity and equity of the tax system have been low.
Table 18: INCIDENCE OF EXCISE DUTIES(percent of income)
1/ Although indirect taxes can be made progressive by differentiallytaxing items LLI i-M-SLwhichL are rua I... cons-4d b
requires that a higher proportion of incomes/expenditures of suchgroups, and not merely a higher amoun,t, is e.xtracted as taxrevenue.
2/ It is difficult to gauge the incidence of import duties as a detailedbreakdown ot expenditures on imports is not available.
- 32 -
75. The tax system has been one of the several elements of governmentpolicy designed to influence resource allocation; although its impact cannotbe readily isolated from that of other policies, it has contributed to theemergence of several distortions in prices and resource allocation. Firstly,the government has continued to charge low rates of import duty on capitalgoods and low sales and excise taxes on many domestically produced goods, and,at the same time to raise revenues through steep increases in duties onimports other than capital goods, food and agricultural inputs. This hastended to raise the levels of protection to import-competing domestic industryand encouraged the growth of some inefficient industries, although protectionto industry probably still remains below pre-devaluation levels. Secondly,following the devaluation of 1972, the Government also levied export dutieson a number of products, which together with the nationalization of exporttrade in rice and cotton and government procurement policies, depresseddomestic prices for agriculture and helped manufacturing by providing cheapinputs to industry and cheap food for urban population. With the reductionof export duties and increases in procurement prices announced during thelast two years to orovide incentives to agriculture- domestic nricen fnragriculture are now much closer to world prices than before; but, termsof trade have generallv remained unfavorable t-o agri{u1ture vi --a-vis manu-facturing during the late sixties and the seventies.
76. To what extent low domestic prices for agriculture in relation townrld prices And domestir manufa turre acted as a disincentive to agricul-tural production is difficult to determine. The statistical relationshipsbetween relative prices for agriculture a.nd acreage under cultivation areweak and neither confirm nor refute the proposition that low relative pricesfor agricu1llture afece acragean production. The discrimination again.stexports through export duties and consequently, low effective exchange rates,h .owvr, pr .. @ V4 |_Ae grae ; - - - - 4-_ ~_ U- .. AF _ v..Cr _ -flttFW;VCt X M-L ViV *'su . ;L
5L CULC& ,k,L.t_lL *tVC LU tL_W FJLUU.A L- Ul VJl MA. *UFJJL L OUULOL. LUL.C
(e.g., sugar), than for export production (cotton, rice). From an economicstandpoint this h1as resuLteU in a misallUaLLUL of resources bUy e,couragLingshifting of land from crops where Pakistan seems to have a greater compara-tive advanrtage to crops she is less efficient in producing.
77. A further consequence of tax and ohner policies pursuea auring tnesixties and the seventies has been to reduce the market price of capitalsignificantly-below its opportunity cost. Tnis was principally due to theGovernment's policy of permitting imports of capital goods at low exchangerates until 1972, and providing subsidized credit for investment; however,tax policies--e.g., lower import duties on capital goods, accelerated depre-ciation allowances, and tax holidays to industry, etc.--also contributed tothis effect. At the same time, Government's wage policies also pushed upmoney and real wages, particularly after 1968, so that relative factor pricesbetween capital and labor have been significantly distorted, making scarceimported capital relatively more attractive, and the more abundant factor--labor--relatively less attractive than they would otherwise have been. Thishas encouraged relatively more capital intensive technology and reduced employ-ment growth below what might have been achieved without such distortions.Since the tax benefits, cheaper credit and import privileges which lowered
- 33 -
the price of capital have been available mainly to large scale industry, ithas encouraged the growth of large scale units vis-a-vis small scale unitswhich are much less capital intensive and provide greater employment oppor-tunities.
78. Higher import duties on commodities which are currently exempt ortaxed at low rates--e.g., capital goods--will help to reduce these distortionsat the same time as they increase revenues. Excise duties can also be mademore progressive by selectively increasing duty rates on items which areconsumed by upper income groups. However, since these items have a narrowmarket they alone will not raise sufficient revenues; for purely revenuereasons it may be necessary to tax some of the items of popular consumption,which are now tax exempt, at low rates, even though they may affect the con-sumption of low income groups. The revenue potential of the sales tax canalso be increased by reducing the numerous exemptions and making it a broad-based tax at the wholesale stage. 1/ While this may require adjustmentsin exciRe duties- or vice versa to Drevent overlaDpine taxes. the obiective
should be to extend sales/excise taxes to a much greater proportion of thevalue of domestic transactions than at nresent=
79. Tax ndministration has been imnroued durina the last 7-3 years by
reorganizing the Central Board of Revenue and by deploying existing staffmore rshlo rho 1 -mFa en -h; nrnta hnuo not b0 on reahed
tax administration needs to be considerably strengthened to improve revenuesfrom ex4stOing taxes and psarticularly to implement effectively incomeon agriculture. To be more specific, larger financial allocations are re-quired to expand thLe staff and 4to .mpro 4v - nq.-14+ hroghs
training and better supervision of field staff. Simplifying tax codes,par t icLuLarL y thLLe cus toms tLar ifL , and Ltax aessment r.dL appeals pr ocF ureare some of the other more immediate requirements.
80. In regard to current expenditures, the overall scope for reducingdebt servicin'g, education and-health, and public administration expendituresappears to be limited; while economies should be imposed wherever possible,these are likely to be largely or wnolly offset by necessary increases inexpenditure on other items in these categories, particularly on the socialsectors. Evidently, it may not be possible to prune admi.unistration expendi-tures further without severely impeding efficiency; indeed, -there is evidencethat this has already occurred. In several government departments, posts whichfall vacant have remained unfilled (e.g., in the Statistical Division 30% ofposts are vacant) and essential equipment is not available. Similarly, keyinstitutions like the Central Board of Revenue, Export Promotion Board, etc.have been allocated insufficient funds even though additional expenditures onstrengthening and improving these organizations can yield substantial benefits.
1/ A turnover tax or a value-added tax is difficult to implement at theretail stage in a country like Pakistan where retail shops are smalland dispersed, and where standards of maintaining business records aswell as tax administration leave much to be desired.
- 34 -
81. As mentioned earlier, spending on defense and internal securitys.il accoun's for nearly 50YO currer,t non-Aevelop-ent expenditures, and Ait1L.LL IL OLU L.L LJ. Lc L Ly JUM L ~.ft L.L LLLLcC.FSLL~O*L~
is difficult to envisage how the latter can be reduced significantly whileUefense speniuung continues to take sucLLhI a large slice of the uUdget.
82. Similarly, subsidies will continue to be a drain on the budgetunless efforts are made to reduce them. Even if wheat imports are eliminatedaltogether the wheat subsidy may be as much as Rs 1.4 billion (in FY1978prices) by FY1983, assuming that ration demand will rise with urban popula-tion and that the differentials between the issue price and the cost ofprocuring and distributing wheat are maintained at present levels. Directinput subsidies to agriculture are even now close to a billion rupees (seeTable 11). Farmers also benefit from indirect subsidies through low waterand power rates, while output prices have been substantially enhanced andexport duties reduced in recent years.
83. There are many other subsidies which benefit different groups with-out regard to need or effect. The railway tariffs do not cover costs. Therates for piped water and irrigation water are so low that they encouragewaste and do not even cover operating costs. Electricity rates have to benearly doubled to earn back a small part of investment cost by the early1980s. City bus fares are insufficient to keep buses on the road. Naturalgas tariffs ar-e very low compared to alternative energy sources. Many publiccompanies continue to charge inadequate prices by deferring depreciation andconsuming capital.
84. Clearly, some segments of the population are so poor that incomeearned elsewhere has to be transferred to them and this may have to be donethrough subsidies. However, subsidies frequently lead to waste and misallo-cation of resources; they should, therefore, be limited and properly targetedto the groups that need relief. As there are so many subsidies it should bepossible to improve the financial situation of the public sector noticeablyby gradually eliminating the ones that are politically least sensitive andtake them away from groups of producers and consumers who do not need them.
85. Public enterprises can make a significant contribution towardsgPnerating addiionnal resonro-s, As mentioned elsewhere; they suffer from
several weaknesses--low tariffs, weak financial management, low productivityand efficien.cy, innadeuateo acnrhintinag and depreriatinn nrnrtires. etc.--which have to be corrected to improve their financial performance. Ofpartieular r. _ nAnc, hnwev,ar is h e norte nmanr e ; 1 1 nonaa tn noirm4-
t. LLaLflL u| L tY&L W~. L wa*L V~ *_J - G …^r-__
tariff adjustments and its insistence on improved performance so that theseises can fance a substantial ro- -tor. nf tfrhoir nw.n invmoetment
spending and reduce their dependence on the government budget. Althoughrates L-lave bLJ-ren LinLCfrlbseu Lrou-L timeC to lime,~ *LLLL- L WO-rats hve ee ircresedfrm tme o tme further substantial adjustme-tsare required to achieve the latter goal.
86. The resource situation of municipal bodies continues to be weak;development expenditures financed by municipal and local bodies from oVwn.resources have been equivalent to about 1% of the ADP. Generally, municipal
- 35 -
revenues have been insufficient to fund even their essential developmentactivities. Much of their revenues (over 60%) is derived from octroi taxeson the movement of goods across municipal frontiers. Although municipalauthorities have the power to tax immovable property (which has grownrapidly in value with rapid urbanization, high rates of inflation and theboom in housing construiction in recent years) they have done little to tapthis major source of revenue. Similarly, services currently provided bymunicipalities such as water supply and sanitation are not adequately chargedto consumers, reducing funds available for the maintenance and efficientoperation of these facilities and for their expansion. Consequently, urgentlyneeded programs to solve the problems of growing urban spread, e.g., improvedwater supply, sanitation, drainage, housing and transportation, have beenseverely constrained by the lack of local funds for such programs. It isnecessary for municipal. authorities to assume greater responsibility andmobilize additional resources to provide such amenities within their ownjurisdictions, both to increase self-reliance as well as to reduce the drainon the government budget.
87. Finally, a matter of considerable relevance to the resource mobili-zation problem is the size and content of the public investment program. Giventhp limits todonmestir and external borrowing- and the social and noliticalconstraints on increasi'ng taxes and rates and reducing defense expendituresanA @ci,,iA@ th0rp is: An uirgpnt n ttn Pnairp that thp 1PVP1 of investment
is geared to available resources; to the extent it exceeds available resources,the AAtna1 reouirce mohblization effnrt thAt will have to hp mAdP will
be larger. It is. also necessary to re-examine the composition of the invest-ment program giving pr,ority to quick-yielding investments and tn in.vaetments
to support production growth, e.g., in agriculture, so that a faster increasein output will b .e generated and thereby ease the resource mobiliz,ation. problem.
IV. STATISTICAL APPENDIX
Table 1: Consolidated Federal and Provincial Government Tax Revenues,
1970/71-1977/78
Table 2: Composition of Federal Government Tax Revenues,
1970/71-1977/78
Table 3: Composition of Provincial Governments' Tax Revenues,
1970/71-1977/78
Table 4: Deductions from Personal Income Tax--Summary, 1970/71-1976/77
Table 5: Rates of Tax on Personal Incomes, 1970/71-1976/77
Table 6: Tax Rates on Corporate Profits, 1970/71-1975/76
Table 7: Rates of Wealth Tax, 1972/73-1976/77
Table 8: Excise Duty Receipts, 1971/72-1975/76
Table 9: Excise Duty Rates, 1970/71-1975/76
Table 10: Revenue Receipts from Import Duties, 1972/73-1976/77
Tahle 11: Revenue Receipts from Export Duties, 1972/73-1976/77
Tahle 12: Exnort Duties Since Devaluation. 1972-1976
Table 13: TInidpnrp nf Excise Duties
Table 14: Assmptions Underlying Estimates in Text Table 17
Table 1: CONSOLIDA'l'D FIDERAL AND PROVINCIAL GOVERNMENT TAX REVENIUES, 1970/)71-].977/78
/a ProvIsional./b Budgest estimates./c Includes land revenue, surcharge on land revenue, motor vehicle tax and property tax./d Federal and Provincial other indirect taxes, viz., stampl duties, registration, entertairunent duties, electricity duties and others./e Actual amounts authorized by the Provincial Assemblies add up to Rs. 172 million. The balance of Rs. '0 million will be found through
other measures..
Source: Ministry of Finance, Planning, Developnent and Provincia'l Coordination.
Table 2: COMPOSITION OF FEDERAL GOVERNMENT TAX REVENUES, 1970/71--1977/78
S Provisional. lb Budget estimates.'c Taxes on incorne realized under Special Martial Law regulations.'d 2% tax on income of industrial estabLishments having annual income of Rs. 100,0OO or more imiposed since 1972/73.
Source: Ministry of Finance, Planning, Development and Provincial Coordination.
/a Provis:Lonal./bL Budget est:Lmates./c Net of irr-Lgation share._I Capital gaiLns tax, betterment levies and cesses based on land revenue./e Actual amotnts authorized, by the Provincial Assemblies addl up to Rs. 172 million. rhe balance of Rs. 10 million will befound through other measures.
Scurce: Ministry cf Finance, Planning, Deve:Lopment and Provincial Coordinationi.
Table 4:: DEDUCTIONS FROM PERSONAL INCOME TAX--SUMWARY, 1970/71-1976/77
C, El C/CTaxable Income Tax Rate Tax Rate _Taxble :ncome x Rate _ Taxable Income Tax Rate Tax Rate _
Up to Rs. 1,000 Rs. 25 Rs. 25 Up to Rs. 2,000 2 1/2% Up to Rs. 5,000 10% .10%Over 1,000 Up to 2,000 5% 5% Over 2,000 Up to 4,000 10% Over 5,000 up to 10,)00 20% :20%
i Public companies 1 IL5 15 15 15 15 15ii Private companies-/ 20 20 20 20 20 20
(g) On every industrial company having 25 25 25 25 25 25paid-up ciapital and free reservs,
of lesis than Rs. 1,000,000.--
3. Surcharge on jewellers . - - - 6 6
A reduction of maximum tax rate from 60% to 502 was announced on January 1977 to beeffective from F'Y1978.
b/'From FYL973 onwards, intercorporate divideinds received and bonus shares issuel bycompanies and undistributed profits are exeampt. Prior Ito FY1973 undiLstributedprofits of public companies were subject to an income tax of 15% and of privatecompanies 25%.
_/I
Effectivu rates of supertax after adjusting for rebatet.
SOurce; MiLnistry of Finance, Planning & Economic Development, "Taxation Structure of Pakistan."
- 43 -
Table 7: RATES OF WEALTH TAX. 1972/73-1976/77
1972/73 1976/77
a/ ~~~~~~~~~~~a!Taxable Net wealth Tax Rate- Taxabie Net Wealth Tax Rate-
8. Ten. Loe . lb. 0.62 0.62 0.62 0..62 0.62 0.62- Pocketed Y ~~~~~~~~~~~~~lb. Rotoil Price Lens Than 4.90 0.37 0.37 0.37 0.37 0.37 lb. 4.90 -6.50 0.37 p 1I 5 . a f t a e taia1 1 p r I I lb~.. 6.30 - 0.0 0.37p1as 7 1/2 7. o f t h t a i1 p r IanAd. Ps.Less tha- 8.80 - ,... 7 1427.lb. Ovr 8.00 0.37 p I 2 3 7.fo2th.er. t a I I p sL A.Vol 8.800 10.00 - . -00Ald. Val. Ovr- 10.00 - .. 25%
To. .~~~~~~~~~~~~~~~~~~~~~~~~~~~10 1.10 212K_nFo. 109 .103 3Clothiog 2 .,7
Tohallo J .~~~~~~~~~~~~~~~~~~~~~~~33 5 .89lo-lden.. for 7 1t-.0,9
So-rce: Staff E.tlnate..
- 50 -
Table 14: ASSUMPTIONS UNDERLYING ESTIMATES IN TEXT TABLE 17
GDFP AQ=iimed t-o grow ar 6.6. in 1978, 7=OZ In WV197Q
and at an average rate of 5.4% between FY1979 andPV 1 O R'
Investment: i. Gross Domestic Investment = in FY1978 18.6% of GDP(i.e., same as in FY1977 and slightly lower thanGovernment target -for currentE year);t in ' 0l70
and FY1983 Alternative I, 18.5% of GDP; in FY1983ALIt e r .a tLv es XI an III, ' '' 17.5%/w ofJ GDP'.
'i. Fixed Investment - gross domestic investment lessadditions to stocks of Rs. 1,000 million annually.
iii. Public Investment = 6.6% increase in FY1978; in-Y1979 token increase only, as fixed investment isassumed to be made mainly by private sector; inFY1983 Alternative 1, 50% of increase in investmentsince FY1979 made by public sector; in FY1983 Alter-natives II and III the reduction in total investmentfrom 18.5% of GDP to 17.5% absorbed by public sector.
iv. ADP - in FY1978, same level as planned by Governmentin FY1977 prices; in FY1979 and FY1983 AlternativeI, 85% of public investment; in FY1983 AlternativesII and III ADP fully absorbs cut in public investment.
v. Private Investment = 6.6% increase in FY1978; inFY 1979 5/6 of increase in fixed investment assumedto be in private sector; in FY1983 Alternative I,.50% of increase in fixed investment in privatesector.
External Financing: i. All data through FY1983 are from Table 15, ChapterVII of latest CEM, deflated by deflator for externalaid (i.e., FY1978 = 107, and 6.5% annual increasethereafter); in FY1983 Alternatives I and II arebased on projection model data; FY1983 AlternativeIII assumes that the current account deficit willbe maintained at FY1978 level in real terms.
Savings: i. Gross Domestic Savings = residual, given investmentand external resource inflow levels.
Financing AD?: 1. External RpontirrPA = fnr FY1978 aR aiven in budgetestimates in 1977 prices; for FY1979 onwards assumedto be equal to 731 nf tntnl inflows (i;e. same pOr-portion as in FY1977 and FY1978).
ii. Bank Borrowing = assumed to be equal to 1% of GDPfrom F7v 1979 or.ward.
iii. Public Savings =a residual target given exter.n.alresources available, and keeping bank borrowing to.I of GDPD; alsoo includes private savings directly
mobilized by the Government, e.g., through postalsavings .
