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An innovative and forward looking budget.

An Innovative and Forward Looking Budget

Pakistan's budget for 1991-92 may well be called an innovative budget, a budget with a difference. It is a follow-up of the radical economic reforms introduced by the present IJI government. The budget is, in particular, a natural corollary to the NFC award which envisages equitable distribution of revenues between the Centre and provinces. Wide-ranging tax reforms also indicate that serious homework has been done before the announcement of the budget to close the resource gap through improvement of tax collection, broadening of tax base and checking corruption. Clipping of the discretionary powers of income tax authorities, withdrawal of excise staff from mills' premises, reduction in the highest incidence of corporate and income tax, drastic curtailment of customs duty on a large number of imported items and introduction of capacity tax are some of the redeeming features of the tax reforms which will spare the private sector lot of harassment at the hands of tax authorities and at the same time check tax evasion.

Significant steps have also been taken towards improvement of implementation channels and catalyst institutional linkages. Above all, high priority has been given in the budget to the hitherto neglected social sectors, including education and health which should contribute much to the development of human resources. In a country where the per capita productivity is among the lowest in the world, the need for paying proper attention to the development of human capital can hardly be over-emphasised. It is all the more necessary in the context of the acute dearth of financial capital. At long last the realisation has grown that without promoting education and fighting illiteracy, involvement of the people in development process will remain a far cry. And thus financial and physical efforts will fail to produce the desired results.

Hence it is gratifying to note that part of the proceeds from the sale of nationalised commercial banks and public sector industries will be spent of the development of human resources. Vigorous and sincere efforts will be made to improve the quality of education which has steadily deteriorated over the years. An institutional framework for this purpose will be provided by the National Education Foundation and its provincial counterparts. It is hoped that it will be followed up by a suitable and well-conceived educational policy comprehending all the basic elements to improve the extent and quality of literacy. The budget has already laid stress on technical and vocational education with a view to meeting manpower requirements for export and various productive sectors of the economy within the country.

Another positive aspect of the budget is that it aims at expanding the employment opportunities through privatisation and deregulation programmes at a very rapid pace. There cannot be two opinions about the fact employment opportunities in the public and semi-public sector are more often than not created without commercial considerations while the private sector takes into cost and return factor and therefore scrupulously avoids employing surplus staff. However, the fact remains that acceleration of industrialisation activity in the private sector and promotion of auxiliary activities, a dynamic situation may be created throwing up vast employment opportunities for the teeming millions.

The decision to separate public sector corporations from the budget should spare the federal resources of a great burden. This is a major step towards curing a serious financial ailment. Now the corporations will be under compulsion to make a certain level of profits and improve further investments. However, little has been done to improve the saving rate which is very low. In fact, some of the measures like withdrawal of investment allowance, tax on turnover, levy on profits for Bait-ul-Mal will serve as disincentives to saving. There is an urgent need for promoting austerity on individuals as well as governmental level. A radical restructuring of national savings organisation in terms of creating inducement among the public towards savings can yield palpable results.

The government has deliberately avoided burdening the people through heavy indirect taxation. Greater reliance has been placed on resource mobilisation through tax reforms and broadening of the tax net. Hence very few new taxes have been imposed. As much as 55 per cent of new revenue would accrue from tax rationalisation, 26 per cent from broadening of the tax base and 19 per cent from new tax increases. The government aims at realising most revenue from customs duty followed by excise, income tax and sales tax.

Reform measures taken in the realm of customs duties should yield the biggest chunk of resources - Rs. 4500 million. The assumption is based on the hope that leakages will be plugged and target achieved. It remains to be seen how much success is achieved by the government in creating the revenue through its reform package. Let us all hope that there will be no recourse to deficit financing or additional mid-year taxation.

Excise duty constitutes the most important source of revenue after customs duty. Introduction of capacity taxation in a selection number of industries would yield Rs. 2500 million. It is hoped that industries supposed to pay tax under this arrangement will not try to wriggle out of it on the pleas like non-availability of power, strikes, water shortages etc. Unless the system is operated with care, it is likely to be rendered ineffective.

In the area of income tax, a flat rate of 10 per cent on dividend and profits of the savings would provide Rs. 1500 million. This would discourage saving in schemes the profits of which will be subject to tax thereby giving an edge to government saving schemes which are exempt from the tax. The tax will militate against the growth of the capital market and investment in equities will receive a setback. Another Rs. 1100 million are expected to be realised through presumptive tax and enhancement of withholding tax. The minimum half per cent tax on the turnover of the companies which pay no tax or pay lesser amount of tax has also come as a rude shock to the private sector.

At long last, a modest step has been taken towards widening of the tax base. The budget envisages imposition of fixed tax on shops and establishments within the limits of municipal corporations and municipalities. This is an innovative step and should be widely welcome. Hitherto income tax used to be paid only by public sector, private sector, multinationals and salaried income groups. At present the total number of tax payers is ridiculously low, a little over one million of which one third comes from the salaried class. In this context, the new addition to the list is a welcome step.

The sales tax net has been widened. Last year when the scope of sales tax was first expanded, indication was given that it would be applied to more items over the years. This time its impact is minimal and most of it is coming from the likely increase in consequence of higher customs and excise duties. An additional revenue of Rs. 683 million is expected to accrue from sales tax. It is mostly luxury items like deep freezers, air conditioners and carpets which have been brought under the sales tax net or from which exemption has been withdrawn. In the overall context of the budget, this can be ignored as being inconsequential.

The most significant feature of the budget is the decision to set up Bait-ul-Mal. This testifies to the governments earnestness to mitigate the hardship of the downtrodden millions and establish a truly Islamic welfare state. While the government would be contributing its own share, the big industrial and business houses would pay a one-time tax on their paid-up capital. Its rate has been given in the Finance Minister's budget speech. Though apparently this is a well considered move, the reaction of the private sector to the levy has been none too favourable. The industrialist/business community is bitter because it has to bear the brunt of the Rs. 18 billion tax effort. It asks why other affluent sections of the society have not been asked to contribute to Baitul Mal. Another pertinent question asked by them is why higher agricultural incomes continue to enjoy tax holiday for the past 44 years? The private sector will be further burdened with tax on loans excepting invest, agricultural and small loans. It remains to be seen how does this new mechanism for distribution of wealth in society work. The indigent and needy will welcome this measures as now they can look forward to institutional support.

The package of reliefs includes the lowering of the highest tax rate on individuals and registered firms. This will be widely welcomed. Similarly the price of wheat flour, ghee and pulses has been reduced to provide the much needed relief to the poor from soaring inflation. Concessions have been granted for education and health facilities. Great significance in this connection attaches to matching grants for private sector effort in social welfare activities. The withdrawal of duty on newsprint and computer spares is also a welcome step. The exemption of computer software form duty is a positive response to a long-standing demand. The increasing use of computer technology in the country called for a liberal fiscal policy in this behalf. By reducing duties on these items a significant step has been taken towards popularisation of modern technology in Pakistan. On the other hand, the increase in telephone call rate fetching Rs. four billion, will be construed as a negative step which will add to the soaring cost of infrastructure facilities.

After taking out corporations like T&T and WAPDA, the government has decided to launch a Rs. 72 billion Annual Development Programme. Power generation has received top priority followed by transport and communication. The special development programmes for the provinces have been merged in the ADP. The increased outlay for ADP is motivated by the government's desire to maintain high growth momentum in the economy. This would be 6.5 per cent next year. Had autonomous bodies not been doing self-financing but included in the ADP, it size would have increased to Rs. 96 billion calling for generation of more resources. The idea behind the privatization programme is to disengage the government from the activities which should be none of its business. It is known how much resources would be created through denationalisation programme. It is hoped that the funds thus generated would not be used for meeting government's administrative expenses but will be employed to expand infrastructure facilities for industrial investment. There is grave apprehension that the burden of the Rs. 18 billion tax effort (Rs. 13.9 billion coming from tax reforms and new taxation and Rs. 4 billion from enchanced charges for telephone calls) will be passed on to the consumer. In that case, life will become more miserable for the common man. The increase in government employee's salary will impose extra burden of Rs. 6 billion on the government which will be forced to do some deficit financing. In case, the optimistic revenue targets are not met, the possibility of a mid-term budget cannot be ruled out.

All in all, it is a reasonable budget, particularly in the context of financial constraints under which the present government is operating. It is a bold effort towards implementing the election manifesto of the ruling party. But it falls short of the expectations of the private sector which was looking forward to more reliefs and reforms in view of the track record of the present government. The radical economic and financial reforms had raised high hopes and it was hoped that ground for accelerated investment will be further paved through follow-up measures. But the steam went out of the capital market when the budget was announced, for it imposed a crippling burden of taxes on the private sector by way of imposition of tax on profits from savings and dividend income, withdrawal of investment allowances, tax on turnover, tax on paid-up capital, tax on bank loans etc., introduction of capacity tax on select number of industries, widening of sales tax net increase in withholding tax etc. Thus the route on the share market did not come as a surprise.

However, some analysts believe that the stock exchange over-reacted to the budget. On second thoughts, most of the investors realised that it was a balance budget which provided many reliefs to the private sector such as reduction in customs duty on a number of imported industrial raw materials which would reduce the impact of cost-push inflation, lowering of the maximum rate of tax on the income of individuals and registered firms, cut in the discretionary powers of tax collecting authorities, withdrawal of excise staff from mills' premises, tax exemption to capital gains for another two year, withdrawal of tax on dividend income until 1993 and incentives for export.

While the textile industry is making great hue and cry against the enhancement of excise duty and export duty on cotton yarn, it is a decision of immense importance which should go a long way in bettering the economic lot of the country. It will discourage the export of cotton yarn and provide more yarn to the ancillary industry which has been complaining of inadequate supply of raw material. Thus it will promote the export of value-added items fetching more foreign exchange for the country.

In short, the 1991-92 budget will go a long way in paving the way for an enchanting economic revolution in the country which will be marked by a happy blending of higher growth momentum with distributive justice. The emphasis on social sectors speaks volumes about the government's keenness to improve the lot of the indigent masses. The incentives given to the private sector for investment in health and education sectors should enable it to play a pivotal role in the development of social services. Similarly, the reform package should induce more local and foreign investment propelling the country on to the road of greater prosperity and development.
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Title Annotation:Pakistan's 1991-92 budget
Author:Jabir, Rafique
Publication:Economic Review
Date:Jul 1, 1991
Words:2328
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