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A richman's budget.

* Pakistan's defence expenditure put great strain on its budget as compared to India. In the changed circumstances Pakistan will have to change its defence strategy.

* All the forms of indirect taxation whether on commodities or through inflationary finance in the final analysis involves exploitative transfer of resources from poor to the rich.

* The budget contains incentives to boost stock market.

Following the criticism on the Budget Finance Minister Sartaj Aziz revised certain provision of the Budget 1993-94 Revisions relate to most of the new taxation measures proposed in the budget. They included upward revision in the duty on imported cars, downward revision in the duty on electric fans and desert cooler, apparent change in the capacity tax on cement factories to reduce the cement prices and a promise to announce a pay package for the government employees sooner than the time indicated in the original budgetary proposals.

Similarly, on the protests of the domestic manufacturers, the taxes on electric fans and desert coolers has been revised downwards, while on widespread demand from various quarters, cement manufacturers were persuaded to reduce the prices. And to appease the government employees who were agitating, the government advanced the date for the meeting of the Pay and Pension Committee from December to October so that on its recommendations, some relief can be announced for the government employees at an early date.

Current Expenditure

The current expenditure during 1993-94 would be Rs. 257.762 showing a rise of 9.6 per cent over the figure of 235.166 billion. As a ratio of GDP the current expenditure was about 20.2 per cent in 1992-93 as compared to 18.8 per cent of GDP in 1991-92.

The Government choice in the design of current expenditure policy is somewhat limited by fixed obligations. In the Budget 1993-94 about 81.6 per cent of the expenditure has been allocated for defence 34.5 per cent and debt servicing 47.0 per cent thus leaving very little for any other activity. In spite of all the tall promises, in regard to education and health, the provincial and federal allocation remained meagre.

A tradition was established by earlier Finance Ministers to under estimate expenditure on administration, defence and the like. For instance current expenditure during 1992-93 was Rs. 218.814 billion. Revised estimate of current expenditure came to Rs. 235.166 billion showing an increase of 7.4 per cent. There appears to be no financial control of the Parliament on this excess expenditure.

The Government is free after completing the formality of approval of the budget to incur any amount of excess expenditure on any head. The Government does not even feel the necessity of consulting and taking the approval of the Parliament. As against this, there was widespread shortfall on development expenditure. During 1993-94 the budget allocated Rs. 6.965 billion as compared to Rs. 7.358 billion in the year 1992-93 indicating a decline of 5.3 per cent on the social sector.

Defence Expenditure

The defence expenditure has been swelling from year to year. In the Budget 1993-94 defence expenditure will increase by 1.9 per cent from revised estimate of Rs. 87.439 billion to Rs. 89.103 billion. It is heartening to note that defence expenditure in real terms has gone down. India's defence outlay stood at Rs. 191.8 billion which is about 2.2 times of the Pakistan's defence budget of Rs. 89.1 billion in 1993-94.
Defence Expenditure
 (Rs. in billion)

 Current Defence DE as
Year Expenditure Expenditure % of CA

1983-84 59.96 26.75 44.61
1984-85 77.24 31.79 41.15
1985-86 87.52 35.12 40.25
1986-87 105.57 38.89 36.83
1987-88 108.32 45.29 41.81
1988-89 129.61 48.32 37.28
1989-90 152.88 61.92 40.50
1990-91 161.78 63.27 39.10
1991-92 171.64 63.59 -
1992-93 235.18 87.43 37.17
1993-94 257.76 89.10 34.56

Source: Budget in Brief

India's GDP in 1990 was 254.5 billion dollars as compared to 35.5 billion dollars of Pakistan. It worked out to 7.2 times of Pakistan. Thus Pakistan's defence expenditure put great strain on its budget as compared to India. In the changed circumstances Pakistan will have to change its defence strategy. Defence expenditure from 1983-84 to 1993-94 is given in the above table:-

Defence expenditure, after adjusting for price changes, grew every year by over 11 percent during the Fifth Plan period and by almost 6 per cent during the Sixth Plan period. In the non-Plan period, 1972 to 1978, when prices had risen rapidly, defence expenditure had fallen in real terms by 2.4 per cent per year. In the draft Seventh Plan it was proposed that for the next five years this growth rate be restricted to 3 per cent per year. However, actual average increase was more than 4 percent in real terms. During 1988-89 to 1993-94 defence expenditure almost doubled from Rs. 48.32 billion to Rs. 89.10 billion.

There is of course, some scope to lessen our dependence on imports of defence material. At present we import the bulk of our material requirements, and with efforts this ratio can be brought down. But given the scale of optimal plants in the defence industry, a very major reduction in import requirements does not seem possible except in the long term, and only where a friendly government allows the technology transfer involved.

Defence strategy relies on intelligence, to provide us early warning of enemy mobilisation; a pre-emptive air-strike capability and superior tactical abilities of our ground forces, to permit deep penetration in a forward defence strategy; but ultimately, on effective diplomacy, to secure a quick cessation of hostilities in the event of war. This calls for expensive imports of airborne warning systems and fighter aircrafts, together with the most modern

material for ground forces, most of which are not available without special political relationships with the supply countries.

Tax Revenue

Tax revenue in 1993-94 would be Rs. 17.636 billion as compared to revised estimates of Rs. 161.657 billion showing a rise of 9.26 per cent. Direct tax on income and wealth would be Rs. 41.537 billion showing a rise of 15.36 per cent over the revised estimate of Rs. 36.004 billion. The indirect taxes have not met the target and stood at Rs. 125.647 billion as compared to budgeted figure of Rs. 142.304 billion.

The revenue from indirect taxes in 1993-94 would be Rs. 135.098 billion showing a rise of 7.52 per cent. The contribution of direct taxes has increased from 20.6 per cent to 22.0 per cent while the share of indirect taxes declined from 72.0 per cent to 71.6 per cent in 1993-94. The major revenue earners in indirect taxes in 1992-93 were customs 37.6 per cent and Federal excise 20.7 per cent and Sales Tax 13.7 per cent.

All the forms of indirect taxation whether on commodities or through inflationary finance in the final analysis involves exploitative transfer of resources from poor to the rich. The direct taxes on the whole have very low coverage and yield less than 3.1 per cent of the GDP. The current number of tax payers are estimated 1.1 billion which constitute about one per cent of the population. There would be at least 5 million people in the country who would be earning more than tax exemption limit of Rs. 40,000.

Stock Market

The budget contains incentives to boost stock market. Some of these measures are as follows:-

a) Tax exemption to capital gains on the sale of shares of public companies and modaraba certificates that was expiring with assessment year ending 30 June 1994 is being extended to assessment year ending on 30 June, 1996.

b) Tax exemption to bonus shares issued by companies which was expiring on 30 June, 1993 is being extended to 30 June, 1995.

c) Modaraba which were to become taxable in assessment year 1993-94, will pay income tax for the first two years at a concessional rate of 12.5 per cent. Three years' tax holiday would remain available to new modarabas and in the two years next following, they will pay income tax at the same reduced rate.

d) Capital Gains on sale of modaraba certificates prior to 1 July, 1992 are also being exempted.

e) Modaraba have recently been given a reduced with holding tax rate of 1 per cent, as against the normal 2.5 per cent in modaraba transactions.

f) Capital value tax @ 5 per cent on oversubscribed shares of listed companies imposed last year is being withdrawn.







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Title Annotation:Special Section: Budget 1993-94; includes related articles; Pakistan
Author:Haidari, Iqbal
Publication:Economic Review
Date:Jun 1, 1993
Previous Article:Highlights of budget 1993-94.
Next Article:Taxation measures.

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