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ICMAP
ICMA Pakistan
DIRECTORS'
TRAINING PROGRAMME
UNDER THE CODE OF CORPORATE GOVERNANCE, 2012
Estd. 1951
AL HAM DO LILLAH, ICMA Pakistan is successfully organizing Directors Training Program. The Training is being attended by CEOs, Directors and Aspiring Directors. The participants have given a very positive and encouraging feedback on the training and other arrangements made by the Institute. 1. Fee : PKR 96,000/40 Hours
2. Duration of Training / CPD :
ICMAP
Estd. 1951
ICMA Pakistan
DIRECTORS'
TRAINING PROGRAMME
under Code of Corporate Governance 2012

Key Benefits
Understand the broader role & responsibilities that come with the Directors mandate. Provide an overview of the knowledge and competencies expected from Directors in todays environment Develop skills that contribute to the creation of an effective performing board culture. Hone the ability to challenge executives through positive exchanges focused on the key issues that underpin corporate performances.
1. 2. 3. 4. 5. 6. 7. 8. 9.
Become a Certified Director
Key Learning Outcomes

The Challenges of Corporate Governance Understanding regulatory challenges as a board member Decision Making and effective communication in the Board Room Evaluating Strategy for Value Enhancement Risk Management & Role of Audit Committees Impact of Economic Environment on Businesses Understanding the Financial Value Creation Initiating and coping with Change Management Red flags in Financial Reporting
Who Should Attend: Existing & Aspiring Directors & CEOs

For registration & information Asim Husain Khan, Deputy Director
ICMA Pakistan Head Office, ST-18/C, Block 6, Gulshan-e-Iqbal, Karachi - 75300. Ph: (92-21) 99243027, 99243900 (Ext. 119), Email: asim.khan@icmap.com.pk, member@icmap.com.pk URL: www.icmap.com.pk
From the Holy Qur-n
In the Name of ALLAH, the Most Magnificent, the Most Merciful.

I swear) by those (horses) that run snorting, Then those that create sparks by striking (their hoofs) on the stones, (3) Then those that invade at morning, (4) Then raise, at the same time, a trail of dust, (5) Then enter, at the same time, into the centre of the (opposing) host, (6) Man is, indeed, very ungrateful to his Lord, (7) And he himself is a witness to that fact, (8) And in his love for wealth, he is very intense. (9) Does he not then know (what will happen) when all that is contained in the graves will be overturned, (10) And all that is contained in the hearts will be exposed. (11) Surely your Lord, that day, is fully aware of them.
Surah: 100 - Surah Al-Adiyat; verses 1 to 11
Translation : Mufti Taqi Usmani http://www.quranexplorer.com
(1) (2)
Our Vision
To be the Preference in Value Optimization for Business
Our Mission
To develop strategic business leaders through imparting quality education and training in Management Accounting, to continually set and upgrade professional standards and to conduct research bringing value-addition to the economy.
Journal is also available on ICMAP Website : www.icmap.com.pk
I.C.M.A.P.
ICMA
Pakistan
National Council 2012-14

President and Chief Executive
Mr. Zia ul Mustafa, FCMA Chairman: Executive, Education and Disciplinary Committees
CFO & Business Administrator Expo Lahore (Pvt) Ltd.
Estd. 1951
Institute of Cost and Management Accountants of Pakistan
Vice President
Mr. Ghulam Mustafa, FCMA
Chairman: Examinations and Technical Support & Practicing Development Committees Partner, Qazi & Co. Cost & Management Accountants
Honorary Secretary
Mr. Abdul Wasey Khan, FCMA Chairman: Students Affairs Committee
Manager - Internal Audit Pakistan Telecommunication Company Ltd.
Honorary Treasurer
Mr. Shahzad Ahmad Awan, FCMA
Chairman: Research and Publications Committee Chief Officer (Billing & Recovery) Sui Northern Gas Pipelines Limited (SNGPL)
Members
Mr. Mohammad Ashraf Bawany, FCMA
Chairman: Quality Assurance and Ethics Committee Deputy Managing Director Linde Pakistan Ltd.
Research & Publications Committee

Chairman/Chief Editor
Mr. Shahzad Ahmad Awan, FCMA
Mr. Sajjad Ahmad, FCMA Chairman: Audit and Members Welfare & Coordination Committees General Manager (Cost Accounts) Pakistan Telecommunication Company Ltd.
Mr. Jawed Mansha, FCMA
Chairman: Corporate Relations & Communications Committee Assistant Secretary & DGM Corporate Affairs Pakistan International Airlines Corporation
Members
Mr. Nazir Ahmed Shaheen, FCMA Mr. Amir Raza, FCMA Mr. Anwar ul Haq, FCMA Mr. Mohammad Iqbal Ghori, FCMA Mr. Naeem Haider, FCMA Mr. Muhammad Imran Afzal, FCMA Mr. Aamer Ijaz Khan, FCMA Mr. Saqib Masood, ACMA Mr. Waqar Akhtar, ACMA Mr. Kamran Mahmood Butt, ACMA Mr. Syed Adnan Hussain Shah, ACMA
Mr. Abdul Khalil, FCMA Chairman: Continuing Professional Development (CPD) and Seminars/Conferences Committee
General Manager Finance Askari Aviation Pvt. Ltd. / Army Welfare Trust (AWT)
Members - Government Nominees

Mr. Mahmood Akhtar
Chief Cost Accounts Officer Finance Division Ministry of Finance
Mr. Tahir Mahmood, FCMA Commissioner (Co. Law Division & IT Dep.) Securities and Exchange Commission of Pakistan Mr. Muhammad Abdul Basir
Chairman: Public Sector Coordination Committee
Secretary
Email: ed@icmap.com.pk URL: www.icmap.com.pk
Deputy Auditor General (APR&SD) C/o Auditor General of Pakistan
Mr. Muhammad Haroon Rasheed

Executive Director, FRM State Bank of Pakistan
Volume : 22.2 l March - April, 2013
MANAGEMENT ACCOUNTANT
Official Journal of Institute of Cost and Management Accountants of Pakistan
The only Professional Journal in Pakistan with a circulation of over 10,500 copies per issue
Inside
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From the Desk of President and Chief Executive
33
Asian Development Outlook 2013 Economic Trends and Prospects in Developing Asia: Pakistan
By Dawn Elizabeth Rehm and Farzana Noshab
From the Desk of Chief Editor
Focus Section Interview Section

6
An Exclusive Interview with
38
Proposals of Trade and Industry on Federal Budget 2013-14
Prof. Dr. Khalida Ghaus

Managing Director, Social Policy and Development Centre (SPDC)
Focus Section
9
A Comparative Review of Budget Making Process in SAARC Countries A paper produced by the Research & Publications Department, ICMA Pakistan Reengineering Tax System
By Huzaima Bukhari & Dr. Ikramul Haq
Meritorious Article
42
Another Hurdle on the Road to Compliance Assessing Company Level Controls
By J. Stephen McNally CPA
Articles Section
36 46 48 36 50
Seven Hurdles to Entry Level Career of Females
By S. Ahmad Ashraf, FCMA
Stages of Moral & Ethical Behaviour Assad Mahmood, FCMA Do GDP and KSE Dictate the Destination? By Shahid Tanweer, ACMA
17 24
Exchequer Gains from Services Export

By Qaisar Mufti, FCMA
27
Suggestions for Budget 2013-14 Tax Laws By Syed Adnan Hussain Shah, ACMA The Budget 2012-13 and Cost of Protection in Pakistan
By Muhammad Shamim Anjum, ACMA
Update
29
55
Pakistan's Economic Horizons State Bank of Pakistan's Monetary Policy Decision
Disclaimer: Views expressed herein are authors own thoughts/viewpoint and do not represent ICMA Pakistan policy unless so stated. Publication of paid advertising and new product/service information does not constitute an endorsement by the ICMA Pakistan.
Our Next Issue
Cost Audit
Research & Publications Committee would welcome articles on the above-mentioned topic before May 31, 2013 for Journals forthcoming issue.
Message
From the Desk of
President and Chief Executive

he March-April 2013 Issue of the 'Management Accountant' is in your hands, which focuses on 'Pre-Budget 2013-14 Proposals'. As you all know, budget is presented every year in June, for which preparations commences well in advance by the Finance Ministry. The budget document is developed on the basis of extensive consultations had with different stakeholders, including Chambers of Commerce, Industry Associations, Divisions and Departments under various Government Ministries and other related institutions. ICMA Pakistan has a long tradition of bringing out a special issue of its official journal on pre-budget proposals, which contains useful articles and write-ups on budget related issues such as budget deficits, tax evasion, inflation, fiscal anomalies, economic situation etc. These articles are contributed by wellknown economists as well as qualified CMAs having deep insight on tax and economic fields. In the current country's scenario, when the national elections are just around the corner, the coming budget 2013-14 has assumed significance, not only for the business and industry but also for the general public who are expecting 'something good' from the new government that would be at the helm of affairs after elections. The most crucial challenge for the new government would be to improve the 'law and order situation', which is so vital for rapid economic growth and inducing investment, both local and international. The second priority of the new government should be to resolve the long-pending 'power and gas crisis' which has crippled the local industrial sector, and if not tackled on 'war-footing basis', it would have a devastating effect on our national economy and could even lead to massive unemployment and state of anarchy. The third priority for the new government should be to combat 'corruption' which is deep-rooted in our society as well as in our bureaucratic and political set-up. Corruption, undoubtedly, is one of the most severe impediments to the development and growth of Pakistan and the new government should sincerely and honestly take appropriate reforms to eradicate this menace from our government and society. It would certainly be a great service to this country. Another significant issue that would merit attention of the new government is to tame the rising tide of 'inflation' which has made the life of common man quite miserable. The government should put in place an effective 'price-control' mechanism and check undue profitability in the market by determining the actual cost of every product sold and discouraging hoarding. The ICMA Pakistan would be pleased to extend the professional services of its members in cost determination and audit. In the end, I would like to pay heartiest advance congratulations, on behalf of the Institute, to the new government that would come into power after the elections and hope that under their leadership, our country would tread on the path of economic prosperity and achieve milestones in every field. Long live Pakistan.
Zia-ul-Mustafa,
FCMA
4 | Management Accountant, Mar-Apr, 2013
Message
From the Desk of
Chief Editor
I am delighted to present the March-April 2013 Issue of the Management Accountant Journal which is especially brought out on Pre-Budget 2013-14 Proposals. The national budget is the most important economic policy tool of the government, which sets out the direction of economic policy. It translates government's policies, political commitments, and goals into decisions on how to raise revenue and utilize these funds in priority areas. In Pakistan, as you all know, the Federal budget is presented in the first week of June every year, followed by provincial budgets. This time the Federal budget will most probably be presented by a newly-elected Government that would come into power after holding of the general elections, scheduled on May 11, 2013. ICMA Pakistan, as customary, would be contributing its role by developing some concrete proposals, in consultation with its members, and forwarding them to the government for consideration. This special Issue begins with an exclusive interview of Prof. Dr. Khalida Ghaus, who is a well-known Scholar and Managing Director of Social Policy Development Centre (SPDC). She has vast experience in foreign policy, development and gender issues. We are highly grateful to her for sharing her thoughts with the Institute. In her interview, she has suggested for forming a joint policy dialogue forum with ICMA Pakistan and also carrying out research, which I think is a very good proposition. In the Focus section, the Research & Publications Department has contributed a very comprehensive research paper on A comparative review of budget making process in SAARC countries', which provides a brief outline of the four major budget making stages i.e. budget formulation, approval, execution and oversight stages in Pakistan, India, Bangladesh, Nepal and Sri Lanka. I hope that readers, especially students of economics, would find this paper quite informative and beneficial. We are indebted to Dr. Ikramul Haq, a renowned scholar with expertise in taxation policy, for contributing his article on Re-engineering Tax System exclusively for the Management Accountant. Mr. Qaiser Mufti, former Vice President ICMA Pakistan has shared his experience by dwelling upon the subject of 'exchequer gains from services exports'. Other articles and write ups in Focus section cover the topics of budget proposals, ADB Report on economic trends and prospects in Developing Asia in 2013 and a brief compilation made by the R&P Department on the Proposals of Trade and industry on Federal Budget 2013-14. In the Meritorious Article Section, an article titled 'Assessing Company level Controls - Another Hurdle on the Road to Compliance by J. Stephen McNally, CPA has been selected which is judged as one of the 'Article of Merit' by PAIB Committee of IFAC. The author, having experience of working as Director Finance in M/s. Campbell Soup Co, USA, has provided a six-step process that can be used by Public Accountants to assess the design and operating effectiveness of company-level controls. The Articles section includes four write-ups on different varied topics. A very senior member Mr. S. Ahmad Ashraf, in his article has outlined seven hurdles which restricts the females to enter the business world and build their career. Mr. Assad Mahmood, FCMA and Mr. Shahid Tanweer, ACMA have also contributed useful articles. We express our heartfelt thanks to all the contributors of this issue for their valued contributions. We expect that the readers will find this Issue quite informative and look forward that ICMA Pakistan's Members would contribute their practical experiences in shape of write-ups and articles for the next issue of Management Accountant, which will be on the theme of 'Cost Audit'. Hope you will enjoy reading the articles compiled in this issue. Happy reading!
Shahzad Ahmad Awan, FCMA
Management Accountant, Mar-Apr, 2013
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Interview Section
An exclusive interview with
Prof. Dr. Khalida Ghaus

Managing Director Social Policy and Development Centre (SPDC)
At the outset, please give us a brief profile of SPDC and its advisory role in economic, social and public policy issues of Pakistan. What are the main areas of research of SPDC?
As an independent academic research organization SPDC main objective is to contribute to the national goals of social development through research and policy advice. Consisting of technical units on Gender, Governance, Public Finance, Poverty the focus primarily is on the issues of development/ poverty, inequality, governance, social sector policies, gender issues, sustainable development and pro-poor macro economic policy. SPDC's research publications are widely welcomed by researchers, academicians and policy-makers. As member of federal and provincial technical committee SPDC has been influencing the policy-formulation process.
Pakistan is presently passing through a very difficult and challenging phase of history with host of economic, social and political issues confronting the nation? Would you like to share your thoughts on this.
Pakistan is passing through a difficult time. We have low economic growth, low investment to GDP ratio, poor law and order situation, higher inflation and unsustainable fiscal and current account deficits. The fiscal deficit soaks up private saving leaving too little for domestic investment. Simultaneously, it put pressure on monetary policy resulting in both crowding out and higher growth in monetary aggregates. The monetary expansion together with higher international energy and food prices translates to push up inflation. Moreover, the current account deficit has soaked up foreign saving that has resulted in depilation in foreign reserve, weakening of Pak Rupee and mounting of foreign debt in medium to long-run.
What, in your opinion, are the main economic issues of Pakistan today? Do you think that the government that will be taking charge of the country after the elections in May will be able to tackle these issues prudently?
The sustainability of any economy depends on uninterrupted economic activity. This means that production keep growing without any major interruption. Any factor that creates obstacle in economic activity is considered as a major issue confronted by the economy. At present, two such major issues are energy crisis and disrupted law and order situation in general and in major industrial cities like Karachi, Lahore and Faisalabad. These are considered as main issues because they hinder production. For example, energy crisis causes industrial units either to close down or to operate at below full capacity and effect functioning of tube wells. The foremost impact is the escalation in operating cost of these units which result in layingoff of people. This creates unemployment in the economy at two counts; first the laying off of the existing labour force and second no
Pakistan's exports are not showing any significant growth since 2010-11 while the imports increasing. As result, the demand of foreign exchange is continuously increasing its supply and leading to depletion of foreign exchange reserves. In our view while future government may be aware of few problems they need first to understand and analyse the situation by involving all stakeholders including business community, civil society and research institutions
Interview Section
Pakistan currently spends a very low share of its GDP on the social sector
fresh job opportunities those entering into labour force. All these factors affect production due to which demand exceeds supply and causes demand pull inflation. Further, disrupted law and order situation creates uncertainty in the economy which crowding out the existing both domestic and foreign investment and hiders future investment. The other major problem is the decline in foreign reserves. Pakistan's exports are not showing any significant growth since 2010-11 while the imports increasing. As result, the demand of foreign exchange is continuously increasing its supply and leading to depletion of foreign exchange reserves. In April 2012, the foreign exchange reserves held by the State Bank were $12 billion whereas in March 2013 they have declined to $7 billion. To begin with the relevant question is will the future government be aware of the existing economic challenges and problem. In our view while future government may be aware of few problems they need first to understand and analyse the situation by involving all stakeholders including business community, civil society and research institutions. Moreover, the future government can tackle these problems if it gives such a policy package where investing in few areas would not be at the cost of other pressing areas.
regarding quality of our products. For example, considering only textile exports, where Pakistan has a niche, in spite of having lower price compared to India (in items that both countries export to international market), the value of Pakistan's exports is far below that that of India. This indicates that Pakistan has to concentrate in improving non-price factors to enhance its exports. Having a trade policy every year is not enough rather there is a need to develop a comprehensive strategic plan focusing on the following factors. Strengthening commerce ministry by appointing technocrats with specialisation in international trade; to break commodity concentration and market concentration by identifying new products and markets; establish export processing zones that reduce production cost; concentrate on developing marketing techniques; establish/strengthen a trade advisory cell with a competent staff at each Pakistan consulate that do lobbying to expand export market, facilitate in removing the administrative and logistic bottlenecks for exports and help identifying products that Pakistan can export to the respective market.
The budget spending on education and health in Pakistan is quite miserable, as compared with other developing countries. Please elaborate?
Public expenditure on social services such as education and health contributes to human capital formation and enhancing human capabilities and is therefore considered as poverty reducing in character. Pakistan currently spends a very low share of its GDP on the social sector. A comparison of public expenditure on education and health indicates that Pakistan not only spends less compared to other developing and developed countries but as percentage of GDP it is declining over the time. For instance, as per government of Pakistan's estimates Pakistan spent 0.72 percent of its GDP on health in 2000-01, which decline to a meager 0.27 percent of the GDP in 2011-12.
Would you like to highlight few important social sector issues in Pakistan. What are your views on the seriousness and effectiveness of the poverty reduction initiatives undertaken by governments in the past.
One of the root causes of this situation lies in the negligence of social sectors in policies and budgeting. Compared to other nations, we spend less on education and health. We are far behind in social development and the target of achieving universal primary education in 2015 seems a dream. We have large numbers of uneducated and unskilled youth, wide gender disparity in enrollments across provinces, regions and income groups particularly in poor income groups. The trend in public expenditure priorities show that we focus more on security related expenditures which at the cost of social sectors. While security related expenditures are important but ignoring socioeconomic needs of future generation and spending less on human development is diverting us from the path of development. Recently introduced cash transfers scheme like BISP caused an increase in economically dependent population rather than developing the capabilities of the population. In order to place Pakistan on the path of sustainable development we have to focus more on education and skill development.
There is a general feeling in Pakistan that presentation of budget is a rhetoric and 'jugglery of figures', prepared with the help of international donor agencies? It gives a rosy picture of the national economy to the people. Do you endorse this view point?
We at SPDC partly endorse this statement. In fact, very few people and organizations understand the budget and its documents. The voices raised by these organizations through research reports and newspaper articles generally remain unheard by masses and less influential in formulating economic policies and budgets. In contrast, donors not only understand budget but also pick points from these reports that suit them. Moreover, budget makers also feel accountable in front of donors (IMF and the World Bank) rather than general public. Given this, Pakistan's budget making institutions were focused more on donors and not on the people in the country. In past, SPDC published budget reports and newspaper articles like Federal Budget FY12: Unpleasant Arithmetic, Tax revenues: flaws in Estimation, and the like to highlight flawed estimation in budget documents.
It is a general perception that Pakistan has failed to penetrate into the international export market despite its immense potential and quality products. Where we are lacking and what has been the role of government export facilitation organizations in this regard?
There is no doubt about the immense potential that exists in Pakistan but unfortunately we are underutilising this potential and whatever are using not managing it appropriately. There are concerns
Pakistan's budget making institutions were focused more on donors and not on the people in the country
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Interview Section
The escalating inflation has increased unemployment and crimes in society. As a social scientist, would you like to share with us if this situation is expanding the gap between the 'have' and 'have not and leading to complete elimination of the middle class stratum of the society.
The increase cost push inflation (i.e. increase in cost of production) affects production which in turn creates demand pull inflation and eventually increase unemployment and limited or no job creation. Job creation is directly related to growth in economic activity. In Pakistan, the overall economic activity is slowing down. Production particularly the commodity producing sectors like agriculture and industry is not growing enough to absorb the labour force. It is expected that Pakistan could not achieve the economic growth's target of 4.2 percent during current financial year 2012-2013 and it would remain at 3.5 percent. In Pakistan, 42 percent of labour force is illiterate, 29 percent is educated up to primary level and 12 percent up to matric, nearly 7 percent are graduate, postgraduate or professionals. The jobs therefore need to be created in these sectors that can accommodate the bulk of labour force.
In Pakistan, 42 percent of labour force is illiterate, 29 percent is educated up to primary level and 12 percent up to matric, nearly 7 percent are graduate, postgraduate or professionals
What economic scenario you foresee in Pakistan after five years. Would there be any improvement or our economy is sliding down?
The major set-back to the economy of Pakistan though has been caused by flawed policies and corruption however, the impact of the security on the socio-economic development cannot be ignored. The stabilization will also depend on the regional and internal security situation. The internal socio-political stability alongwith increased FDI, overcoming energy crisis will also influence the stabilization process.
Since, ICMA has a large alumni working in various organisations and SPDC a sound research experience of more than eighteen years, they can join hands to make a forum policy dialogue
We can link this to the investment. The decline domestic investment means capital flight i.e. money being invested outside Pakistan. As a result, the domestic production and employment opportunities are declining. Though who have invested outside are earning profit on it but this is not trickling down to the masses as the money that has to tricle down in not in the economy. And, that is one of the main rasons on increase in the gap between have and have not.
What is your message to the members, students and readers of ICMA Pakistan.
Pakistan is a country with a huge youth population. Undoubtedly, this youth bulge is yet to be converted into youth dividend. It is true that the government/s have been oblivious of this asset, nonetheless, the youth themselves need to realise their importance and responsibility towards the society and channelize their energies towards the development of the society.
Profile of Prof. Dr. Khalida Ghaus

Prof. Ghaus - former Director, Centre of Excellence for Women Studies, Chairperson (Department of International Relations, University of Karachi), and Pakistan Centre for Democracy Studies is currently serving as the Managing Director, Social Policy and Development Centre (SPDC), Karachi. She has a Phd. in International Relations. Dr. Ghaus has a teaching/ research experience of 30 years and has extensively worked on foreign policy, development, and gender issues. Some of her recent work includes; Devolution and Social Development, Social Impact of the Security Crisis, Women at Work in Pakistan, Gender dimensions of development induced displacement and resettlement: A Case of Lyari Expressway in Karachi, The Scoioeconomic cost of violence against women: A Case Study of Karachi, Socio-Economic Impact of Floods in District Thatta: A Gendered Analysis, The changing Security Spectrum of South Asia: Consequences for SAARC', and 'Issues of Cultural Identity, Challenges Confronted by Muslim Societies. Author of a book and monographs she has extensively participated in seminar/conferences and has given lectures in Canadian and American Universities besides attending the sessions of the UNCHR. She has been actively involved in the Neemrana process (Track II initiative). Dr. Ghaus has been involved in the policy- making (both) with the Federal and Provincial Governments on gender-related issues and is a member of Several Technical Committees, Public Policy committees and Advisory Committees, besides, being a member of several professional bodies. The interview ended with a vote of thanks to Prof. Dr. Khalida Ghaus, Managing Director, Social Policy and Development Centre (SPDC) a distinguished economist who spared her valuable time and gave her candid views exclusively for this journal. Editor
What is the status of research in Pakistan. Do you think that there need be a forum for interaction and knowledge sharing by all the academic institutions who are doing some kind of research in their respective fields. Would you like to offer to jointly carry out research with ICMA Pakistan.
Pakistan is among those fortunate countries that had intellectual like Mehboobul Haq in the past. Even in the present era there are institutions and scholars who engaged in doing policy oriented research on economic and social issues. Since social science is not a definite science there might be possibility of more one policy options for a single problem and various paths to achieve the desired goal. In order to choose a right path, the policy research should be discussed and debated. An academic forum to discuss research would a very good idea. Since, ICMA has a large alumni working in various organisations and SPDC a sound research experience of more than eighteen years, they can join hands to make a forum policy dialogue.
Focus Section
A Comparative Review of Budget Making Process in SAARC Countries

A Research Paper produced by the 'Research & Publications Department', ICMA Pakistan
Origin of the word 'Budget'
The word 'budget' is derived from the Latin word 'bulga' which means 'a little pouch or knapsack'. This word is later traced in the French language with word 'bougette' which means 'purse' or a 'leather bag'. In English, this word was used during the fifteenth century, with meaning of 'pouch' or 'wallet' or 'bag'. Afterwards, during 1880s this word began to be used as a verb for the meaning 'planning expenditure'. also interested to know about the impact of proposed measures in the budget on their living standard.
Types of 'Budget'
Generally, there are two different types of budget viz. (1) Balanced Budget and (2) Unbalanced Budget. The unbalanced budget is further classified into (1) Surplus Budget and (2) Deficit Budget. A Balanced budget is one in which estimated revenues are equal to anticipated expenditures and there is neither a 'budget deficit' nor a 'budget surplus' available to the government. An Unbalanced budget is one in which the revenues and expenditures are not equal to each other. A Surplus budget occurs when estimated revenues exceeds anticipated expenditures. Surplus budget indicates the financial soundness of the government. In case of high inflation, the government can adopt surplus budget policy to reduce aggregate demand and price level. In present times, however, government has so much economic and social responsibilities that it does not adopt surplus budget strategy. A Deficit budget is one in which estimated expenditures exceeds the anticipated revenues. Deficit budget indicates the financial weakness of the government. Such deficit amount is generally covered through public borrowings or withdrawing resources from the accumulated reserve surplus. In developing countries like Pakistan, where it is not possible to raise such resources through taxation, the government normally resorts to deficit budgeting as the only option. It has been observed that the developed countries normally use deficit budget as a tool to stabilize and control business and economic fluctuations.
First Budgets of Independent Pakistan and India

In the context of the Indo-Pak Sub-continent, budget was first introduced on 7th April, 1860, two years after the transfer of Indian administration from East-India Company to the British Crown. Mr. James Wilson was the first Finance Member who presented the Budget. Mr. Liaquat Ali Khan, Member of the then Interim Government of India presented the Budget of 1947-48. After Independence, Pakistan's first Finance Minister, Mr. Malik Ghulam Mohammad presented the first budget of Pakistan on 28th February 1948 to the Legislative Assembly, which approved it the following day. As a result of this budget, the fields of commerce, banking and economics were rendered so stable that Pakistan was able to stand on its own feet. On the other hand, India's first Finance Minister, Shanmukham Chetty presented the first budget of Independent India on 26th November, 1947.
Definition of 'Budget'
'Budget' is an important policy document through which a Government establishes its economic and social priorities and sets the direction of the economy. 'Budget' reflects the basic values underlying the Government's economic policies and objectives and its future plan to spend huge amount of fund on defense, administration, development and other welfare projects. It is the responsibility of the government to identify possible sources of funds which could be utilized for meeting these expenditures. Budget, in fact, signify the planning process of the government to assess the revenue and expenditure. It shows the income and expenditure of the government during a financial year. A budget is a financial plan and a list of all planned expenses and revenues of a government. According to Tayler, "Budget is a financial plan of government for a definite period". Rene Stourm defines budget as "A document containing preliminary approved plan of public revenues and expenditure". Being a legal document, the budget of any country is often passed by the legislature and approved by the President or the Chief Executive of the country. For the common man, the budget provides an understanding of the financial performance of the government during the previous year and its policies and financial programs for the next year. They are
Approaches to Preparing a 'Budget'

o Line-Item budgeting It is the traditional approach and also called 'incremental budgeting'. It simply uses the current year's actual results and adds expected increases and expected decreases for each account. The budget item groups are usually presented in an incremental fashion as compared to previous time periods, assuming that the "baseline" is automatically approved. Zero based budgeting It is opposite to traditional incremental approach. In this approach every budget line item need to be approved, rather than only changes. Previous expenditure is not taken into account and each program or project is vulnerable to zero-funding. Performance budgeting It is the practice of developing budgets based on relationship between resource applied (i.e. inputs) to units of work accomplished (outputs). It classifies expenditures by administrative units; by functions and by items and determines costs of each program or activity.
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Focus Section
o Program budgeting It provides detailed costs of every activity or program that is to be carried out in a budget. Objectives, outputs and expected results are described fully as are their necessary resource costs. The sum of all activities or programs constitutes program budget. It is considered a transitional form between traditional incremental and performance approaches. Medium Term Budget Framework It is a budgeting approach which relates government's policy priorities to resource allocations and then to the performance. It emphasizes efficient use of limited public resources and supports a strategic allocation of resources. This budgeting approach is intended to improve the aggregate fiscal discipline and micro-level efficiency. the capital requirements of the government and the pattern of their financing. Capital receipts are normally raised by the government by seeking loans from the central bank, commercial banks, financial institutions, market borrowings or through sale of treasury bills, disposing of assets etc. Capital expenditures are normally incurred by government on purchasing property, making investments, loans and advances etc.
Stages of a Budget Cycle

The budget reflects the government's policy priorities and fiscal targets and is developed after passing through a series of consultation processes, normally regarded as the 'budget cycle'. It is an interactive and evolving process in which many stakeholders play their decisive roles to develop a balanced budget. The Budget Cycle normally consists of following stages, depending from country to country:
Basic Elements of a 'Budget' Revenue Budget and Capital Budget

The Annual Financial Statements released by the government constitutes its main budget document. There is a provision in the budget to differentiate the expenditure on 'Revenue Account' from other expenditures. The budget is therefore classified into 'Revenue Budget' and 'Capital Budget'.
Government Budget Revenue Budget Revenue Receipts Tax Revenue Revenue Expenditure Capital Receipts Capital Budget Capital Expenditure
Stage 1: Budget Preparation

The first phase of the budget cycle is budget preparation or formulation in which the executive agency like the Ministry of Finance or Finance Division prepares a draft budget plan or budget proposal. This draft plan is normally formulated behind closed doors and then submitted to the legislative body (i.e. the Parliament) for consideration and debate. Normally, the executive body request proposals from its association departments and divisions, and even the private sector, to send recommendations for budget. The size of the budget depends largely on anticipated revenues and expenditures and also on key parameters like GDP, government priorities areas, inflation, budget deficits, welfare initiatives, etc.
Stage 2: Budget Enactment

The budget plan is presented by the Finance Minister in the Parliament. It is then debated, altered and approved by the legislative body i.e. Parliament. The input of the parliamentary committees is obtained on the budget proposal and eventually after extensive discussion; the budget is passed either intact or with amendments. The approved budget is then executed and implemented by the concerned organizations.
Non-Tax Revenue
Direct Tax
Indirect Tax
(1) Revenue budget Revenue budget consists of the revenue receipts of the Stage 3: Budget Execution government and the expenditure met from such revenues. Once the budget is approved by the legislative body, it must then be Revenue receipts are those revenues which are derived mainly executed as planned with appropriate management control and from tax revenues and nontax revenues. Revenue expenditures accountability systems in place. For efficient and effective are incurred by the government on public spending, infrastructure development, welfare projects, defense expenditures, social sector investments, grants Key Budget Key Budget and subsidies. Documents: Documents: Audit reports; Budget Formulation: Tax Revenues are generated from direct and Executives Legislative Audit The executive formulates budget proposals; Committee indirect taxes. Direct taxes are those which are Supporting the draft budget. reports budget reports to be paid directly by the tax payer (such as income tax, wealth tax, CVT etc), whereas indirect taxes are those whose burden could be Budget Oversight: passed on to others (such as custom duty, Budget Approval: The budget accounts are audited The legislature reviews sales tax, federal excise etc) and audit findings are reviewed by and amends the budget the legislature, which requires and then enacts it into law. Non-Tax Revenues are generated by action to be taken by the executive government from property and enterprises to correct audit findings. (including profits, interest receipts and Key Budget dividends from government's investment), Key Budget Documents: Documents: receipts from civil administration, royalties etc. Budget Execution: Budget law; In-year reports; The executive collects Reports of (2) Capital budget Mid-year report; revenue and spends money legislative budget Year-end reports; committees as per the allocations made Capital budget consists of capital receipts and Supplementary in the budget law. budgets capital expenditure of the government. It shows
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utilization of funds, the government must ensure a fool-proof system to control spending and provision of execution infrastructure. At the execution stage, the responsibility shifts from the federal or central government to a divers network of agencies and department such as tax authorities and finance divisions etc. The budget resources are distributed to the designated recipients within the government. document that initiates budget preparation is the 6th Five Year Plan titled Accelerating Growth & Reducing Poverty. The line ministries determine their strategic objectives and then identify the major activities by operationalizing the strategies into actions. Ministries also consider sector specific planning documents. Under planning stage, some KPIs (Key Performance Indicators) are also defined and also quantitative targets are set against the KPIs. The budget process focuses on services (outputs) delivered and resources required (inputs). Budget Preparation - The Finance Division of the Ministry of Finance has overall responsibility for initiating the budget making process. The 'Budget Wing' within the Finance Division collate and examine the revenue budget submissions, received from different Ministries; summarize them; forward to Parliament for approval and its final publication. The 'Development Wing' is responsible for the Development Budget. The budget is prepared using the Medium Term Budget Framework (MTBF) approach, introduced in FY 20042005. MTBF system connects government strategic policy priorities to resource allocations and resource allocations to performance. Under the MTBF, the budget preparation process in Bangladesh is completed in three phases. In first phase, the Ministries and Divisions prepare/update Ministry Budget Framework (MBF). In second phase, the line ministries prepare estimates for one year and projections for four years, which are forwarded to Finance Division and Planning Commission. These estimates/ projections are reviewed to check for consistency with policies and priorities and for compliance with ceiling and guidelines provided in budget circular. In the last phase, the Finance Division and Planning Commission finalize development and non-development estimates in consultation with respective ministries and submits them before the Parliament for approval. Budget Enactment The Finance Minister presents the budget (Annual Financial Statement) in June in the Parliament of Bangladesh. Except for the Minister's budget speech, there is no discussion on budget on that day. After the budget presentation of budget, there is a general discussion by the House, in which the members express their views on the budget and raise issues thereon, without moving any motions at this stage. The Business Advisory Committee (BAC) decides in advance the time needed for discussing the budget at different stages. Usually more time is allotted for the general discussion of the budget. After conclusion of general budget debate, the House discusses the demands for grants and appropriations in respect of charged expenditure commences. At this stage, the members can move motions to reduce expenditure. Members can move three types of motions to reduce expenditure; these are commonly referred to as policy cut, economy cut and token cut. The Rules neither allows any motion to increase expenditure, nor to alter the destination of a grant. The Speaker, in consultation with the Leader of the House, allots number of days that is compatible with the public interest for discussion and voting on demands for grants. On the last of the allotted days, at the time when the meeting is to terminate or at such hour, the Speaker may fix in advance, every question necessary to dispose of all the outstanding matters in connection with the demands for grants is put forward. Budget Execution After approval of budget by Parliament, the line Ministries, Divisions and relevant Institutions can spend funds allocated to their departments according to approved expenditure
Stage 4: Budget Oversight

The last stage in the budget cycle involves oversight mechanism to ensure effective use of public funds. The budget is audited and reviewed following implementation. This audit task is normally performed by the independent Auditor General office or other audit institutions. Evaluation and auditing are not only important for the legislature to exercise its oversight function, but they are also an integral part of the overall public expenditure management system. A budget glossary is given at the conclusion of this research paper which would provide basic understanding to the readers about different terminologies used in budget documents.
Role of Parliament in Budget Process

The Parliament has to play a proactive and most vital role in analyzing the budget proposal, drafted by the executive agency (Finance Ministry) with a view to safeguard the interest of the general public as well as to match the nation's needs and people's aspirations. As a representative of the people, the parliament acts as a link between the tax payers and the government which spend the tax payers' money. It ensures that the budget reflects the priorities of the nation. The check and balance by the Parliaments brings transparency and accountability and leads to good governance. The parliament debate, criticize and recommend amendments to the budget and for this purpose they seek the input from the parliamentary committees. A strong parliamentary committee system is a precondition for efficient parliamentary involvement and input in the budget process. These committees monitors, reviews and assesses the budget and make useful suggestions for improvement in the budget.
Budget Making Process in SAARC Countries

After basic understanding about the budget, its types, components, cycle, etc now let us have a look at the budget making process in the SAARC countries viz. Bangladesh, India, Nepal, Pakistan and Sri Lanka.
(1) Bangladesh
Legal Provisions - The constitution of the Peoples' Republic of
Bangladesh 1972 provides the basic legal framework for the governmental budgeting process. Articles 81 to 92 of the Constitution outline the requirements of the budgetary procedures. The Annual Financial Statement or the statement of the estimated receipts and expenditure of the Government of Bangladesh in respect of each financial year (referred to as "the budget") is presented to Parliament in accordance with the provisions of Article 87 of the Constitution. The budget is presented to the House in such form as the Finance Minister considers suitable. Budget Cycle - The Budget Cycle starts with formulation of relevant planning and policies. For proper implementation of pledged deliverables, the government formulates policies/planning with varying time-frames. The single most important planning
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plans. All expenditures are monitored and evaluated by the implementing departments themselves. The Planning Commission monitors and evaluates implementation of development projects under Annual Development Program (ADP). The Finance Division reviews quarterly trends of revenue receipts and expenditures against targets set out in the budget. The Finance Minister submits a statement at the ensuing session of the Parliament on the results of the aforesaid review and report on possible remedial measures. Budget Oversight At the end of financial year, public expenditures are audited independently by the Office of Comptroller and Auditor General (OCAG) of Bangladesh. It audits government receipts and public spending and ascertains whether expenditures have yielded value for money in government offices, public bodies and statutory organizations. In addition, financial and performance audits are conducted by OCAG throughout the year who reports are considered by the Parliament to determine whether public spending met its objectives, and whether implementing departments used their resources efficiently and effectively. The Parliament plays its oversight role through three financial committees of the Parliament, i.e. 1) Public Accounts Committee, (2) Committee on Public Undertakings, and (3) Committee on Estimates. These committees make sure that public money is spent in a transparent, effective and efficient manner. Budget Documents - The following financial documents are prepared at the time of budget presentation to the Bangladesh Parliament by the Finance Division: (a) Budget Speech (b) Budget in Brief (c) Supplementary Estimates (d) Annual Financial Statement (e) Budget Summary Statement (Contains 14 separate statements) (f) Detailed Estimates of Revenue and Receipts (g) Demands for Grants and Appropriations (Non-Development) (h) Demands for Grants and Appropriations (Development) responsibilities. The Comptroller & Auditor General (CAG) keeps a check on accounts. The administrative ministries state their plan priorities. The budget is prepared by the budget division in the ministry of finance after consulting with other ministries and the planning commission. Ministries prepare estimates of how much their plan and non-plan expenditure is likely to be for the year. This is reconciled with the finance ministry's estimates of how much money it can make available. The finance ministry estimates how much tax revenue it can raise after accounting for increases in income and inflation. Throughout the process, the finance minister and other officials meet with economists, experts, industry representatives and citizen groups. The finance minister briefs the prime minister and cabinet on budget proposals Budget Enactment - The Finance Minister presents the Budget in Lok Sabha on the last working day of February. The Budget speech has two parts. Part A deals with general economic survey and policy statements, whereas Part B contains taxation proposals. The budget documents are made available to the members of Parliament after the finance bill has been introduced in Lok Sabha, and the House has been adjourned for the day. A few days after budget presentation, there is debate and finally a 'Vote of Account' for expenditure for the next two months of ensuing year is obtained after which the house is adjourned. During this period, detailed estimates of ministries' expenditure, called demands for grants are considered by relevant standing committees. There are 24 such committees which submit reports to the Lok Sabha on each ministry's Demands for Grants. The House discusses and votes on demands for grants. The Speaker puts all outstanding demands to the vote of the House. This device is called 'guillotine'. The Lok Sabha has power to approve or refuse any demand. After discussion and voting, the government introduces the Appropriation Bill, which is intended to give authority to government to incur expenditure. Budget Oversight - The Comptroller and Auditor General of India (CAG) play a crucial role in parliamentary financial control. The Indian Constitution provides for a unitary and independent audit by CAG. The audited Appropriation and Finance Accounts are submitted along with the audit reports of the CAG to the President of India or the Governors of the States according to whether they relate to the Union or the States. These accounts and reports are then caused to be laid before the Union Parliament or the State Legislatures concerned. The primary function of the audit of the CAG is to verify the accounts to ascertain effective and proper utilization of funds. The jurisdiction of CAG extends to audit of Government commercial enterprises, as well as to bodies and authorities substantially financed from Government revenues. The CAG also examines accounts relating to grants and loans given by the Government. CAG has complete discretion to regulate the scope of his audit. Apart from the traditional forms of audit, commonly known as the appropriation audit and regularity audit, the discretionary forms of audit (the propriety audit and the efficiency-cum-performance audit) developed by the CAG have assumed significance from the viewpoint of 'accountability' in a comprehensive sense. The audit looks beyond the mere regularity of expenditure to its prudence and economy and to a general examination of the efficiency and effectiveness with which an organisation is discharging its financial responsibilities. Other Budgets - The Indian Railways, largest public-sector enterprise, and Department of Posts and Telegraph have their own budgets, funds, and accounts. The appropriations and
(2) India
Legal Provisions - The President is obliged under Article 112 of the Indian Constitution to have the Annual Financial Statement (i.e. Union Budget of India) of the ensuing financial year laid before the Parliament (known as Lok Sabha). The Union Budget is presented in Parliament by the Finance Minister each year on the last working day of February. The budget is to be passed by the House before it can come into effect on April 1, the start of India's financial year. Budget Cycle - The Budget cycle begins with the formulation of next financial year's Union budget in the months of August September every year by the budget division in the department of economic affairs under the Ministry of Finance. An annual budget circular is issued by the last week of August or the first fortnight of September every year. This annual budget circular contains detailed instructions for the Union government ministries/ departments/UTs/ autonomous bodies and defense forces, relating to the form and content of the statement of budget estimates to be prepared by them. The ministries are required to provide three different kinds of figures relating to their expenditures and receipts during this process of budget preparation i.e. budget estimates, revised estimates and actual. Budget Preparation - The Ministry of Finance has the overall responsibility for framing the Budget. The Planning Commission sets the overall targets for the ministries, which have specific
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disbursements under their budgets are subject to same form of parliamentary and audit control as other government revenues and expenditures. Dividends accrue to central government and deficits are subsidized by it like other government enterprises. Budget Documents - The Union Budget comprises various documents, which are as under: (1) Budget Speech (2) Budget Highlights (3) Key to Budget (4) Annual Financial Statement (5) Finance Bill (6) Memorandum (7) Budget at a Glance (8) Expenditure Budget (9) Receipts Budget (10) Customs & Central Excise (11) Implementation of Budget Announcements (12) Macro Economic Framework Statement (13) Medium Term Fiscal Policy Statement (14) Fiscal policy Strategy Statement production, services & environment, (5) science, technology, research & development, (6) social protection, (7) art, culture & religion, (8) governance, operations & monitoring, and (9) public order & safety. In the month of May, the DNB sends circulars to government departments and ministries requesting their expenditure requirements. A process of consultations between the departments, ministries, DNB and the treasury takes place between the call for requirements and the presentation of the Appropriation Bill in parliament based on the Annual Appropriation Act. Guidelines and directions for preparation of annual budget are sent to all departments, ministries, and semi- government institutions in the National Budget Circular ('Budget Call') during July of each year, which is posted on the Treasury website and available to the public. Budget Enactment - In November, on the day of Second Reading of Appropriation Bill, the Finance Minister presents his budget speech in the Parliament in which detailed revenues and expenditure proposals are submitted. The macroeconomic framework, budget ceilings, and appropriations are earlier approved by the Sri Lanka Cabinet and the approved Appropriation Bill' is presented in Parliament at least six weeks before presentation of budget. The allocations made in Appropriations Bill could be amended at the committee stage of budget debate in parliament, which is called Third Stage of Reading. The estimates of expenditure of each Ministry and the previous year's performance of Ministries are scrutinized at the Committee Stage Debate. All amendments to the Appropriations Bill need to be finalised before end of December and the Finance Minster has to issue warrants authorizing expenditures from 1st January of the following year. The budget has to be initially approved by majority of Parliament and then prior to the Committee Stage scrutiny and finally at the conclusion of the Committee Stage proceedings. If the Appropriation Bill is not passed in Parliament, rejecting the Budget, it will result in the resignation of Government or in the dissolution of Parliament, as stipulated in the Constitution. Budget Execution - After the approval of Appropriation Bill by the Parliament, execution of the budget proposals takes into effect as soon as the Finance Minister signs the warrant and the Budget Department prepares cash flows. Relevant laws and regulations are made to give effect to the budget proposals. The Treasury Operation Department releases imprest to spending agencies, which starts making expenditures as per the approved budget. They are required to send monthly expenditure reports to the State Accounts Department. The execution process normally continues till end of December each year. There is also a system for constant monitoring of cash flows, project performance, revenue targets etc. Budget Oversight - The government's finances are monitored by an auditor-general appointed by the President of Sri Lanka. The Auditor-General is required to audit the government accounts and submit his report within ten months, that is by October of the following year and his reports are referred to the Public Accounts Committee or the Committee on Public Enterprises. Budget Documents - The budget documents presented at the time of budget in Sri Lanka are as under: 1) Budget Speech 2) Budget Estimates 3) Summary of Budget 4) Fiscal Management Report 5) Global Partnership towards Development
(3) Sri Lanka

Legal Provisions - The Sri Lankan constitution mandates that Parliament shall have full control over public finance and taxes and other levies cannot be imposed without permission of Parliament. The funds of the republic form one consolidated fund, withdrawal from which cannot be made except under the authority of a warrant, issued under the hand of Finance Minister. No bill relating to public finance can be introduced in Parliament except with the sanction of the Cabinet, which is collectively responsible to Parliament. Budget Cycle - In Sri Lanka, the budget is drafted by senior bureaucrats in the Ministry of Finance which determine the budgetary requirements. In July each year, ministries are sent circular asking for submission of budget recommendations. The Appropriation Bill, which is government's main financial authority for the year, is presented in Parliament in the first week of October after which it may be challenged before the Supreme Court within one week. If challenged, the Court is allowed to deliver its verdict within a period of three weeks. The Second Reading of the Bill usually takes place in early part of November and begins with delivery of the budget speech by the Finance Minister. The debate on the Second Reading of the bill lasts for seven days in which almost all members participate. After the passage of the Second Reading, the Bill is referred to the Committee of the whole House. The appropriation estimates are examined by a committee of whole House. At this stage, the relevant minister, as well as the Finance Minister is answerable to the House. The committee stage lasts 19 days, after which the Third Reading is passed. Apart from the Appropriation Bill, supplementary estimates may be moved at any time during the year and when required. Budget Preparation - The budget process begins from start of fiscal year in Sri Lanka i.e. from January. The Fiscal Policy Department (FPD) and the Treasury of the Ministry of Finance and the Central Bank of Sri Lanka jointly start discussing the macroeconomic framework in January. Based on macroeconomic outlook the Department of National Budget (DNB) prepares expenditure ceilings for each Department and Ministry. Budget ceilings are made in terms of nine broad clusters i.e. (1) pro-poor, pro-growth livelihood and regional development, (2) human resource development, (3) infrastructure development, (4)
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6) 7) 8) 9) New Revenue Proposals New Expenditure Proposals Gross Borrowing Requirements Technical Notes to Budget Proposals approval, after which the budget becomes an Act.
Budget Execution - The execution of budget is made by Ministry

of Finance. The fund is disbursed in four- monthly basis to the departments according to the schedule of the project and actual performance. The first four-monthly fund is disbursed on the basis of proposed expenditure and work. The next four-monthly budgets are disbursed after submission of the progress reports of the work. The planning office scrutinizes the progress reports, finds out the causes of deviation if any, and gives advice for correction. The budget office, on the other hand, may stop fund disbursement or reduce the fund on the basis of the information received in the fourmonthly report regarding actual expenditure and physical performance. The control of budget through audit is done by the office of Comptroller General and Auditor General. The purpose of audit is to ensure that expenditures are made according to budget and the existing the laws and rules. Budget Oversight - In Nepal, the overall responsibility of audit rests with the Auditor General (AG). The AG prepares the annual report after carrying out audits of all government transactions and submits its report to the government. This report is then forwarded to Parliament for discussion and implementation. There is also a 'Central Monitoring and Evaluation Division (CMED) of the National Planning Commission (NPC) which monitors the core projects selected and sends its report after every four months to the National Development Action Committee (NDAC), headed by the Prime Minister. Budget Documents - The following documents are presented at the time of budget presentation: 1) Budget Speech 2) Budget-in-brief 3) Red Book - contains line-item Estimates of Expenditure 4) Yellow Book - contains performance review of Public enterprises 5) White Book - It is a source book for projects financed with foreign assistance
(4) Nepal
Legal provisions - The interim constitution of Nepal provides
some explicit provisions for the financial procedure of the country. The constitution has not mentioned the word 'budget' explicitly. It is referred to as the Annual Estimates. The Financial Procedural Act, 1998 provides authority to the Ministry of Finance to formulate, execute, and control budget. The Economic Administration Regulation, 1999 to the Financial Procedural Act, specifies the procedures to sanction and spend the allocated budget, and to implement the budgetary policies. A separate Budget Division in the Finance Ministry works on budgetary expenditures. Budget Cycle - The Budget Division of Finance Ministry prepares the budget guidelines in line with economic planning and fiscal policy. It sends circulars to government ministries and departments to send the estimate of revenue and expenditure on the basis of these guidelines. The ministries and departments also send such circulars to their concerned offices. After receiving the estimates, there is detail discussion with representatives of different agencies in the budget division. Finally, the budget document is prepared in the final form. In general, the Finance Minister presents the budget message with budget-in-brief in the parliament (Sansad). The fiscal year in Nepal starts from 16th July and ends with 15th July of the following year. The Annual Estimates include an estimate of revenues; the money required to meet the charges on the Consolidated Fund (Charged Expenditure); and the money required to meet the expenditure to be provided for by an Appropriation Act (Voted Expenditure). Budget Preparation - The budget is formulated by the Budget Division of the Ministry of Finance (MOF) Nepal. The regular budget is prepared by the Finance Ministry, whereas the development budget is formulated by National Planning Commission (NPC), in consultation with the concerned Ministries. The budget process starts few months before the start of the i.e. 16th July and consists of six stages. In the first stage, the level of government expenditure and size and ceilings of next budget is determined by the Resource Committee. In second stage, the NPC fixes priority on main sectors of government activity. In third stage, the operating department formulates proposed projects and submits them to the NPC. In fourth stage, NPC reviews and selects the projects for inclusion in budget and submits them to budget division of MOF along with financial estimates. In the sixth and last stage, the budget division reviews selected projects and gives final shape to the budget. Budget Enactment - In second or third week of July, the Finance Minister of Nepal presents his budget speech, along 'budget-inBrief', at the joint session of Parliament, which is followed by a brief discussion of underlying budgetary principles and policies. After completion of broad discussion on budgetary estimates, the Finance Minister tables the 'Appropriation Bill' and 'Finance Bill'. The Appropriation Bill consists of details of programs and their regional distribution. The Parliament then participates in the Articlewise and Ministry-wise discussion on budgetary allocation. The parliament debate continues upto two months and finally in September, voting on bill takes place. After enactment in the Parliament, the budget is submitted to His Majesty the King for
(5) Pakistan
Legal Provisions In Pakistan, budget is governed by the
Constitution and rules relating to Parliamentary procedure. The Constitution requires that the Federal Government presents an 'Annual Budget Statement (ABS) to the National Assembly in respect of each financial year, which begins on 1st July. The business of the National Assembly is governed by the Rules of Procedure and Conduct of Business in the National Assembly Rules, 2007. Essentially, Rules 182-197 govern the manner in which the National Assembly participates in the budgetary process. Prior to presentation to National Assembly, the budget is discussed and approved by the Cabinet. The budget shall then be presented to the National Assembly by the Finance Minister on a date determined by the Leader of the House. No other business is allowed in the House on that day. After this, at least two days are set aside before any discussion of the budget commences. At least four days must then be allocated for budget discussion. The Constitution underlines that all receipts and expenditure to be incurred in a particular financial year are to be met by the Federal Consolidated Fund (FCF) of Pakistan, which constitutes the total sum of revenues and moneys received and loans raised by the Federal Government. There is also a Public Account of the Federation (PAF), which consists of all other moneys received by or on behalf of government. The custody of both the FCF and PAF is
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governed and regulated by the Act of Parliament (Majlis-e-Shoora). Budget Cycle - In Pakistan, the budget is presented usually in the first week of June every year by the Federal Government in the National Assembly and is followed by each of the provincial governments in their respective Provincial Assemblies. The budget cycle / calendar begin with issuance of a 'Budget Call Circular' by the Finance Division of the Ministry of Finance in October every year. From November to January, the budget estimation is carried out on the basis of estimates received from different Ministries and Divisions. The Finance Department conducts detailed scrutiny during January and February and finally in April the budget proposals are finalized by the Finance Department. In May/June, these budget proposals are forwarded to the Federal Cabinet for approval, after which it is presented in the Parliament (National Assembly) in June. In July, after the approval of the Budget by the Parliament, the funds are released by the Finance Department for spending by the different Ministries and Departments.
Budget Execution After legislative and executive approval of

the Budget, the Finance Ministry sends a release letter to all ministries, departments and agencies and their respective offices of Accountant General of Pakistan Revenue (AGPR) or Accountant General (AG) advising that funds are being made available against their budgets. AGPR/ AG offices in turn inform district accounting/ treasury offices of the availability of their funds. The federal government releases funds at specific intervals according to specific formulae and percentages. The provinces release allocations to district governments on first of every month. The Ministries/divisions are required to send a monthly statement of expenditure to the Ministry of Finance through financial advisors. A mid-year review of budget based on reconciled accounts is conducted, which helps formulate a strategy for budget implementation for remaining period. There are clearly established procedures for approved reallocation of expenditures from one line item to another. The Principal Account Officer (PAO) has power to reallocate funds within the department below a certain threshold. Reallocations above a certain threshold and transfers between major budget heads must be approved by the Ministry/ Departments of Finance at the time of each month's reconciliation process. All supplementary grants are subject to approval by the Parliament at the time of the next year's budget. Budget Oversight The Auditor General of Pakistan (AGP) is authorized to conduct independent and objective assessment of financial governance process to facilitate legislative oversights of the parliament on government operations at national, provincial and district levels. It is a constitutional body which is fully mandated to conduct all kinds of audit such as certification audits, regularity and compliance audits of expenditure and revenue receipts, performance audits on the outcomes of various projects and programs with emphasis on social sectors. AGP also conducts special studies on any matter of public importance on the case of urgency. The audit reports are placed before the assembly and the Public Accounts Committee (PAC) which deliberates on the reports and decides to hold the officials accountable for audit findings and may even order action including administrative or criminal action against officials. The document System of Financial Control and Budgeting (2006) has underlined the scope for internal auditing of the spending by each ministry/department. In each ministry/division there is a Chief Finance and Accounts Officer (CFAO) who is assigned with matters of risk management, asset protection, internal control/audit, reconciliation of accounts, monitoring and coordination with Departmental accounts Committee, Public Accounts Committee and financial properties of expenditure and receipts. Budget Documents The following budget documents are usually presented at the time of budget presentation of the Finance Minister in the National Assembly: 1) Budget Speech 2) Budget-in-Brief 3) Budget at a Glance 4) Annual Budget Statement (ABS) 5) Details of Demands for Grants and Appropriations (Pink Book) 6) Demands for Grants and Appropriations (White Book) 7) Explanatory Memorandum of Federal Receipts 8) Schedule of Authorized Expenditure 9) Supplementary Demands for Grants and Appropriations 10) Estimates of Foreign Assistance
Budget Preparation - The budget process begins in October

every year with the issuance of a 'Budget Call Circular (BCC) by the Ministry of Finance to all ministries, divisions and departments of the government. The BCC explains the procedure for preparation of Budget estimates and provides time-line for completion of various stages of Budget. The original estimates are developed by agencies and departments, keeping in view the past actual, current trends and future expectations and commitments. These estimates are then submitted to relevant administrative ministries and divisions for examination and onward transmission to concerned Financial Advisers with recommendations. Thereafter, the Financial Adviser and Finance Ministry carry a detailed scrutiny of the estimates before they are finally accepted for inclusion in the budget. For the finalization of Annual Development Plan (ADP), there is another institution named as 'Priorities Committee (PC) which meets regularly in April each year, under chairmanship of Planning Division to evaluate and prioritize projects for allocation of resources. This meeting is attended by all line ministries and provincial governments. In May, another meeting of 'Appropriations Committee' is held which is chaired by Finance Division. This Committee discusses proposals for sector-wise allocations which are then finalized by the Finance Division.
Budget Enactment The budget (Annual Budget Statement) is presented by the Finance Minister in the National Assembly during the second week of June every year and is passed by the National Assembly by the beginning of last week of June. This process generally leaves 15 to 20 calendar days and around 12 to 17 working days for various stages of budget debate in the National Assembly. Since 2003, it is a requirement that the budget statement is copies to the Senate at the same time as its presentation to the national assembly. The Senate may discuss the budget proposals and make recommendation to the National Assembly, However, its recommendation are non-binding. Besides ABS, the 'Demands for Grants' is also presented which is made in respect of the grants proposed for each Ministry or Division. Each demand contains a statement of the total grant proposed and a statement of the detailed estimate under each grant divided into items. The approved budget is referred to as the 'Schedule of Authorized Expenditure' (SAE), which is then submitted to the President of Pakistan for assent.
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BUDGET GLOSSARY
1. 2. 3. 4. 5. 6. 7. 8. 9. Actual Expenditure Appropriation Accounts Annual Development Plan Annual Development Program (ADP) Statement Appropriation Budget Budget Call Circular Budget Estimates (BEs) Budget Resolution Amount expended by a spending department/spending unit out of the funds allocated against a particular account head. A comparative statement of actual expenditure against respective budget allocations separately for each grant. These Accounts are published annually by Auditor General's office (through the provincial Accountants General/AGPR) and are prepared according to Function and Object classification A document is issued by Planning Commission and includes yearly targets. The key sectors covered include Growth, Saving and Investment; Balance of Payments; Fiscal and Monetary Development; Poverty Reduction and Human Development. (See also 'Medium Term Development Framework') A statement of ongoing development schemes and those proposed to be launched by a provincial government in a fiscal year. It is similar to Public Sector Development program (PSDP) at the Federal level. Allocation of funds to a spending department. It is an Act of Parliament that enables department to spend money for specific purposes. A government's Annual Financial Plan describing the proposed expenditures and the means of financing them. An official notice issued by Ministry of Finance (or Finance Department in case of a Province) to line ministries/departments inviting them to prepare and submit budget estimates for the following fiscal year. This includes budget forms, guidelines and instructions for preparing budget estimates and calendar of activities leading to final presentation of budget in Parliament. Demands prepared for next fiscal year submitted to the Parliament for approval. Annual framework within which the Parliament makes its decisions about spending and taxes. This framework includes targets for total spending, total revenues and the deficit as well as allocations, within the spending target for spending. Receipts obtained from sources of finance other than Revenue. Examples include loans, advances, grants, etc. Expenditures met from capital receipt. For example, research and development activity met from loan obtained from domestic sources. This can be both Development and Non-Development (or Current) Expenditure. A system of budget control whereby funds are released to spending units on the basis of activities planned to be carried out in a fiscal year. Currently, this system is applicable to Federal Development Projects only. Expenditures met from the consolidated fund, which, under the Constitution, must be discussed, but are not submitted to the vote of the National or Provincial Assemblies. A scheme of systematically recording, aggregating, consolidating, summarizing and reporting government financial transactions. Chart of Accounts prescribes various codes for Function, Object, Entity, Fund, Project, etc. All budget books (including Annual Budget Statements) use codes prescribed under the Chart of Accounts. Operating account of the Government and consists of various financial resources, the balance of which is available for appropriation against the general operations of the Government. There are separate Consolidated Funds for Federal and each of the Provincial Governments, i.e.: Federal Consolidated Fund Sum of internal and external resources of the federal government. Provincial Consolidated Fund Sum of internal and external resources of the provincial government A development project is an activity undertaken to acquire, build or improve physical assets or develop human resources and is provided within the development expenditure grant. A development project usually has a finite life and a specific source of funding. At the provincial level, it is normally referred to as "Development Scheme". (See also 'Non-Development Expenditure') A tax imposed directly on the income or capital of a person or organization, rather than as part of the price of goods or services. Tax on an individual's income, referred to as Income Tax, is an example of a Direct Tax. All current and development expenditures on Revenue Account and current and development expenditures on Capital Account. The term 'Expenditure' as used in Annual Budget Statement and related documents usually covers Budget Estimates, Revised Estimates and Actual Expenditure. Accounting period followed by the government. It begins on 1st July and ends on 30th June every year. One of the five components of Chart of Accounts' used to identify 'the purpose' for which a budget allocation is utilized. Some common "functions" (and their relevant codes) are: Health (07), Education Affairs and Services (09), Economic Affairs (04), etc. Funding approved for a Ministry or department against their Demands through the Schedule of Authorized Expenditure (SAE). A standard measurement of the size of the economy. It represents the total value of goods and services produced during a fiscal year, including those of the private sector and the government. Unlike an Annual Budget, the MTBF is a multi- year approach to budgeting which links the spending plans of the government to its policy objectives. It is aimed at providing ministries/departments the space and flexibility they need to formulate, plan and implement policies that focus on public service delivery or 'output'. A Framework that provides medium term strategies for the key sectors of economy. It is prepared by Planning Commission under the direction of National Economic Council. It is implemented through Annual Development Plan, which provides the flexibility for adjustments to targets/ strategies given in the MTDF. A Review of budget allocations and actual expenditures during a fiscal year. For development projects, budget review is carried out on a quarterly basis with detailed review in the middle of the year and usually involves both financial performance and physical progress of the projects/schemes. Expenditure relating to on-going/operational costs of the government e.g. Pay and Allowances of employees, operating expenditure, repair & maintenance, etc. Non-Development Expenditure is also referred to as 'Current Expenditure'. One of the five components of Chart of Accounts' used to identify 'economic classification' of a budget allocation. Examples include Pay & Allowances (Code A01), Repairs & Maintenance (Code A13), Operating Expenses (A03). A Pro-forma prescribed by Planning Commission to be prepared before initiating any development project. A document that provides focused strategy for poverty reduction based on four pillars, i.e. accelerated and broad-based economic growth while maintaining macroeconomic stability; improving governance and consolidating devolution; investing in human capital; and targeted programs with emphasis on social inclusion. Combined Expenditure of the federal and provincial governments relating to development projects/schemes. PSDP document includes project wise allocations for federal projects separately for each Ministry/Division for a particular fiscal year. This is similar to the Annual Development Program (ADP) in the provinces. Those specific-purpose moneys for which Federal and Provincial Governments have a statutory or other obligation to account for, but which are not available for appropriation against the general operations of the Governments. For example, inflows into and disbursements from savings schemes launched by the government from time to time. A body constituted from the members of the National Assembly or Provincial Assembly which is responsible for examining and reporting, as detailed in the consolidated financial statements prepared by the Auditor General of Pakistan Transfer of allocated amount from one unit of appropriation to another such unit is called 'Re-appropriation'. This is done to utilize 'saving' of budget allocation in a unit/head of appropriation. For example, if it is anticipated that budget allocation for Utilities could not be fully utilized during the fiscal year, the spending department can request for transfer of un-utilized amount to another account head, e.g. repairs & maintenance. Certain restrictions apply on Reappropriations. Expenditure met from revenue receipts. This can be both Development and Non Development (or Current) Expenditure. Receipts which are collected during the normal operations of the government and make up the largest proportion of government's total receipts in a fiscal year e.g. income tax, sales tax, CVT etc. collected by or on behalf of government. Budget Estimates adjusted for any Supplementary grant, Surrenders or Re-appropriations are called Revised Estimates. Amount un- utilized out of budget allocation. Relinquishment of allocated funds by a spending department is called 'Surrender'. This happens when allocated funds are not likely to be spent by that spending department in a fiscal year. A pro- forma used by provincial government departments for preparation of budget estimates. Expenditure (SNE) Additional funds under a particular object not provided in the original budget. Supplementary budget is prepared and approved during the year of execution, by the National Assembly. This refers to that portion of expenditure on which the Assembly votes. Under the requirements of the Constitution, expenditure in the Annual Budget Statement (ABS) is separately shown for "charged expenditures" and "voted expenditures".
10. Capital Receipts 11. Capital Expenditure 12. Cash & Work plan 13. Charged Expenditure 14. Chart of accounts 15. Consolidated Fund
16. Development Project 17. Direct Tax 18. Expenditure 19. Fiscal Year 20. Function Code 21. Grant 22. Gross Domestic Product (GDP) 23. Medium Term Budgetary Framework (MTBF) 24. Medium Term Development Framework (MTDF) 25. Mid-Year Budget Review 26. Non-Development Expenditure 27. Object Code 28. PC-1 29. Poverty Reduction Strategy Paper (PRSP) 30. Public Sector Development Program (PSDP) 31. Public Account 32. Public Accounts Committee 33. Re-appropriation
34. Revenue Expenditure 35. Revenue Receipts 36. Revised Estimates (REs) 37. Savings and Surrenders 38. Schedule of New 39. Supplementary Budget 40. Voted Expenditure
Focus Section
Budget 2013-14 Proposals
Reengineering Tax System

By Huzaima Bukhari & Dr. Ikramul Haq
very year before the announcement of annual federal budget -which has become an official ritual -- plethora of tax proposals are received by the Federal Board of Revenue (FBR) from trade and professional bodies, tax bars and industry's representatives. For the last many years, FBR itself has been soliciting budget proposals by placing detailed guidelines on its website. However, each year the Finance Bill proves to be a hopeless document containing meaningless changes in tax codes, imposing more and more burden on the existing taxpayer sespecially through cumbersome withholding of taxes -- with no policy shift to bring the untaxed sectors and non-filers in the tax net. Taxation in Pakistan is oppressive, lopsided and counterproductive -- there is only 2% of corporatization of total business. By heavily taxing corporate sector vis--vis firms and association of persons, FBR has been encouraging undocumented sector. We have only 60,000 companies and annual addition is just 3000 or even less, whereas in countries like Malaysia and Turkey having much less population than Pakistan, the number is in millions with impressive annual growth. If Pakistan wants to move from undocumented economy to regulated and transparent corporatized sector, it will have to reduce corporate rate -- restricted to 20% if not less -- and will have to tax firms and other non-corporate business entities at a higher rate -- between 25% to 30%. Taxation should serve as a catalyst for industrial expansion and economic growth. In Pakistan the ill-directed, illogical, regressive and unfair tax regulations are causing a dampening effect on the industrial and business growth. The sole stress on meeting revenue targets, without evaluating its impact on the economy, has crippled our trade and industry during the last few years, especially since we have started submitting completely before the dictates of the foreign donors. Had the successive governments concentrated on economic growth and industrial expansion, there would have been consequential substantial rise in taxes today. It is impossible to enhance revenues with stagnation in economy; and over-taxing such economy, as has been done in Pakistan, can destroy the revenue system as well. The priority of our tax managers is achieving revenue targets, fixed ambitiously every year in utter disregard of how economy is actually behaving. This is the main problem of tax system. By fixing revenue targets in isolation and without making necessary efforts to improve productivity and economic growth, Pakistan has been forced into a quandary, where it can neither afford to give any tax relief package to the trade and industry [due to growing fiscal deficit] nor can it achieve a satisfactory level of economic growth [due to retrogressive tax measures]. This is a vicious circle which has ensnared our policymakers. They will have to find ways and means
to come out of this tangle to make Pakistan an economically viable and secure place which can attract investors. In a country where there is no security of life or property, notwithstanding the availability of a host of tax benefits and other incentives, investors would never come forward. FBR, apex administrative revenue authority, has been singlehandedly destroying Pakistan's trade and industry by resorting to discretionary powers [Statutory Regulator Orders (SROs)], withholding undisputed refunds payable to the taxpayers, making excessive tax demands and resorting to all kinds of negative tactics and highhandedness to meet its budgetary targets. Such actions of the tax machinery are detrimental for business and industry and resultantly, FBR not only has failed to tap the real revenue potential but has remained unsuccessful in meeting revised targets for the last many years. Besides, there is perpetual deterioration in our fiscal and budget deficits. There cannot be two opinions about the complete shifting of our economic priorities. We, as a nation must concentrate on increasing our productivity, efficiency and economic growth, which alone can ensure more revenues for the State. The main cause of our pathetic economic situation is existence of inefficient, corrupt, repressive and criminal governments/institutions, which do not give a damn for the welfare of the common people. Successive governments' onerous tax and regulatory policies on the dictates of the foreign masters have pushed millions of people below the poverty line. We will have to move quickly and decisively to reverse this trend by restoring Pakistan's undeniable geo-strategic and business competitive position in the region. There is an urgent need to take necessary and tough decisions to make Pakistan a respectable place to live, work and invest. This paper, therefore, is not proposing cosmetic changes in the Income Tax Ordinance 2001, Sales Tax Act 1990, Federal Excise Act, 2005 or the Customs Act, 1969. It is concentrating on some key areas where paradigm shifts are needed in structural and operation level to ensure not only more tax revenue for the State but also business growth, social equity and fairness so that honest taxpayers are not disillusioned - presently FBR is extending concessions, immunities and amnesties to dishonest noncompliant people engaged in trade, business and industry.
Countering Tax Evasion

It is a curious paradox of our situation that while money for worthwhile industrial and business growth and public benefits is scarce, there is colossal unaccounted cash supply circulating in the economy in search of further undercover gains. What is more tragic is that this social evil inherent in the tax system gets doubly
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Focus Section Focus Section

compounded as it necessitates greater and greater tax burden on those who are law-abiding. The most crucial problem faced by us in fiscal reform programme is that of devising astute and stringent measures to curb tax evasion so that we can distribute the burden of taxes fairly and justly between different persons in the same or similar walks of life. Honest taxpayers have to be safeguarded as day by day they are being disillusioned by the fact that mighty tax evaders are not paying anything with the connivance of their friends and mentors in the tax machinery. The unholy alliance between tax evaders and corrupt tax officials has to be eliminated as a first and foremost step if we want to initiate any meaningful change in the tax system. Pakistan must have 'Compulsory Public Disclosure of Assets Law' requiring the following to make their assets and liabilities public: o High ranking civil and military officials o All Senators, MNAs and MPAs o Judges of the superior courts o Any person who have availed loans exceeding Rs. 50 million from any financial institution o Professionals like lawyers, doctors, chartered accountants, engineers, journalists, consultants etc The above privileged classes of society shall act as an example for others. Their declarations would inspire common people to pay their taxes honestly. The State needs to wage an all-out war against burgeoning black economy, money power and corrupt politicoadministrative structures. This war must start from the mighty classes as suggested above. The people of Pakistan have a right to know how these mighty sections of society amassed immense wealth without paying taxes.
Change in Tax Policy

There is a national consensus that existing tax policy needs to be reformulated to provide an equitable, pragmatic, investmentoriented and business-friendly tax system, integrating good tax administration with simplified tax laws that are easily understood and hassle-free from the implementation perspective. Efforts of the government in the past to reform the tax system through special task forces, recruitment of new members on market wages and relying on the reports of so-called foreign experts had not yielded any positive results or acceptability from the taxpayers. It remained a closed door, bureaucratic exercise with no meaningful dialogue with the people and experts who matter in the subject. In the absence of a well-designed tax policy, the agenda of tax reforms would always remain lopsided. The government should not make any legislative and administrative changes until a transparent tax policy is announced and support of those who are affected by it, is secured. Over the period of time our tax system has become rotten, oppressive, unjust and target-oriented. There is a dire need to discuss the philosophical framework and principles that should be the main concern of our tax policy that is above mere achieving of targets set out unreasonably by foreign donors. Our potential is much higher than these targets, which we can never attain with the present tax laws and incompetent, inefficient and corrupt tax machinery.
The duty to pay taxes is seen as a collective responsibility rather than a personal one. The ability-to-pay principle views tax policy issues in isolation to incidence of public expenditure. Many regard this principle as the most equitable and just method of taxation -emphasized primarily for its redistributive role. We in Pakistan have completely deviated from this principle, which is a constitutional obligation of the government. We have to follow Quranic injunctions in this regard which unambiguously and unequivocally commands us to spend in Allah's way whatever is surplus after the fulfillment of one's legitimate needs [2:219]. There is no room for concentration of wealth in a true Islamic society. The existing tax system is highly exploitative and unjust. It protects the rich and exploitative elements that have monopoly over economic resources. There is no political will to tax the privileged classes. The common man is paying an exorbitant sales tax of 16% (on many finished imported items the impact is as high as 25% after adding all other duties, taxes etc) on essential commodities like eatables, but the mighty sections of society such as big industrialists, landed classes, generals and bureaucrats are paying no wealth tax/income tax on their colossal assets/incomes. The determination of a tax base capable of measuring an individual's ability-to-pay is a major problem of our tax system. This rule is incorporated in the form of progressive rate schedule for personal income tax, estate duty, and property tax worldwide. In Pakistan we have moved from this policy to unequal sacrifice rule where the mighty civil and military bureaucrats (now they are part of the landed aristocracy by getting State lands as awards and rewards), rich industrialists and greedy businessmen are paying meagre personal taxes and the poor people are compelled to pay sales tax of 16% and subjected to hardships due to ever rising costs of public utilities and POL products. This is in direct violation of Quranic injunctions and Article 3 of the Constitution of Islamic Republic. It is the duty of the government to immediately remove these dichotomies and distortions. Taxes should be for the welfare and benefit of public at large along with making the State invincible, but definitely not for the luxuries of the rulers and State functionaries.
Benefit Principle
According to this principle, an equitable tax system is one under which tax payments are based on the amount of benefits received from government services. In other words, the cost of government services should be apportioned among individuals according to the relative benefits they enjoy. Clearly, implementation of the benefit principle presupposes determination of the incidence of public expenditure before deciding distribution of tax burden. Thus it encompasses issues of both tax and expenditure policies. Our successive governments have failed to convince the people that payment of taxes is their collective responsibility. All civil and military governments alike had been engaged in wasteful expenditure, never caring to live within their means and failing to
Equity Principle
If a given amount of revenue is needed to finance public services, then each taxpayer should contribute in line with his ability-to-pay taxes. Those who possess more economic power (income and wealth) should contribute more to public exchequer and vice versa.
Focus Section
undisputed right by levying tax on services on presumptive basis -this is in substance indirect tax -- under various sections of the Income Tax Ordinance, 2001. Such taxes are not taxes on income, which the federal government is empowered to levy under item 47 of the Federal List. Generally, the purpose of tax assignment is to augment the resources of lower level governments. The assignment of tax may be conditional. Thus, it may be obligatory on the part of a lower level government to levy the tax assigned to it. Not only this, the lower level government may not have power to alter the basic structure of the assigned tax. It may enjoy flexibility in fixing the tax rates within a minimum and maximum range prescribed by the higher-level government. There is an urgent need in Pakistan to reconsider the equitable distribution of fiscal and taxing powers among federation, provinces and local governments. True provincial autonomy can only be guaranteed if assignment of tax principle is followed in letter and spirit. Establishment of local governments is a Constitutional obligation [Article 140A] elections and asking them to dislodge the District Management, provincial autonomy but all the four provinces and federal government have failed to fulfil this command. Let the provinces have exclusive right over their resources and finances and they must transfer taxes to local governments so that grass root democracy and funds for public services can be utilised and guaranteed.
even protect the life and property of the people, not to talk of providing them basic needs of health, education and civic amenities. Are these rulers justified to ask people to tighten their belts while their own lifestyle is Shahana (like royalty)? Tax policy must be used as a tool of distributive justice. The Government should launch programmes, financed mainly through taxes, to solve the twin problems of unemployment and poverty. These welfare-oriented schemes may also include subsidized/free medical and educational facilities, low-cost housing, and drinking water facilities in rural areas, land improvement schemes, and employment guarantee programmes. Once people see the tangible benefits of the taxes paid, there will be better response to tax compliance. Taxes cannot be collected through harsh measures and irrational policies. The rulers and tax bureaucrats would have to demonstrate a clear inspirational model by their actions, so that the taxpayers can place their trust in them and pay taxes honestly and diligently.
Buoyancy and Elasticity

Tax revenue may change through automatic response of the tax yield to changes in national income and/or through the imposition of new taxes, revision of the bases and/or the rates of the existing taxes, tax amnesties, stricter tax compliance and other administrative measures backed by legal action. Changes in the tax yield resulting from modifying tax parameters (bases, rates etc.) are called discretionary changes. Variations in the tax yield flowing from the combined effects of automatic responses as well as discretionary changes constitute the buoyancy of a tax. It is computed by dividing percentage change in tax yield by percentage change in national income. The Pakistani experience in this regard has been very disappointed as admitted by the government in almost every Economic Survey in the following manner: Although successive governments have made attempts to narrow the revenue-expenditure gap by taking new fiscal measures in the federal budgets, little improvement has taken place in the overall fiscal deficit. Why is it so? Pakistan tax system is still characterized by a narrow and punctured tax base, over reliance on distortionary import-related taxes, high taxes on the one hand and tax concessions and exemptions on the other, and weak tax administration. The combined effect of these structural weaknesses resulted in low and stagnant tax-to-GDP ratio on the one hand, and tax elasticity and buoyancy on the other. Such a tax system has severely hampered resource mobilization efforts in the past despite a series of discretionary measures taken in almost every federal budget to reduce the widening gap between revenue and expenditure. Buoyancy estimates assess the overall success of government measures to increase tax revenues while elasticity coefficients indicate the inherent responsiveness of a tax system to changes in national income. In the absence or weakness of elasticity attribute of the tax system, a government will have to revise tax rates and tax bases every year to keep the share of tax revenue in national income undiminished. Such frequent changes complicate tax laws,
Taxpayers' Bill of Rights

The Government, before imposing any new obligations on the taxpayers, must restore the confidence of taxpayers by immediately promulgating a Taxpayers' Bill of Rights, as was done by a number of countries including USA and UK in the 1980s. The provisions of the Bill must:a) Safeguard and strengthen the rights of taxpayers. b) Ensure equality of treatment c) Guarantee the privacy and confidentiality of their declarations d) Provide right to assistance by State in tax matters e) Guarantee unfettered right of appeal through an independent appellate system and alternate fast-track administrative dispute resolution system.
Assignment of Tax
Assignment of a tax means transfer of taxation power from a higher level to a lower level government. Taxation power includes the following: right to levy tax, collect tax, and appropriate proceeds from the tax. Thus, there can be three interpretations of assignment of a tax. Firstly, higher-level government may levy and collect a tax but handover the entire proceeds to lower level governments. Secondly, the higher-level government may levy a tax but allow the lower level governments to collect it and retain fully the proceeds therefrom. Finally, the higher-level government may transfer a tax to lower level governments, a situation which defines assignment of a tax in its strictest sense. In the Pakistani scenario the exact opposite has happened. The levy of presumptive taxation by the federal government and nonexistence of local bodies to raise funds for providing education and health at grass root level have denied the fundamental rights of the people. The provinces enjoy exclusive right under the Constitution to levy taxes on services within their respective physical boundaries. The federation blatantly encroaches upon their
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reduce administrative efficiency and are also politically inexpedient. This is what happened in Pakistan since 1977. It is high time that we must go for a paradigm shift in our tax policy to avoid these kinds of negative effects. Therefore, the tax structure should be redesigned so as to impart a reasonable degree of elasticity to the tax system. Taxation is a potent instrument to shape and influence the socioeconomic polices of a country. It is therefore imperative for us to formulate a nationally acceptable tax policy keeping in view our own peculiar conditions. Our Tax policy must take into account: o Present stage of our economic development. o Objectives of economic policy. o Priorities of economic policy continually change with the changing economic, social, and political milieu. It is necessary for us to use the forthcoming budget as a tool for CHANGE and not as guardian of status quo. In taxes, we need to bring some fundamental structural and operational changes. Mere amendments here and there will serve no useful purpose. New tax strategy should entail the following three components: taxation to regressive taxation, on the dictates of foreign donors. It is a dangerous step that is bound to force us to civil strives, as our society is already divided on economic, geographical and religious divisions. The primary function of a tax system is to raise revenue for the government for its public expenditure as well as for local authorities and similar public bodies. So the first goal in development strategy as regards taxation policy is to ensure that this function is discharged effectively. The performance of the Pakistani tax managers is highly disappointing as fiscal deficit remained high during the last decade and the revenue targets fixed annually were revised downwards many a times and even then the same could not be achieved. The Tax-GDP ratio remained dismally low. The second equally important function is: To reduce inequalities through a policy of redistribution of income and wealth. Higher rates of income taxes, capital transfer taxes and wealth taxes are some means adopted for achieving these ends. In Pakistan there has been a gradual shift from equitable taxes to highly inequitable taxes. The shift from removing inequalities through taxes to presumptive and easily collectable taxes has destroyed the entire philosophy of taxes. This deviation has effectively transferred the burden of taxes from the rich to the poor.
Resource Mobilisation
The first and foremost objective must be to raise resources for public authorities for administration and development. Taxes are the main instrument for transferring resources from private to public use. By designing an appropriate tax structure, resources can be raised from those who are holding them idly or squandering them on luxury consumption. According to Roy Gobin, the revenue criterion is usually the dominant consideration, since governments in developing countries have become increasingly aware of the active role which budgetary measures can play not only in initiating and promoting growth but also in maintaining political power. Not only are higher revenue levels needed, but also tax yields should be increased at a faster rate than income, if infrastructural investments and social welfare expenditures are to be financed without generating unacceptable inflationary pressures and/or increasing reliance on foreign assistance. The revenue performance is in fact the best and optimal use of resources. Since the composition of investment is an important determinant of growth rate of the economy, public policy must discourage the flow of resources to low priority areas so that they could be diverted to vital sectors of the economy. By imposing high tax rates on luxuries and other low priority items (such as motor cars, air conditioners, and jewellery), the government can discourage the consumption and production of such items, ensuring in the process release of resources for high priority sectors.
Stabilisation
Initial developmental efforts are generally marked by inflationary tendencies in an economy. Inflation, if uncontrolled, may thwart all development plans and bring misery to the poor. A reasonable degree of price stability should be the primary concern of a government's economic policies. The overall level of economic activity in an economy depends upon aggregate demand, relative to capacity output. At times, the level of aggregate demand may be insufficient to secure full employment of labor and other factors of production. At other times, aggregate demand may exceed available output at full employment level. Government intervention in both the cases becomes essential to correct such disequilibria in the economy. The evaluation of our existing tax system with reference to the foregoing objectives is a difficult task because various other policies (like public expenditure policy) may be geared to achieve the same objectives. To what extent the redistributive objective has been served and the extent to which tax policy plays a relative role are difficult questions to answer. Moreover, the various objectives of tax policy may not always work harmoniously. Rather, they are often in conflict with each other if not mutually exclusive. Since the tax system of a country grows out of the interaction between political judgment and economic rationale, the process of compromises and tradeoffs is influenced by political expediency and economic logic, the former, in most cases, having the upper hand. In fact, political requirements and economic thinking change with time, giving new directions to tax policy. As Richard Bird has observed, Tax reform is, therefore, a never-ending process, not something that can be brought about once and for all and then forgotten.
Distributive Justice
Distributive justice or economic justice is an important function of tax policy. Economic justice relates largely to distribution of tax burden and benefits of public expenditure. It is a component of the broader concept of social justice, which encompasses, besides distributive justice, such questions as treatment of women and children, and racial and religious tolerance in a society. Tax policy is a democratic method to influence the distribution of income and wealth on desired lines. The main ingredients of this policy can be (a) progressive direct taxation of income, wealth, and property transactions, (b) taxation of commodities (customs duty, excise levy, and sales tax) purchased largely by high-income groups, and (c) subsidies (negative taxation) on goods purchased by lowincome groups. In Pakistan we are moving from progressive
Focus Section
Briding Tax Gap
A country's tax gap is measured by the amount of tax that remains uncollected due to non-compliance with tax laws. 'Pakistan Tax Gaps: Estimates by Tax Calculation and Methodology' (http://aysps.gsu.edu/isp/files/ispwp0811(1).pdf), a joint study of Federal Board of Revenue (FBR), Andrew Young School of Policy Studies at Georgia State University and World Bank, provides in detail, tax gaps by type of tax and describes the methodologies and data used for such estimates. The report released in December 2008 under the name of Rubina Ather Ahmad (FBR) and Mark Rider (Andrew School) warns that views expressed are of the authors and not of the Government of Pakistan. It is shocking that FBR on the dictates of World Bank initiated this study and when final report was released it disassociated itself this is typical of our governmental ways non-committal and hesitant to take any responsibility. After disowning this report, in 2013, FBR is still struggling to bridge the large tax gaps which are the direct result of its persistent inefficiency, incompetence and rampant corruption. For fiscal year 2004-2005, according to this report, Pakistan's federal tax gap was Rs. 409.5 billion or approximately 69% of actual tax receipts of Rs. 590.4 billion. Terming this as conservative estimate, the report claims direct tax gap at Rs. 262.8 billion (around 143% of actual collection of Rs. 183.1 billion) and indirect tax gap at 146.7 billion (36% of actual tax collection of Rs. 407 billion). In 2008, the data selected was for fiscal year 2004-2005 and tax gap was estimated at 45%. Since then tax gap has increased significantly and it can safely be concluded that it is not less that 70% of actual tax collection. This report and many others do not take into account the real tax potential of Pakistan and therefore estimates of tax gaps are under-assessed. The real tax potential of Pakistan, by a very conservative estimate, is Rs. 8000 billion. However, the target for the current fiscal year at the time of budget announcement was fixed at Rs. 2381 billion and in is now reduced to Rs. 2190 billion. FBR is finding it difficult to even meet the revised budget. Who is responsible for the prevailing pathetic state of affairs? Our debt burden is increasing monstrously, fiscal deficit is getting beyond control, inflation is crushing the poor, taxes are being evaded and avoided by the rich and whatsoever little is collected, is mercilessly wasted by those who matter in the land. Domestic debt and liabilities continues to witness a rising trend and reached a new high of Rs. 8.7 trillion as on February 2013 due to a widening budget deficit and fall in tax receipts, according to the latest statistics issued by the State Bank of Pakistan. The State Bank in its report stated that financing of fiscal deficit through domestic channels has raised concerns regarding debt sustainability of the economy. A heavy reliance on expensive short-term debt has increased the debt servicing burden of the country. Pakistan has been reeling under a revenue deficit for the past six years, implying that a larger part of public borrowings, which financed the government's current expenditures, did not add to the repayment capacity of the economy. In view of the size and magnitude of public debt, a high fiscal deficit is inevitableour total debt and liabilities have increased to Rs.15.1 trillion, or 68.4%, of GDP, while debt alone stood at Rs 14.4 trillion, or 65.3% of GDP. Fiscal deficit reached 8.5% of GDP in 2011-12, against the original budget target of 4%, reflecting both revenue and expenditure slippages, including higher subsidies mainly to clear arrears in the power sectorthe situation is worsening in the current fiscal year as FBR is facing daunting task of collecting Rs. 900 billion in the remaining three months of the current fiscal year. It is a great tragedy that while country is caught in debt trap, the rich and the mighty are not only refusing to pay due taxes, but are also living an emperor-like life at the taxpayers' expense and on borrowed funds. They are the de facto beneficiaries of the State's resourcesgenerated mainly by the landless tillers, industrial workers, professionals and white-collared employees. Pakistan is not a poor country -- the State's kitty is empty because of the unwillingness of the rich to pay taxes, collossal wastage of taxpayers' money on unproductive expenses and non-exploitation of vital natural resources. Absentee landlords (they include mighty generals who have been allotted State lands under one pretext or the other during the last many decades) have been resisting proper personal taxation on their enormous income and wealth. In the wake of floods, the President promulgated an Ordinance on March 15, 2011 to levy 15% surcharge on existing taxpayers and enhance indirect taxes on poor growers and common man instead of taxing the rich. An unholy anti-people alliance of the trio of indomitable civil-military complex, corrupt and inefficient politicians and greedy businessmen-controlling and enjoying at least 90% of the State resources-contribute lower than 3% towards the national revenue collection. This tax gap has not at all been discussed in 'Pakistan Tax Gaps: Estimates by Tax Calculation and Methodology', a study which is nothing but an eye wash. The gigantic and useless government apparatus doing nothing for public welfare is also busy wasting whatever taxes are collected. The army of ministers, state ministers, advisers, consultants, highranking government servants (sic) is not willing to cut down their perquisites and privileges. They are not ready to live like the common man by surrendering unprecedented perks and privileges they are enjoying at the cost of taxpayers' money. For their luxurious life they are burdening the poor, property-less masses with more and more taxes. Time and again we have made a case for monetizing all perks and perquisites and right-sizing of government departments and corporations, but civil-military complex and their cronies in politics are not ready for such reforms. The existing exploitative, rotten, regressive, ill-directed and unfair tax system is widening the existing gulf between the rich and the poor leading to gang wars, crimes, commotions and break down of the entire society. The sole emphasis on regressive indirect taxes [even under the garb of income taxation through presumptive and minimum tax regimes on goods and services] without evaluating their impact on the economy and lives of the poor masses and lack of political will to tax the rich and mighty, is the real dilemma of our State - not scarcity of resources or narrow tax base (nearly sixty million active mobile users are paying exorbitant sales tax at 19.5% and 10% income tax). Equity demands higher taxes from those who have higher income and wealth, but in Pakistan since 1991 all tax policies have been aimed at decreasing tax burden on the rich but increasing its incidence on the poor. The realistic and correct working of tax gaps in Pakistan is not possible unless the quantum of loss of revenue of trillions of rupees caused by all governments since the first military era of Ayub Khan is not taken into account. Successive governments - civil and military alike -- have extended unprecedented exemptions and concessions to the rich and mighty, some of which are mentioned below: o Ayub Khan, Ziaul Haq and Musharraf abolished all the progressive taxes e.g. Estate Duty, Gift Tax, Capital Gain Tax on immovable property and Wealth tax etc.
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o The historic decision of taxing agricultural income, passed by the Federal Parliament in the shape of Finance Act, 1977, was thwarted by the military regime of Ziaul Haq. Through this law, the Parliament amended the definition of agricultural income as contained in section 2(1) of the Income Tax Act, 1922 then in existence, to tax big absentee landlords. This was a revolutionary step to impose tax on agricultural income for the first time in Pakistan, but foiled by a military dictator, supported by Mullahs, who were funded by big landlords and businessmen. It is now well-established that pro-people economic policies of the Bhutto regime posed a great threat to neo-imperialists and their gumashtas in Pakistan. Zia's rule continued for 11 long years and that of General Musharraf for nearly 9 years, but absentee land owners (including mighty generals who received state lands as gallantry awards or otherwise!) did not pay a single penny as agricultural income tax. Taxation of agricultural income is the sole prerogative of provincial governments under the 1973 Constitution of Pakistan (the Constitution). All the four provinces have enacted laws to this effect, but total collection in 2012 was less than Rs. 2 billion (share of agriculture in GDP in 2012 was about 22%). Non-taxation of long-term capital gains at stock marketexemption is meant for the rich and mighty and not for the small investors who lose more money than they make due to maneuverings of big players-caused annual loss of billions of rupees to the national exchequer [loss from 2007 to 2012 alone was more than Rs. 412 billion as admitted by the government in Economic Surveys of Pakistan]. Despite, this so-called tax incentive, market crashed many a times and billions of rupees of the small investors were gobbled up by big fish once small brokers are now owners of many banks and investment companies and bid for vital national assets when privatization offers are made! From 2011 onwards a nominal tax is imposed on capital gains if holding is less than a year and that too as a separate block of income. Full and proper taxation of the big sharks is still a distant dream due to influence of the mighty whose benami accounts are managed by big brokerage houses. Annual tax gap under this one head alone is Rs. 125-200 billion. Tax losses for exempting (in fact not taxing) speculative transactions in real estate are to the extent of billions of rupees per annum. According to Economic Survey of Pakistan 2011-12, the loss for fiscal year 2011-12 was Rs. 700 billion. Multi National Companies (MNcs) through abusive transfer pricing mechanism deprive Pakistan of tax loss of over Rs. 200 billion every year. Wealth Tax Act, 1963 was abolished through the Finance Act 2003 on specific demand of Shaukat Aziz before taking charge as Finance Minister of Pakistan. He was fully aware of the fact that by virtue of his status as resident in Pakistan, his world assets would attract provisions of the Wealth Tax Act culminating into substantial tax liability annually. Repeal of this progressive law, especially suitable to Pakistan where enormous assets are created without showing income, was shown to be justified despite tremendous revenue losses, distortion in the social set-up and the resultant misery inflicted on the majority of the people of Pakistan. In 2002 before its abolition, wealth tax was the only progressive tax left in Pakistan with tremendous potential for growth, if exemption given to the rich absentee landlords were scrapped. This became obvious immediately after its repeal when billions of rupees (estimated at US$ 60 billion) started pouring in from all over the world, remitted by all and sundry without any fear of being investigated, courtesy amnesty given under section 111(4) of the Income Tax Ordinance, 2001. Influx of enormous wealth was directed to the stock exchanges and real estate markets where hungry sharks continued to devour the small investors through unholy maneuverings; or was used to artificially enhance prices of immovable property. With no wealth tax to pay, both these avenues helped to increase individual wealth but dreadfully stripped the entire nation of its right to live in peace and economic prosperity. o From 2003 to date, according to a conservative estimate, we have lost Rs. 400 to 500 billion worth of wealth tax that could have been imposed on unaccounted/untaxed wealth amassed by those already enjoying the privileges of a luxurious life. o Section 111(4) of the Income Tax Ordinance, 2001 protects tax evaders as they can whiten untaxed income through an extremely simple and easily available procedure by going to a money exchanger and getting fictitious foreign remittance in his account after paying a nominal premium of 1% to 2% of the entire proceeds! The loss caused due to this provision alone in the last five years is nearly Rs. 275 billion. o In the last three years alone, revenue loss on account of taxing income from property at reduced rate is estimated at Rs. 480 billion. The above are just a few areas showing how much tax loss we have been incurring perpetually. In 'Pakistan Tax Gaps: Estimates by Tax Calculation and Methodology', no effort was made to take into account all these factors to correctly determine total federal tax gap. The Pakistani State does not need any borrowing at all, if the rich and the mighty are taxed according to the established norms of democratic dispensation of justice. The dire need in today's Pakistan is to reduce inequalities through a policy of redistribution of income and wealth by taxing the rich and mighty. Higher rates of income taxes, capital transfer taxes and wealth taxes are some means adopted for achieving these ends in all democratic countries. In Pakistan, there has been a gradual shift from equitable to highly inequitable taxes. The shift from removing inequalities through taxes to presumptive and easily collectable taxes has destroyed the fundamental principle of horizontal and vertical equity. The equity principle can be held to be satisfied when the overall classification of individuals into categories is reasonable and broad enough to contain many individuals within each category and there is equality of treatment within each category. o
o o
Taxes & Poverty

There is a direct link between growing poverty in Pakistan and distortion in tax base since 1991, when a major shift was made by introducing presumptive taxes (indirect taxes in the garb of income tax). The lack of judicious balance between direct and indirect taxes has pushed an overwhelming majority of Pakistanis towards the poverty line. According to official figures, in fiscal year 2011-12, the share of indirect taxes rose to 62% and that of direct taxes dipped to 38%. It once again
Focus Section
confirmed that the taxation system in Pakistan is highly regressive. The government statistics wrongly accounted for in direct tax collection that portion of income tax collection which in fact was indirect in nature (fixed tax on imports, supply of goods, contracts and services and rental income). In reality, after adjustment of these collections, the share of indirect tax was not less than 78% in the total collection. For social justice and pro-people economic development, the government, through tax policies, must discourage certain activities, which are considered undesirable, for example, excise duties on liquor and tobacco and special excise on luxury and semiluxury goods. Such measures act as deterrents in avoiding a spillover of these items and creating disturbance in the society as a consequence. For achieving the cherished goal of establishing an egalitarian State, we need to take the following steps through the ability of the taxation system to influence allocation of resources: transferring resources from the private sector to the government to finance public investment programme; directing private investment into desired channels (rapid industrialisation) through heavy taxation of collossal income earned by absentee landlords-cum-pirs from orchards and exploitation of labour of their murids (blind followers); influencing relative factor prices for enhanced use of labour and economizing the use of capital and foreign exchange; increase the level of savings and capital formation by enhancing investment resources for economic development. In Pakistan we find a reversal of this principle. Recent years have experienced flight of capital, closure of huge industries and recession in the trade market. Lack of consistency in the tax policies have forced the business community to move towards safer havens depriving the country of invaluable capital. Similarly, foreign investors feel shy to make use of the tremendous Pakistani talent that goes to waste for lack of proper funding. protect local industries from foreign competition through the use of import duties, turnover taxes/VAT and excise. This has the effect of transferring a certain amount of demand from imported goods towards domestically produced goods. Pakistan is one of those very fortunate countries of the world that has an abundance of resources and a climate that is fit for simply any activity throughout the year. But unfortunately and thanks to IMF-imposed economic wizards (sic), our dependence on imported products has been hit with an upward surge in the recent years. Due to the introduction of harsh tax measures and mis-administration, our industrial sector has suffered so badly that instead of being able to export our goods we are forced to import in order to cater for the demands of the nation. stabilize national income by using taxation as an instrument of demand management. Taxation levels could be used to eliminate inflationary or deflationary gap in the economy. Taxation reduces the effect of the multiplier and so can be used to dampen upswings in trade cycle. The poor and helpless masses of Pakistan desperately owe explanation from all those in power: o Why the privileged are continuously being favoured and thriving on the money collected as tax (sic) from their own poorer brethren? o Why it is that ordinary taxpayers having income of more than Rs. one million are required to submit annual wealth statements whereas rich and mighty politicians, who have exempt agricultural incomes, have not yet made public, declarations of their assets? o Why do they hesitate from paying wealth tax but charge taxes and levies of Rs.38 per litre on petroleum products knowing very well that these are consumed by the general masses? o Why not subsidize the poor and make good the loss by levy of wealth tax on the rich? o Why not monetize all the perks and perquisites of government employees and those working in state-owned corporations and force them to live amongst the common people rather than in fortified (cordoned off) GORs and palatial houses? o Why not curtail unnecessary and extravagant expenses on the civil-military establishment starting from the President House, to fill up the void? o Why not reduce the number of ministers/advisers instead of following policy of appeasement and doling out public offices as if this nation was not burdened enough by worthless and incompetent bureaucrats? Our tax potential is around Rs. 8 trillion. If there are 10 million individuals having annual taxable income of Rs 1.5 million (a very conservative estimate), total income tax collection comes to Rs. 3750 billion. If we add income tax from corporate bodies, other nonindividual taxpayers and individuals having income between Rs. 400,000 to Rs. 1,000,000, the gross figure comes to Rs. 5000 billion. FBR collected only Rs. 716 billion as income tax in 2011-12. Similarly, due to rampant corruption in sales tax, federal excise and custom duties, the total collection is not more than 30% of actual potential. In fiscal year 2011-12, FBR collected Rs. 804.8 billion under the head sales tax, Rs 122.5 billion under federal excise duty and only Rs. 216.9 billion under custom duties. The total indirect collection of just Rs 1148.2 billion is pathetically low. It should have been at least Rs 3500 billion. If prevalent tax gap of billions is bridged, the total revenue collection cannot be less than Rs. 8500 billion without imposing any new taxes or raising the tax rates. It will change the entire fiscal scene of Pakistan. Instead of deficit we will have surplus funds to retire our debts - internal and external. Based on above facts and figures, revenue target for the coming fiscal year (2013-14) should not be less than Rs. 8 trillion. This is achievable provided the mighty segments, identified above, are taxed according to their capacity, number of tax filers are substantially increased, equitable and rational policies are devised with the backing of the masses, tax machinery is completely overhauled and all exemptions and concessions available to the privileged sections of society are withdrawn. If taxes are collected to this extent, Pakistan can become a self-reliant economy and easily move towards an egalitarian State. This is the only way to get out of the present quagmires of debt prison and political enslavement. One hopes that in the new budget under the new regime, mindless changes in tax codes and procedures will be avoided as these cannot improve tax collection. The real weakness of tax system lies in poor enforcement that includes corruption, which is not possible without the connivance of tax collectors. Tax codes are ruthlessly amended each year through Finance Bill and in between, by way of statutory regulation orders (SROs) this is not a solution but part of problem.
Exclusively written for Management Accountant
The writers, tax lawyers and partners in HUZAIMA & IKRAM (Taxand Pakistan), are Adjunct Faculty at Lahore University of Management Sciences (LUMS).
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Exchequer Gains from Services Export

By Qaisar Mufti, FCMA
ervice is an activity which provides satisfaction to a person or entity in which role of goods transfer is incidental. In many of the services, separation of goods from the services is inseparable e.g. sale of software on a CD is not separate from the CD. Services differ from goods on numerous counts. Services can not be transported when proximity of the supplier and acquirer / consumer is called for e.g. between the beauty parlour and the person requiring the doing. Services are not separate entities over which ownership rights can be established. They cannot be traded separately from their production. Services are heterogeneous outputs produced to order and typically consist of changes in the condition of the consuming units realized by the activities of the producers at the demand of the customers. By the time their production is completed they must have been provided to the consumers. - All About Service Tax by G.D. Lohani & Ataur Rehman
(Page # 10).
Under General Agreement of Trade in Services (GATS) following transfers are defined as supply of a service: (a) from one Member into the territory of any other Member; (b) in the territory of one Member to the service consumer of any other Member; (c) by a service supplier of one Member, through commercial presence in the territory of any other Member; (d) by a supplier of one Member, through presence of natural persons of Member in the territory of any other Member. In terms of contribution to GDP, 'services' are globally in fierce competition with production of goods. In Pakistan also, percentagewise contribution of the services sector to GDP is on the rise. According to Pakistan Government's 'Economic Survey 2011-12',
Service tax is destination based consumption, tax leviable on services provided within the country. As an economic concept, there is no distinction between 'consumption of goods' and 'consumption of services'.
GDP growth during the year was estimated at 3.7%. Services sector, however, recorded growth of 4%. Tax on services is an economic concept. Source of the concept of service tax is in the discipline of economics. It has evolved due to service industry becoming a major GDP contributor. Thus service tax is destination based consumption, tax leviable on services provided within the country. As an economic concept, there is no distinction between 'consumption of goods' and 'consumption of services'. However, the law may provide that service rendered by a non-resident person, in the course of an economic activity, shall be treated as a taxable service. The Punjab Sales Tax on Services Act states that services provided by a non-resident person to a resident person are identifiable for purposes of the Act, whether or not a consumer. Here the writer does not propose to comment on vires of this provision.
Tax Free Export of Services

Tax free export of services in India is described as follows: Exporters of taxable services are not liable for service tax. In addition to that all the credits of Central Excise Duty on capital goods, inputs and service tax on input services used for providing the taxable service exported can be availed. If such credits are not utilizable for domestic payment of service tax, available cash refund of the same can be applied for.
Service Tax Problems by Madhunkar N. Hiregange (First Edition 2009).
Focus Section
Zero Rating vs. Exemption
Supplies of goods and services are either taxable or tax free. To make the supplies cheaper exemptions are provided, relieving them from tax, but all the purchases (including capital goods) are taxed, which goes to flouting the credit chain. In other words, exemption may actually increase the amount of tax finally paid which is the opposite effect that an exemption may seek to provide. However, if a supply is exempt only at the retail level, prices fall only marginally, because bulk of GST element would have already been charged and paid at the manufacturing and wholesale stages. When a supply is zero rated, not only tax is not payable on the zero rated trader's value, the trader receivers a credit for the tax paid on purchase of materials and other inputs used in providing such supplies. Credit on last sale is the only way to ensure that a product is truly free of GST. Accordingly, zero rating of a fiscal levy means that rate of the sales tax or VAT levy on relevant goods or services will be computed at zero percent or at nil rate. These are structures on the destination principle, as a result exports are relieved of the burden of sales tax and excise duty by zero rating. Resultantly there is no levy on the relevant goods or services. Common feature between exempt and 'zero rating' is 'no levy'. Going a bit deeper, when 'exempted', with hands change of relevant goods or services movement forward of tax machinery stops. There is no impact of duty or tax on the amount payable by the purchaser or acquirer. In respect of deliveries of the goods or services nothing is payable by any party beyond cost. As against this, tax machinery starts movement in the reverse when deliveries are 'zero rated'. Such travel of tax machinery in the reverse gear comes to a grinding halt with refund / adjustment of taxes or duties paid on the zero rated supplies at all the earlier stages of that supply. The privilege of being levy free accrues to its supply at all of its prior stages (of supply). This privilege turns out to accrual of the right of refund of the tax / duty paid on the relevant supplies of goods / services prior to their becoming levy free. Thus if goods fit for zero rating under section 4 of the Sales Tax Act are supplied at a price of Rs. 1,000 not only sales tax amounting Rs. 160, otherwise leviable, would not be applicable, sales tax paid at all earlier stages of such supply (amounting (say) Rs. 150) would be refunded to the supplier making the zero rated supply at a price of Rs. 1,000. His (factual) revenue will be Rs. 1,150 (1,000 + 150).
zero rate of duty and draw back of duty etc. may be allowed on the goods exported or on such other related goods as may be notified by the government. The Sindh Sales Tax on Services Act (SSTSA) does not contain a provision to zero rate export of services. In disregard to their destination, local or export, all the services declared taxable by SSTSA call for payment of tax. Text of the Punjab Sales Tax on Services Act-2012 (PSTSA) does not contain zero rating provision in relation to services exported. Section 76 of the PSTSA reads: The Authority may, with the approval of the Government and by notification in the official Gazette, make the rules for carrying out the purposes of any of the provisions of this Act. Under this provision 'Punjab Sales Tax on Services (Adjustment of Tax) Rules-2012' are framed. PSTSA rules contain Chapter-IV, with the title: 'Export of Taxable Services'. The chapter has following rules: o o o o o o o Rule Rule Rule Rule Rule Rule Rule 12 12 14 15 16 17 18 Export of Service. Export Without Tax. Refund of Tax. Records of Refunds. Pre audit of refunds. Inadmissible refunds. Reporting of refunds.
Thus, the Punjab Act provides: 'no sales tax on services exported'. Khyber Pakhtoon Khwa and Balochistan do not have sort of independent 'sales tax on services laws'. In India, tax is not attracted on sub-contracted services if certain conditions are satisfied viz. the sub-contracted services are in the same category of services e.g. have identical PCT classification. Tax is payable if the sub-contracting is to a different service category. In Pakistan, these niceties are not catered by PSTSA and SSTSA. In India also sales tax on goods is in Delhi's domain with services' taxation dwelling on State (provincial) Governments. Service tax in India is not attracted on services in relation to which payment is made to a supplier of the home country in convertible foreign exchange. Doing away with tax is not available when payment, received in convertible foreign exchange for services rendered, is repatriated or sent outside the country (from India). In India the tax is not attracted when a service provider incurs expenses such as travelling, boarding or lodging etc. during the course of rendering services to his client and these expenses are
Taxation Provisions in Pakistan

Zero rating of goods exported is catered by the Sales Tax Act under its section 4. According to section 5 of the Federal Excise Act,
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4. Despite severe handicaps, Pakistanis are confronted with, our professionals are high rated world over. No wonder there is unflinching demand abroad for them, more particularly for doctors, I.T. experts, technicians, cost / chartered accountants and telecommunication professionals. Sizeable percentage of the ones leaving or aspiring to leave homeland may stay back when strength, through zero-rating of services, is added to their pursuits to sell abroad their professional plays. 5. To augment export of services, service providers have to keep improving their quality. They have to also upgrade infrastructure for bringing their produce into being. Export of services not only down pours foreign currency, it germinates ideas on modes, models and structures for their production. This helps upgrading, diversifying, beefing-up the volume of services' export. Demand pouring from abroad also imbibes advices for presentation, designing, tailoring, shaping and presentation articulation of the services desired. Zero-rating of services has definite role on upgrading infrastructure for services rendering as well as in relation to quality of the produce. 6. Through reduction of cost to the user abroad, zero-rating is shot in the arm to the exporter. It helps broad basing exportable services and addition to production at home of auxiliary goods and services. Through incremental production of goods and services, the country stands to gain in terms of terms of higher GDP also. This will be over and above other healthy effects on the economy. 7. 8. Through play of economies of scale of production, it may go to lowering of related production costs. Boost in export of services, ushered by zero-rating, also helps knowledge uplift and perceptions base at home through cross fertilization of ideas with the importers. Zero-rating widens avenues for sub-contracting, both in and out, helping specialization and value addition at home.
reimbursed. One can expect refining PSTSA and SSTSA in view of the light available.
Advantages of Zero Rating

There are enormous advantages of zero-rating of services on fibre of the country. Following points quickly occur to support induction of zero-rating provisions in fiscal laws devoted to services: 1. Services are taxed in the country where these are used, whereto these are exported. If not zero-rated by the exporting country, because of taxation both in exporting and importing countries, there is double jeopardy to the importer / user, unjustly and illogically. Cost of imported services to the users may be prohibitive, if exports are not zero-rated. In case of non-zero-rating, volume of national trade is prone to shrink with a toll on the folk at home aspiring to export services not only for their living but also for demonstration of their muscles' strength, skills. 2. Due to built in element of sales tax therein, services imported with a higher price tag may come to have a low ranking or may be (purposely) attributed sub-standard adversely affecting flow of orders for both goods and services to the non zero rated services exporting country. This may happen due to an adverse goodwill for produce of the exporting country - non zero rating of its services by the country causing the adversity. 3. Services from countries with lower price tags, facilitated by zero-rating, have an edge in the importing country. With the passage of time, higher prices of services imported may culminate into customers' diversion from / distaste for the costlier services rendered by 'non green pastures' i.e. countries not zero rating their produce. Reversal of this phenomena may be difficult or time consuming if not impossible.
9.
10. Immediate loss in revenue to the exchequer due to zero-rating of services may be more than offset by incremental tax revenue, facilitated by rise in production of goods and services directly used and inputs auxiliary or incidental to export of services. These auxiliary goods and services, production of which may increase sequel to rise in export services may be: packing material, other indirect material needed for production, advertisement, shipping, construction, banking services etc. due to upping of their demand by the expanded zero rate sector. Such addition to production of services or additional revenue generated by way increase in taxes.
About the Author: A former Chairman of ICAP & ICMAP Joint Committee, former Vice President ICMAP & ICSP, founder President PIPFA, the author practices sales tax and corporate laws.
Focus Section
Suggestions for Budget 2013-14
By Syed Adnan Hussain Shah, ACMA
Tax Laws
Proposed Amendment
Investors who hold their shares for more than one year will only be charged a tax rate of 5%; those holding shares for from one month to one year will be taxed at the present rate of 10%; and those holding shares for one month or less will suffer the tax rate of 20%.
No. Clause of the Relevant Law

1. First Schedule Part l Division III The rate of tax imposed under section 5 on [dividend] received from a [ ] company shall be [10%.]
Rationale
It is hoped that, not only will the new dividend tax structure further encourage the development of Pakistan stock markets, but also discourage short-term speculative investors and increase longer term investment.
2.
Amount should be increase to Rs. Sixth Schedule Part I R u l e 3 . E m p l o ye r ' s a n n u a l 200,000/contributions, when deemed to be income received by employee contributions made by the employer in excess of [one-tenth of] the salary [or Rs.100,000, w h i c h e ve r i s l o w ] o f t h e employee; and Age limit should be 25 PART X TAX CREDITS 63. Contribution to an Approved Pension Fund In calculation of C Age limit is 40 Tax credit should be 15% for three CHAPTER III consecutive years. PART X TAX CREDITS [65C. Tax credit for enlistment. (1) Where a taxpayer being a company opts for enlistment in any registered stock exchange in Pakistan, a tax credit equal to [fifteen] percent of the tax payable shall be allowed for the tax year in which the said company is enlisted
Rs. 100,000/- was inserted in 2008 and 5 years has been passed, should be revised. At that time exempt salary was Rs.180,000/- and now it has been reached to Rs.400,000/-
3.
This will help to introduce the Saving habit between youngsters
4.
This will help to increase the tax collections.
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5. Income Tax Rule Chapter XV
RECOGNISED PROVIDENT FUNDS, APPROVED SUPERANNUATION FUNDS AND APPROVED GRATUITY FUNDS PART I - RECOGNISED PROVIDENT FUNDS a Sec 103 (1) (b)to meet the expenditure on purchase of a motor cycle or scooter provided that authenticated copies of documents substantiating such purchase are deposited with the trustees of the fund; b in the case of withdrawals permitted under clause (a), (b), (c) or (d) of sub(a) in the case of withdrawals rule (1) of rule 103, the accumulated permitted under clause (a), (b), (c) balance to the credit of subscriber or (d) of sub-rule (1) of rule 103, six months salary of the subscriber or the total of accumulated balance to his credit, whichever is the less Sec 104 (1) (b) in the case of withdrawals permitted under clause (d) of sub-rule (1) of rule, six months' salary of the subscriber or twenty five thousand rupees or/ of the total of the accumulated balance to his credit, whichever is the lowest d Sec 105 Clause should be (e) mistakenly it was mentioned as (d) and withdrawals permitted under clause (e) of sub-rule (1) of rule 103, the accumulated balance to the credit of subscriber Sec 104 (1) Vehicle (Car / Van) should be inserted
Second withdrawal should be permitted without any condition for Second withdrawals.repayments of first permanent (1) Save as provided in sub-rules withdrawal. (2), (3), (4) and (5), no second withdrawal from a recognized provident fund shall be permitted until the sum first withdrawn has been fully repaid 106. Repayment of amounts Repayment should be without markwithdrawn.up as profit is being calculated on prorate basis so subscriber will lose profit as well. This treatment will help to introduce Islamic profit
About the Author: Syed Adnan Hussain Shah, ACMA is a Manager Finance & Accounts at Tradekey (Pvt.) Ltd.
Focus Section
The Budget 2012-13 and Cost of Protection in

By Muhammad Shamim Anjum, ACMA
Brief Overview:
The emergence of Pakistan, after a long and arduous movement, was in fact a great victory of the democratic idea of life. The development of reliable DBMS is a valuable asset for the nation to bring forth documentation of economy process and finance manager to take long and short term fiscal decisions. The development of annual budget and remedial fiscal decision on the basis of live management information system can only satisfied all stakeholders. Unluckily, like other developing countries the data bank of Pakistan is not rich and worthy to fulfill current needs from very first day. This is the reason why hype always rises regarding solidarity of financial figures. Now the data bank available from NADRA is somewhat helpful for concerned quarters to use it for genuine statistical conclusions. The need to study local issues with vision and digging a well from own sources persistently remain a dream for finance intellectuals. We have been measuring and adopting fiscal decisions with rented yard sticks. Being a new born state it encountered a lot of economic, social and political problems. Since the resources for economic growth were short in supply, need for foreign assistance was felt and efforts were carried out to have good relations with western developed countries and as an outcome aid started to flow to Pakistan. The Rs. 200 million cash, share of Pakistan received from India showing capital scarce country. The private wealth was remarkably high than public wealth since the day one. This private wealth still today is not documented and hence government receipts in shape of taxes and duties are not appropriate. Protection is demarcated as governmental action (or inaction) that effectively discriminates in favor of home producers against foreign producers.
Pakistan
Abstract
"Protection consists of transparent formal barriers such as tariffs and quotas, less transparent formal barriers such as licensing requirements and product standards, and informal barriers such as effectively discriminatory access to law enforcement, contract enforcement and market information". Taxes on international trade and average tariffs rates are used as a proxy for protection and this measures the cost of protection for Pakistan using data from 1991 to 2010 of the relevant variables by the technique used by Arvind Panagariya.
Assumptions:
o o o o Pakistan has a small economic quantum, There is perfect competition, Arc elasticity of demand for imports is same for all products, and Tariff rates are same for all products and services.
Conclusion:
The results reveal that the cost of protection is positively related to the arc elasticity of demand for imports. Trade policies work through their effects on domestic prices of goods and services by altering the relationship between domestic and world market prices. Import duties raise domestic prices, while export taxes lower them. Policies that regulate the quantities of imports or exports have an indirect effect on domestic prices. By limiting the amount of a good that can be imported, an import quota creates an artificial scarcity in the local market and hence raises its domestic price. The price has direct interest to consumers and users of domestic goods. Wheat millers' costs are directly affected by changes in the domestic price of wheat arising from tariffs or restrictions on wheat imports. Final consumers experience the impacts of import duties through higher prices of food and clothing and other protected goods. The effects of trade policies on domestic prices are referred to as the nominal protection arising from trade policies. Changes in nominal protection affect the real incomes of the users of protected goods. By increasing the cost of protected goods and by forcing
Protection consists:
o o o Transparent formal barriers such as tariffs and quotas, Less transparent formal barriers such as licensing requirements and product standards, and Informal barriers such as effectively discriminatory access to law enforcement, contract enforcement and market information.
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Focus Section
users to adjust their demands for these and related goods, increases in nominal protection decrease real incomes of users of these goods. For the economy as whole, there is a loss in economic welfare as demands are adjusted to prices that do not reflect the true scarcity or opportunity costs of protected goods. Decreases in nominal protection have the opposite effect. The nominal rate of protection (NRP) on any good is the proportional difference between its domestic and international price arising from the trade policies in question. These policies can include import tariffs, export taxes, quantitative restrictions (licensing requirements, prohibitions, rules of origin, local purchase requirements, etc.) and other 'incentives' such as subsidies and tax rebates. If the only relevant trade policy were a 20 percent import tariff, the NRP would be 20 percent - the proportional difference between the CIF import price and landed price (and therefore of closely competitive locally produced goods) in the domestic market. With a more complex set of trade policy measures the NRP is an estimate of the equivalent ad valorem tariff that would lead to the same difference between domestic and international prices as prevails under the policies in question. The effective rate of protection measures the net protective effect on producers of any product due to the structure of protection on both its inputs and its outputs. In the recent literature on international trade and economic development, the subject of protection to domestic manufacturing industry, the encouragement of 'import substitution', the possible gain from restricting trade through the use of tariffs, and the welfare losses from inappropriate trade is one of the most interesting restrictions that have played an important part. The contributions is the notion of protection to value added, or implicit or effective protection, as opposed to the more usual procedure of examining the level of tariffs on goods to determine the level and structure of protection. Trade costs are broadly defined to include all costs incurred in getting a good to a final user other than the production cost of the good itself. Among others this includes: o o o o o o o Transportation costs (both freight costs and time costs), Policy barriers (tariffs and non-tariff barriers), Information costs, Contract enforcement costs, Costs associated with the use of different currencies, Legal and regulatory costs, and Local distribution costs (wholesale and retail). discrimination against exports and overvalued exchange rate, result in inefficient use of resources. While economic theory also suggests that reduction of impediments to free trade would make the structure of production in LDC's more consistent with their comparative advantage, resulting in a higher rate of economic growth. In particular, comparative advantage promotes specialization in goods and services that use abundant local resources (for example, labor in most developing countries) more intensively. This would increase the productive employment, which is most effective and efficient instrument for poverty reduction. This hypothesis is confirmed by East Asian Countries' experiences [Khan (1997)]. Thus, integration with the global economy is expected to have positive impact on economic growth, improve income distribution, and reduce poverty. In late eighties and during nineties, Pakistan liberalized imports under structural adjustment programme (SAP hereinafter), in order to enhance the capacity utilization of the domestic industry and competitiveness of the production sector. It is widely accepted that because of the sensitivity of domestic resource allocation for the developments of the external sector the issue of foreign trade is particularly well suited for general equilibrium analysis. We have to measure the cost of protection in Pakistan. Assumptions about market structure are significant. In general, estimates of the costs of protection are greater in models that consider imperfect competition. This allows for product differentiation between firms as well as between countries and introduces market power effects. Costs from trade protection arise in a number of ways and the costs of protection can be estimated by using models that take account of how barriers to trade affect production and consumption decisions of firms and households in both domestic and foreign markets. Depending on their complexity, models account for a combination of changes in prices, trade volumes, allocation of resources (capital and labor), production, consumption, and terms of trade, government revenue and more. They provide estimates based on a particular scenario of reductions in tariffs and other forms of trade protection. As in most other areas of economics, measurement of costs of protection lags behind theory. Though theory as well as measurement of the cost of protection has had a long history, the natural starting point for our purpose is Harry Johnson (1960), which builds on the broader work of Arnold Harberger (1959) on efficient allocation of resources and also relates to an earlier contribution by Max Corden (1957).Subsequently, attention was drawn to four sets of reasons that could make the static costs of protection larger than believed conventionally. Richard Harris (1984) brought economies of scale as a source of higher costs of protection by incorporating them into a general-equilibrium simulation model. He demonstrated that the presence of scale economies could give rise to much larger costs of protection. Paul Romer (1994) demonstrated that if export sales are associated with fixed costs of entry, protection can lead to disappearance of some imports altogether and result in large losses of consumers' surplus. Joel Bergsman (1974) and Bela Balassa (1971) went on to incorporate Harvey Leibenstein's (1966) notion of X-efficiency into the calculations and obtained estimates
We do not cover the structural determinants of these trade costs except in passing on the prior step of measuring the costs. Ultimately, with an understanding of the size and pattern of the costs, the profession can and should proceed to the explanation of the costs. There is undoubtedly a rich structure of endogeneity between various types of domestic and international trade costs, market structure and political economic structure. Some trade costs provide benefits, and it is likely that the pursuit of benefits partly explains the costs. The control on imports (tariff and non-tariff barriers),
Focus Section
that were much larger than those based purely on allocate efficiency effects of protection. Anne Krueger (1974) drew attention to real resource costs of protection resulting from rent-seeking activities while Jagdish Bhagwati (1982) has broadened the concept of rent seeking and measurement of the cost of protection to include the impact of what he has christened "Directly Unproductive Profit-seeking" (DUP) activities.
Interpretation of the diagram:

In the above Figure DD and SS, respectively, represent the demand for and supply of an importable in a small country. The world price of the good is PW and imports are subject to an ad valorem tariff at rate t. The domestic price is denoted P = PW (1+t). The removal of the tariff leads to an expansion of consumption from Ct to CW and contraction of domestic output from Qt to QW. In turn we obtain dead weight loss by triangles b and d, respectively. By simple manipulation we get: 2 t V. Cost of Protection = 1+t 2 Here V is the value of imports in USA dollars in the presence of the tariff, the absolute value of the arc elasticity of demand for imports as we move from protected to free-trade equilibrium and t taxes on international trade (a proxy for protection) . Here V is the value of imports and taxes on international trade are known now we have to calculate the (the absolute value of the arc elasticity of demand for imports) , once we get the quantity of imports of goods and services we can calculate the arc elasticity of demand for imports as = (Qt Qt1 / Tt Tt1 )* (Tt+Tt1 / Qt + Qt1 )
Data and Methodology

The methodology used in this paper is one of Arvind Panagariya, which is described below, assuming the following. o o o o Pakistan is a small country. All importable goods are subject to a uniform tariff rate. The arc elasticity of demand for imports is the same for all goods and services. There is a perfect competition.
Calculation of cost of protection as per Arvind Panagariya Consider the diagram given below:
Price K D S
P (1+t) W P W
P (1+t) W P W D
The value of absolute arc elasticity of demand for imports = has been calculated with the help of above formula now we can calculate the cost of protection by the following formula: Cost of Protection = V. 2 t 1+t
2
QW
Qt
Ct
CW
Quantity
The results calculated by the above formula are given in table-1
Table-1
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Focus Section
Table-2
The above estimates shows that cost of protection depends mainly on the sign and value of the arc elasticity of demand for imports if the value of arc elasticity is higher, then the cost of protection is also higher and if the value of arc elasticity is lower, then the cost of protection is also lower. The cost of protection and the arc elasticity possesses the same sign negative cost of protection means benefit by applying barriers on international trade in that particular year. We can also calculate the cost of protection as a percentage of GNP by the following formula Cost of Protection as Proportion of GNP = Where denotes the share of imports in GNP The above estimates shows in table-2 that cost of protection depends mainly on the sign and value of the arc elasticity of demand for imports if the value of arc elasticity is higher then the cost of protection as a percentage of GNP is also higher and if the value of arc elasticity is lower then the cost of protection as a percentage of gdp is also lower. The cost of protection and the arc elasticity possesses the same sign. There are some out liers in both of the above calculations which needs further research to be explored. . 2 t 1+t
2
Bibliography
Anderson, J. E., B. College, et al. (July 2004,)."MEASURING THE RESTRICTIVENESS OF INTERNATIONAL TRADE POLICY." Arne Melchior, J. Z. a. . J., NUPI (May 2009). "Trade barriers and export potential: Gravity estimates for Norway's exports Beshkary, M. and E. Bondz (October, 2011). "Tari Binding Overhang: Theory and Evidence." Chaudhry, A. ((Winter 2011):). "Tariffs, Trade and Economic Growth in a Model with Institutional Quality " The Lahore Journal of Economics 16 : 2: pp. 31-54 Duncombe, W., et al. (June 1995). "ALTERNATIVE APPROACHES TO MEASURING THE COST OF EDUCATION " Feenstra, R. C. (1992). "How Costly is Protectionism?" The Journal of Economic Perspectives, , Vol. 6, (No. 3): pp. 159-178. Francois, J. F. (march 2000). "The Cost of EU Trade Protection in Textiles and Clothing ". Miroudot, S. e. S., Jehan and Shepherd, Ben ( December 2010). "Measuring the Cost of International Trade in Services." Nunn, N. and D. Treer (, 2004). "The Political Economy of Tari s and Growth." Panagariya, A. (2002). Approaches to Measuring the Cost of Protection American Economic Association meetings. Atlanta. . Panagariya, A. "Cost of Protection: Where Do We Stand?" SIDDIQUI, R. (2001). "Tariff Reduction and Functional Income Distribution in Pakistan:" MIMAP TECHNICAL PAPER SERIES (NO. 10 ).
Focus Section
By Dawn Elizabeth Rehm and Farzana Noshab

Pakistan Resident Mission, ADB, Islamabad
rowth picked up slightly, but for the fifth consecutive year low growth, falling investment, excessive fiscal deficits, high inflation, and a deteriorating external position weighed on the economy. While problematic security and natural disasters are endemic, a difficult political situation stalled effective policy response to macroeconomic and structural problems, especially regarding energy. As official reserves are steadily declining on low capital inflows and heavy debt repayments, downside risks color the outlook.
Pakistan
Economic Trends and Prospects in Developing Asia:
Asian Development Outlook 2013
Economic Assessment
Economic performance during the first half of FY2012 (ended June 2012) was driven by a rebound from the devastating floods a year earlier that was partly offset by record power outages from load shedding in the second half. Growth strengthened to 3.7% but again remained well below the 7% pace needed to absorb new workforce entrants (Figure 3.20.1). Agriculture recovered to grow by 3.1%, as better weather favored the production of major crops, though minor crops in parts of the country were hurt by floods. Industry expanded by 3.4%, mainly from post-flood reconstruction. The impact of the higher load shedding was apparent as large-scale manufacturing reversed early gains, tapering off to 1.2% expansion for the year, even lower than the flood-induced slowdown to 1.8% in FY2011. Output of intermediate goods declined for the third year in a row as Pakistan's steel, petroleum refining, and fertilizer industries continue to operate well below capacity. The large service sector, growing by 4.0%, continued to account for most GDP expansion. Private consumption expenditure expanded by 11.6% in FY2012 to provide nearly all GDP growth (Figure 3.20.2). As in past years, it benefited from rising remittances and government salary increases. Fixed investment fell for the fourth year in a row, to 10.9% of GDP, the lowest share since 1974 and the lowest among major Asian countries (Figure 3.20.3). This downdraft is being driven by prevailing security issues, worsening power shortages, and growing concern over the general direction and outlook for the economy. Clearly, the steady decline in investment, coupled with reliance on consumption for growth, is unsustainable and undermines future growth prospects. Investment subtracted 1.4 percentage points from growth in FY2012. Net exports subtracted 3.8 percentage points partly because energy outages frustrated producers efforts
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Focus Section
to reliably meet export schedules and partly because demand was slack from the global slowdown. Food inflation eased in FY2012, allowing consumer price inflation to slow from the 13.7% average pace of FY2011 to 11.0% in FY2012. The persistence of inflation in nonfood components is evident in the observation that core inflation measures, which exclude food and energy, accelerated from 9.5% at the beginning of FY2012 to 11.4% by June 2012, as more items in the basket experienced double-digit increases. The FY2012 budget deficit ballooned to 8.5% of GDP from 6.6% in the previous year, well above the 4% target (Figure 3.20.4) The bulk of the overrun was from recurrent outlays, mainly higher spending on power subsidies and funding to partly settle power sector arrears. Interest payments were also over budget, increasing to 4.0% of GDP and 42.2% of federal tax revenue, as domestic borrowing drove up the government's domestic debt by 27%. Patterns from previous years continued, as outlays for wages and other expenses, pensions, subsidies, defense, and interest payments substantially exceeded federal tax revenues, leaving the government's current operations to be substantially financed through debt (Figure 3.20.5). Development expenditure, restricted by flooding in FY2011, bounced back and met its targeted 3.5% of GDP. Tax revenues collected by the Federal Board of Revenue increased to 9.1% of GDP from 8.6% in FY2011 but still fell short of budget targets. The 20.8% growth in tax revenue reflected in part receipts from flood-related emergency measures, higher sales tax receipts on imports (partic ularly oil), and administrative improvements. There was also a significant shortfall on nontax revenues as Coalition Support Fund receipts and the auction of 3G mobile phone licenses were delayed. Collections under the petroleum development levy fell short as it was reduced to offset the impact of higher oil prices on consumers. The magnitude of recent deficits worked against compliance with the Fiscal Responsibility and Debt Limitation Act, 2005. The provisions of the act called for a revenue surplus over current expenditure by FY2008 to ensure adequate capacity for public investment, doubling the share of spending allocated to health and education, and debt limits. While these goals appear distant at present, achieving them appeared feasible at the time, as FY2004FY2007 fiscal deficits averaged a low 3.6% of GDP, there was near revenue balance, and foreign direct investment inflows to privatize stateowned enterprises were on the rise. As external financing covered a scant 10% of the FY2012 deficit, the bulk of financing came from domestic markets, including PRs505.7 billion in borrowing from the State Bank of Pakistan, the central bank. A legal restriction calling for borrowing from the central bank to be zero at the end of each quarter fell by the wayside. The 27% increase in government domestic debt was mostly in short-term issues that eroded the government debt maturity structure and heightened rollover risk. Public debt expanded to PRs1.6 trillion in FY2012, raising the government's ratio of debt to GDP to 62.5% (Figure 3.7.6), which substantially exceeded the limit set under the Fiscal Responsibility and Debt Limitation Act. External public debt dropped from 27.6% of GDP to 25.6%, while domestic public debt including the debt of state-owned enterprises increased from 33.3% of GDP to 37.0%. Pakistan's debt is higher than the recommended 30%40% of GDP for economies at a similar stage of development. The central bank policy stance in FY2012 was generally accommodative. As inflation eased early in the year, it lowered the policy rate by 200 basis points to 12% to stimulate investment and strengthen growth. However, surging deficits made government debt readily available and more attractive than lending to the private sector in a risky business environment, which inhibited commercial banks' financial intermediation. Bank loans to private businesses did increase by PRs18.3 billion, or 0.8%, but this amount was
Focus Section
dwarfed by banks' PRs692 billion in lending to the government (Figure 3.20.7). Broad money growth of 14.1% in FY2012 was somewhat slower than in the year earlier, largely reflecting the drawdown of foreign exchange reserves, ensuring that money growth came entirely through an expansion of net domestic assets. The loss of foreign exchange reserves, combined with the large amount of government debt entering the market, caused liquidity shortages at banks that were met by weekly injections by the central bank of up to PRs600 billion, far larger than in the past. The current account returned to a deficit of 2.0% of GDP in FY2012, after a marginal surplus in FY2011 (Figure 3.20.8). The reversal came mainly from an 11.9% increase in imports, as oil payments increased by nearly 17% and fertilizer imports doubled because of shortages of natural gas. Exports contracted by 2.8%, as textile exports stagnated, cotton prices fell, and food exports declined. Remittances continued to grow at a robust 17.7% pace, somewhat slower than a year earlier, but still providing an important cushion for the trade account deficit. Inflows in the capital and financial accounts continued to decline, while debt amortization payments increased, reducing net liquid foreign exchange reserves by about one-quarter in FY2012, to $10.8 billion, or 2.6 months of import cover. Foreign direct investment fell to $821 million, and private portfolio investment recorded net outflow. Sustained inflation and pressure on the foreign exchange market induced a 9.1% depreciation of the Pakistan rupee against the US dollar. The economic situation weakened further in the first half of FY2013 as official reserves declined markedly, food and general inflation both reaccelerated in January following their earlier decline, and exports stagnated while imports contracted. Economic growth is expected to slow to 3.6% in FY2013, with risks on the downside from possible shortfalls in agricultural production, which may offset the modest improvement in large-scale manufacturing during the first half of the year. Production of petroleum products, iron, and steel picked up, but growth in textiles and food, which account for almost half of large-scale manufacturing production and the bulk of exports, remained negligible. Manufacturing performance for the year will hinge largely on limiting power outages during the hot season, when demand peaks. With little prospect for improving energy supply or investment, growth is expected to remain weak at 3.5% in FY2014. Consumer price inflation continued a downward trend during most of the first 8 months of FY2013 as food price inflation decelerated. However, yearon-year inflation at 7.4% in February 2013 was higher than the year low of 6.9% in November 2012 as food prices moved higher (Figure 3.20.9). Nevertheless, food inflation in this fiscal year is much slower than a year earlier, reflecting improved supply. Core inflation, excluding food and energy, also improved but, at 9.6% in February 2013, remains stubbornly high with many of its subcomponents staying in double digits, reflecting entrenched inflationary pressure in the economy. However, with slower growth in food and energy prices, inflation is expected to average 9.0% in FY2013, or 2 percentage points lower than in the previous fiscal year. On the expectation that there will be no substantive improvement in the country's fiscal and energy imbalances in FY2014, inflation is expected to edge up to 9.5%. Easing inflation early in FY2013 prompted further reductions in the central bank's main policy rate by a total of 250 basis points, bringing it to 9.5% in December 2012 (Figure 3.20.10). While banks' weighted average rate on new
Prospects
The end of the government's 5-year term in mid-March 2013 limited political scope for major policy or structural reforms. Economic developments in FY2013 are therefore unfolding along broadly similar lines as FY2012 but with deepening concerns about sustainability and the adequacy of foreign reserves.
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Focus Section
loans in this period fell by about 200 basis points to 11.3%, overarching constraints coming from energy shortages and other uncertainties, such as law and order issues, will limit the impact of interest rate reductions on investment and business conditions in general. A modest increase in lending to private businesses in the first 7 months of FY2013 was mainly for working capital, with the bulk of lending going to textile firms. A modest surplus in the current account during the first 7 months of FY2013, following inflows of $1.8 billion from the Coalition Support Fund, reverted to a deficit of $700 million in February 2013. As disbursements of the same magnitude are not expected during the second half of the year, it is expected that the current account will post a deficit on the order of 0.8% of GDP. Exports contracted by 0.9% during the first 8 months of FY2013, but a 3.5% contraction in imports was four times larger (Figure 3.20.11). Low export growth was largely the result of 2.7% lower textile exports, reflecting the impact of sustained energy shortages, difficulties in meeting production schedules, and slack global demand. The contraction in imports was mostly of food, transportation equipment, and petroleum. Despite improvement in the current account, net liquid foreign exchange reserves declined further, dropping from $10.8 billion at the end of June 2012 to $7.9 billion at the end of February (Figure 3.20.12), reflecting higher debt amortization payments, including payments to the International Monetary Fund (IMF), and lower financial inflows. Low reserves adequacy, at less than 2 months of imports cover as of February 2013, raises concern over external sector sustainability. Pressure on reserves is expected to continue, with an additional $1.7 billion due to the IMF before the end of FY2013 and $3.2 billion during FY2014. The financial account was in deficit during the first 8 months of FY2013 (Figure 3.20.13) despite a modest revival in portfolio inflows as foreign direct investment stagnated. The nominal exchange rate depreciated by 4% in the first 8 months of FY2013. Continued weak export prospects, combined with limited import demand held down by slow domestic growth and relatively stable global prices for oil, support a projection that the current deficit will increase marginally to 0.9% of GDP in FY2014. However, weak capital inflows and large debt repayments, including to the IMF, will put pressure on the official reserves and the exchange rate. The fiscal outlook is largely unchanged from FY2012. Revenue targets announced with the FY2013 budget are unlikely to be met, as tax receipts have grown by only 12.0% in the first 6 months, well below the 23.7% increase needed to meet budget targets. On the expenditure side, overruns on interest outlays and subsidies are again expected, as subsidy allocations of PRs120 billion have already been exceeded and will reach at least PRs200 billion along with a further buildup of power sector arrears. The deficit for the first half of FY2013 is 2.5% of GDP, including the 0.7% of GDP from the Coalition Support Fund that is the single payment for the year. Given normal quarterly patterns for fiscal balances, the deficit for FY2013 is expected to breach the 4.7% target and is likely to come in at 7.0%7.5% of GDP, excluding any payments to settle power sector arrears. Government bank borrowing continued in the first half of FY2013. The government did acknowledge requirements under the State Bank of Pakistan Act by retiring PRs399 billion of the PRs505 billion borrowed from the central bank during the first quarter of FY2013, before borrowing back PRs183 billion in the second quarter in response to fiscal pressures, thereby breaching the act once again. Large government borrowing from commercial banks requires ever-larger injections from the central bank on a weekly basis to meet banks' liquidity requirements and keep money market rates anchored within central bank policy rates (Figure 3.20.14). Taming inflation would require shrinking these injections, which would require in turn lower government borrowing or else higher lending rates to further crowd out credit to the private sector.
Focus Section
Development Challenge Lifting Constraints on Growth
The economy faces fundamental challenges to growth. The existing pattern of consumption-led growth with falling investment is unsustainable. In this context, macroeconomic sustainability and increasing investment go hand-in-hand with the improved growth prospects necessary to provide adequate employment. Unchanged policies marked by the lack of structural reform, high fiscal deficits, and accommodative monetary policies will mean continued slow growth, excessive inflation, and a weakening balance of payments that drains official reserves. Some drivers of the current situation, such as security challenges, are unlikely to change immediately. However, other factors, such as the energy deficit and the losses run up by public sector enterprises that drain fiscal resources needed for infrastructure development, are more malleable in the near and medium term. Deterioration in the power sector is the main physical constraint on growth and a major cause of financial and economic instability. Power outages are estimated to cut growth by 2 percentage points annually, making it unlikely that Pakistan will be able, without significant reform, to move toward the 7% growth rate needed to generate adequate employment and meaningful poverty reduction. The current environment in the power sector, in which receipts do not cover costs, means that for every unit of power sold there is a large loss that is either covered by a government subsidy or becomes part of the continuously accumulating arrears of the state-owned power companies. Growing arrears, which reached PRs450 billion at the end of December 2012, or about 2% of GDP, constrain the availability of cash needed to operate existing power-generation assets at full capacity. While it will take time to move to a more efficient system for generating, transmitting, and distributing electricity, improvements to collection, adjustments to pricing mechanisms, and improved management could enable higher power generation, lift the financial burden on the budget, and motivate private investment in the sector. Large loss-making public sector enterprises absorb fiscal resources without any apparent improvement in their operations or financial viability. Explicit subsidies included in the budget for them are limited, as most assistance is in the form of sovereign loan guarantees that require lump sum pay-outs from the government at crisis points. The end result is the inefficient provision of services at prices that are higher than necessary. The framework for economic growth approved by the government in FY2011 identifies the restructuring of public sector enterprises as a key focus area. Its recently approved corporate governance rules for public sector enterprises are a step in the right direction, but the rules will need to be rigorously applied in the face of longstanding resistance to change. Finally, achieving the major challenge of boosting agricultural productivity and strengthening food security requires improving the management, storage, and pricing of water for irrigation. Anecdotal evidence suggests that agricultural productivity could be doubled with appropriate reform. Improved water management is critical to deliver sufficient water to the 80% of farmland in the country that is irrigated. Pakistan is one of the most waterstressed countries in the world, not far from being classified as water scarce, with less than 1,000 cubic meters per person per year. Water demand exceeds supply, which has caused maximum withdrawal from reservoirs. At present, Pakistan's storage capacity is limited to a 30-day supply, well below the recommended 1,000 days for countries with a similar climate. Climate change is affecting snow-melt and reducing flows into the Indus River, the main supply source. Increases in storage capacity to manage periods of low snow-melt and low rainfall are required, as well as the rehabilitation of the distribution system to reduce losses.
Source: http://www.adb.org/sites/default/files/ado2013-pakistan.pdf
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Proposals of Trade and Industry on Federal Budget 2013-14

Federation of Pakistan Chambers of Commerce and Industry (FPCCI)
he experts of Federation of Pakistan Chambers of Commerce and Industry (FPCCI) in budget proposals for fiscal year 2013-14 informed the ministry of finance that smuggling, particularly through Afghan Transit Trade, Iran and the Sust border (KKH) continued unabated, resulting in colossal losses to trade, industry and government revenues. Since the total elimination of smuggling only through administrative measures at the borders is difficult, the remedy lies in reducing incentives for smuggling by reducing the tariff rates on smuggling prone items to
the lowest possible level. This will result in higher government revenue, provide impetus to local trade and industry and generate employment opportunities. The list of smuggling prone items with Federal Board of Revenue (FBR) may be revisited in consultation with FPCCI. Moreover reduced sales tax rate from 16 percent to eight percent and withholding from five percent to one percent should be levied on the smuggled prone items in consultation with FPCCI. The smuggled prone items included: coffee; tea; spices; electrical appliances and machinery; POL
products; tyres; polyethylene and P.P Granule; steel products; cigarette; sulphonic acid; mobile phones; surgical and medical equipments; and PVC. The FPCCI proposed that the customs duty on all basic industrial raw materials should be between zero percent to five percent if not manufactured locally. It further said that currently the duty on import of plant and machinery ranges between five percent and 25 percent. On the other hand other countries in the region have allowed duty free import of plan, machinery and spare parts.
Karachi Chamber of Commerce and Industry (KCCI)

arachi Chamber of Commerce and Industry unveiling budget proposals for 2013-14 has emphasized that the newly elected government in its first 100 days should bring economic reforms which was crucial for sustainable economic growth, industrialization and uplift the e c o n o m y. G o v e r n m e n t ' s b a s i c objectives should be to increase the Foreign Direct Investment (FDI), reduce the budget deficit and create new ventures for industries. The only hope for saving this country from total economic collapse is to facilitate private sector encouraging entrepreneurs to expand existing businesses, as well as to u n d e r ta ke n ew ve nt u re s a n d industrialization. The KCCI's proposals seek to redress the issues through both administrative and policy measures aimed at providing relief and facilitation to the taxpayers. Efforts are made to identify the segments, which have so far been left out of the tax net despite generating substantial income, leakages in the system, exemptions and evasions. Concrete measures have been proposed
t o b ro a d e n t h e tax b a s e a n d documentation of economy. KCCI recommendations for all major sectors stresses the need for reducing taxes on already burdened sectors and levying taxes on untapped areas. Where there is income there should be taxed. It is the responsibility of the government to expand its tax net, which should be carried out in consultation with business and industry across Pakistan. KCCI has highlighted the most punching issues such as fiscal measures, high mark-up rate, energy crises, high gas and power tariff, inflation, industrial production cost, declining exports, increasing cost of raw materials, petroleum product prices etc. The issues of export oriented zero-rated sectors as well as direct and indirect taxation of industry and commercial importers, audit parameters of GST, various customs duties, port charges and provincial sales tax are touched in the proposals. It is highlighted high rates of customs duty, sales tax and withholding tax on import of raw materials, intermediate and finished goods should be brought down to curb smuggling and illegal
imports under the cover of Afghan Transit Trade (ATT). After 18th amendment and 7th NFC Award the right to collect taxes on services remained with the provincial government. In the last few years government's role has been missing in providing and maintaining the industrial infrastructure, gas and electricity, a growth oriented monetary policy and conducive environment for promotion of trade and industry. Budget proposals opined the growth rate of GDP should at least be 4.5 percent just to break even or achieve zero growth. With the present state of affairs in the institutions such as Pakistan International Airlines, Railway and Steel Mill, which are burdened with surplus staff numbering thousands, only the private sector has the capacity to create new jobs. Growth in industry means growth in jobs and growth in jobs means growth in GDP. To meet these challenges, KCCI's budget recommendations this year are aimed at reversing the negative trends in various sectors of the economy. Rates of GST and Income Tax should be brought down to a
Focus Section
maximum of 9 percent and 25 percent respectively to provide relief to trade and industry. Customs duty and taxes on capital goods such as machinery and basic raw materials be brought to a nominal rate. ATT is a bleeding wound for Pakistan's economy. The flow of goods through ATT has to be more regulated and controlled. Prices of fuel, electricity and gas should rationalised and reduced wherever possible so as to reduce cost of production. GST system of revenue generation suffers from major flaws, which results in hardships to the taxpayers. Online computerised system of filing tax returns has flaws and inadequacies making it difficult for a registered person to file returns, rectify errors detected subsequently and avail the entitlements to tax input and refunds. Sales Tax Act'1990 and Income Tax Ordinance 2005 should be comprehensively amended to repeal the draconian laws governing the tax policy and curtail the unbridled discretionary powers to the officers of Inland Revenue. To achieve revenue targets and offset the deficit, loopholes and avenues for evasion must be closed. Exemptions to be withdrawn and other incentive regimes be replaced with Export Voucher Scheme. Restore law and order in the largest city of Pakistan and there has to be a national consensus on measures to be taken to extricate this once thriving city from shackles of violence, crime, arms and various mafias. Political patronage of mafias has to be ended. Chronic fiscal deficit is due to revenue shortfalls and uncontrolled expenditure. Total focus on rural economy by previous government has severely impaired the capacity of urban economy to pay taxes and generate growth. Public sector development programme lack transparency and massive losses by state owned enterprises. Industries all over Pakistan were facing electricity and gas shortage. Private sector was facing financial crunch due to reckless borrowing by government. Lack of transparency in budget expenditures such as Public Sector Development Programme and discretionary funds are to be revisited. Failure of Federal Board of Revenue (FBR) to broaden tax base and netting the influential tax evaders is also a question. A disintegrated tax structure and flaws in e-filing systems, FBR's inadequate capacity to administer and manage revenue collection, a number of income generating sectors are exempt from all taxes. Irrational and draconian tax laws and sweeping discretionary powers to officers of Inland Revenue and other issues were discussed in detail in the specific proposals of KCCI.
Lahore Chamber of Commerce and Industry (LCCI)

he Lahore Chamber of Commerce and Industry (LCCI) outlined key priorities for the Budget 2013-14, calling for an immediate attention of the policymakers towards the challenges being faced by the economy. LCCI urged the policymakers to focus on investing in the energy solutions and enforcement of law and order, while lowering tariffs on smuggling-prone items, increasing the share of direct taxes in revenue and lowering the slab of indirect taxes in the forthcoming budget to achieve key economic targets set for the year 201314. In order to tackle the energy shortages, the LCCI said that maximum funds should be allocated for the construction of dams / water reservoirs, tapping of Thar coal, completion of IranPakistan gas pipeline and establishment of LNG terminals. At least Rs200 billion, or 10 percent, of the total budget should be allocated for hydel power projects. LCCI further stated that country's reliance on costly thermal power is jacking up cost of production and the
import bill, as such the country needs an urgent shift in its energy-mix in favour of hydel power and local fuels. The use of biogas should be promoted throughout the rural sector both for electricity generation and gas for cooking, besides producing bio fertilizer. Maximum funds be made available for early completion of Iran-Pakistan gas pipeline and LNG terminals to keep the industrial wheel running, especially in Punjab that has borne the brunt of recent suspension of gas supplies to the industry. The present state of law and order is hurting Pakistan's potential as a highly attractive investment destination. Foreign and local investors are shying away from Pakistan. A number of industrial units had already shifted their operation to other countries. Therefore, the sizeable funds must be allocated for improving the law and order situation. Rising risk perception about investing in Pakistan is hitting hard the foreign direct investment (FDI) that fell sharply in the
recent months and needs to be tackled through a comprehensive policy approach by involving chambers of commerce. Any fall in FDI is likely to adversely affect the country's economic growth. All the developed countries accord special importance to economic issues and challenges. But in Pakistan, economy is on the bottom of the policymakers' to-do list. Infrastructure development, coal, energy, agriculture, livestock, textiles and pharmaceutical offer lucrative investment opportunities to foreign investors but unfortunately due to the absence of a proper and welltailored marketing strategy, these opportunities are unattended even today. The Federal Board of Revenue (FBR) should cut the rate of duties on all smuggling-prone items in order to check smuggling of plastic moulding compound, electronics, chemicals, fabrics and tyres and tubes. LCCI suggested that the sales tax slab should immediately be curtailed in order to reduce inflationary pressures.
he Overseas Investors Chamber of Commerce and Industry (OICCI) has urged substantive tax reforms in its 20132014 proposals submitted to the Federal Board of Revenue (FBR). The trade body
Overseas Investors Chamber of Commerce and Industry (OICCI)

has also forwarded general and industryspecific suggestions to broaden and rationalize the country's revenue base to help overcome prevailing economic crunch faced by the country. The proposal include implementation of a consultative tax and revenue enhancement regime involving all key stakeholders, using every legitimate means to withdraw tax and duty exemptions as well as amnesty
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schemes barring those impacting the poor, effective monitoring and scrutiny to identify tax evasion and notably, bringing agricultural income into the tax net. The chamber suggested FBR to come up with a five year tax and revenue enhancement strategy with the engagement and approval of all key stakeholders. A uniform tax rate be applied to all business income, irrespective of the legal structure of the business entity to boost corporatization. It suggested that all individuals, traders and organizations should be made liable to file income tax return and statement of net wealth. FBR should be empowered to seek details of all customers of financial institutions whose accounts show turnover in excess of Rs. one million during the year. Effective use should be made of all available data bases to identify potential tax payers, including retailers, through a simple and effective automated tax collection infrastructure. The chamber advocated the gradual reduction of General Sales Tax (GST) rates to encourage documentation and further rationalization of the exemptions in Sales Tax system. Moreover, a transparent and systematic mechanism should be framed to settle down all refunds of Sales Tax within an agreed time-frame of 30 days. It suggested the government to ensure implementation of Reformed Sales Tax/ VAT taking all stakeholders on board from large businesses to retailers. It also suggested FBR to exempt companies from withholding tax regime which are registered with Large Taxpayer Units (LTUs) beside minimum tax should be eliminated for companies with a high turnover and low profit.
Pakistan Tanners Association (PTA)

n its Budget 2013-14 proposals, the Pakistan Tanners Association (PTA) has submitted a set of suggestions to the FBR for consideration in the budget. It has proposed to revise upward duty drawback rates by 6.3 percent on export of finished leather for goat/ sheep skins, cow/buff hides and Cow/Buff Leather for Upholstery to make it realistic, presently DDB rates on these items are very low i.e. 0.80 percent, 1.17 percent and 2.12percent respectively. The PTA has further proposed the FBR to
impose a complete ban on export of wet blue leather including wet blue split leather of all kinds of raw hides and skins and pickled leather to avert the scarcity of these essential raw materials for domestic leather industry. It has proposed incentives equivalent to 3 percent of the total exports of leather to enable PTA members to import duty free essential Accessories for value addition in leather shoes, leather products, leather handbags and leather garments, etc. It further proposed
reduction in duty on Chromium Sulphate, Fat Liquors, Buffing Paper, Pigments, formic acid & Dyes from present duty (different slabs of 15%, 20 percent, 25 percent) to 5 percent as the main raw materials of leather industry. It further proposed reduction in duty to 5 percent on hot stamping foils falling under HS Code 3212.1000 which is presently at 20 percent. The duty will be reduced to 5 percent on polyester foils falling under HS Code 3920.6900 which is presently at 20 percent.
Pakistan Ship Agents Association (PSAA)

n the budget 2013-14 proposals, the Pakistan Ship Agents Association (PSSA) has proposed comprehensive amendments to various sections of the Customs Act, 1969 and Income Tax Ordinance, 2001 from next fiscal year. It proposed that the criteria for filing return and payment of tax for NonResident Pakistanis having income from shipping business in Pakistan should be on quarterly basis in budget (2013-14).
Under the existing section 143 of the Income Tax Ordinance 2001, the criteria for filing return and payment of tax for Non-Residents having income from shipping business in Pakistan is to file return on vessel to vessel basis. The return filing criteria for scheduled vessels and non-scheduled vessels should be differentiated. PSAA further proposed that section 7 of
Income Tax Ordinance should be amended to include CDC/THC and other charges/receipts on Principal Account. The treatment of the said charges in the same manner of freight is encouraged as it is easy, practicable and justified in from of Principals, sources said. The a s s o c i at i o n h a s a l s o p ro p o s e d amendment in section 233 of the Income Tax Ordinance 2001.
Pakistan Association of Printing and Graphic Arts (PAPGA)

n its budget 2013-14 proposals, the Pakistan Association of Printing and Graphics Arts (PALGA) has proposed the Federal Board of Revenue (FBR) to remove tariff anomaly in the Chapter 48 and 49 of the Pakistan Customs Tariff (PCT) in Budget (2013-14) to check huge difference in duty on the import of paper used for books printing and finished products. The industry is heavily dependent on import of paper, paperboard and printing paper. Paperboard is used in packaging of various
consumer and industrial products, e.g. pharmaceuticals, food items, shoes, auto parts, electric appliances, etc. Another end-use of paperboard is graphic printing. According to the association, Pakistan currently stands at the highest rates of customs duties on imports of paper and paperboard in the world, whereas, the developing countries and developed countries stand at 0-5 percent rate of customs duties on the same. Pakistan Customs Tariff levies 20 25 percent
customs duty, 16 percent sales tax and 5 percent withholding tax on the import of paper which is used for printing text books, other books and magazines; and on paperboard used as a hard and soft-cover of the printed material, whereas finished product (printed publications) is being imported on zero percent customs duty, sales tax and withholding tax. The Chapter 48 and 49 of the Pakistan Customs Tariff (PCT) gas created this anomaly/ irregularity.
Focus Section
Pakistan Vanaspati Manufacturers Association (PVMA)

n its budget 2-13-14 proposals, the Pakistan Vanaspati Manufacturers Association (PVMA) has promised Rs 2 per kg decrease in price of ghee/cooking oil, following reduction in customs duty from 20 to 5 percent on import of tin plates in budget (2013-14). It has linked reduction in prices of ghee/cooking oil in coming budget (2013-14) with the rationalization of duties and taxes and procedural and legal changes in Customs Act, 1969 and Income Tax Ordinance 2001 from next fiscal year. The association has proposed that the customs duty on imported tinplates should be reduced to 5 percent and sales tax to remain 16 percent for manufacturers of vegetable ghee/ cooking oil, to reduce the packing cost of the product for reduction in the production cost/sale price of vegetable ghee/cooking oil. Resultantly, the benefit of Rs 2 per kg would be passed on to the consumers. It has also proposed reduction of Rs 3000 per ton in the customs duty on the import of RBD palm oil/palm olein and soyabean oil. The industry has promised reduction of Rs 3 per kg in the price of ghee/cooking oil from next fiscal. The reduction of duty on imported edible oil by federal government for bringing down the price of vegetable ghee/cooking oil. The vegetable ghee/ cooking oil industry is mainly dependent on the imported edible oils and as such the prevalent high rate of edible oils in the international market is the key factor for fixing prices of locally made vegetable ghee/cooking oil. To control and bring down the prices of vegetable ghee/cooking oil there is no option other than the Government initiative for reduction in taxes. Presently, the total duties/taxes paid
by vanaspati manufacturers are around Rs 26,000/M.Ton. In the years 2010-11 and 2011-12, Pakistan imported Edible Oils to the quantum of 2.01 and 2.2 million Metric Tons, and in the year 2012-13, the import of Edible Oils is 1.9 million M. Tons. Through Finance Act 2013-14, the association has also proposed that the FBR should reinstate the status section 148(8) of the Income Tax Ordinance 2001 as final discharge of liability and secondly the tax paid on packing material must be made refundable as per previous practice to reduce the cost of production on Vegetable ghee/cooking oil for consumers' benefit. There shall be no burden on revenue collection however manufacturer's complication in book keeping will be simplified. The structure of income tax application on edible oil and vegetable ghee industries before June 30, 2009 was levied on import of raw material @ 2 % under section 148(8), as final discharge of liability and the tax paid on import of packing material was refundable to the manufacturers whereas it was converted in Finance Bill, 2009 as under: On import of raw material @ 3 percent us 148(7& 8), as minimum tax liability instead of Final Discharge The tax paid on import of packing material has been converted as tax payable under section 148(8). This change has adversely effected and also created lethality of assessment for manufacturers. The association has proposed that the levy of sales tax on import/manufacturing stage may be reduced to 8 percent in the Budget for 2013-14. This will result in reduction of t h e m a r ke t p r i c e s o f v e g e t a b l e ghee/cooking oil and will bring a sizeable
relief to the masses. The industry has committed Rs 8-10/kg benefit to consumers in case sales tax is being reduced from 16 to 8 percent. PVMA further proposed that the warehousing period limitation be enhanced from existing 30 days to proposed 60 days. It will help in mitigating the negative impact of fluctuating international prices. The vegetable ghee manufacturers were liable to pay 1 percent surcharge on import of edible oils in addition to customs duty, FED, Advance Tax, etc. The Government, on repeated requests of the PVMA in the Finance Act, 2007 (SRO 626(I)/2007 dated the 21st June, 2007) reduced the Warehousing Surcharge to 0.25 percent in spite of the fact that the Warehousing cost is paid by the importers of Edible Oil to the terminals for handling of imported edible oils involving no government activity for the purpose. The Duty Tax Remission Export Scheme (DTRE) coverage is no longer available to the importers of the raw-edible oil which they process for export of the vegetable ghee/cooking oil, against the "export orders" in hand. For providing an incentive to the exporters of Vegetable Ghee and Cooking Oil manufactured from imported raw edible oils, the DTRE Scheme needs to be extended to manufacturers of Vegetable Ghee, who are capable/eligible of exporting the same to Afghanistan and the Central Asian States (CAS). The Association has further proposed that Duty and Tax Remission for Export (DTRE) scheme coverage be extended to the importers who export their products (vegetable ghee/cooking oil) made from this stuff.
Pakistan Chemists and Druggists Association (PCDA)

akistan Chemists & Druggists Association (PCDA) has proposed to the Federal Board of Revenue (FBR) not to apply section 153A of the Income Tax Ordinance 2001 on all those distributors, dealers and wholesalers, having valid National Tax Number (NTN) and sales tax registration number (STRN) from next fiscal. In its budget 2013-14 proposals, the A s s o c i at i o n h a s state d t h at t h e distributors, dealers and wholesalers of consumer goods and pharmaceuticals are facing twofold hardships. One is due to introduction of Section 153A for 0.5 percent collection by manufacturers from
distributors, dealers and wholesalers which has been addressed by suspending the application of 153A up to June 30. Since this was brought with a view to document the economy and for which the Association is with the Government, in preparing the budget for the year 2013-14 this section should not be made applicable to all those distributors, dealers and wholesalers who have a valid NTN/STRN as they are already documented and in the tax net. "On supplies made by distributors, a tax of 3.5 percent for consumer products and 1.0 percent for Pharma products and cigarettes is deducted under section
153(a) (3) by persons who fall in the category of withholding agents. Such deduction of 3.5 percent and 1.0 percent is treated as final tax liability which amounts to far more than our net margins and in many cases this deduction is more than even gross margin. The general perception is that the tax so deducted is adjustable against final tax liability which is contrary to the fact. The PCDA has proposed that the tax so deducted on supplies made by distributors, dealers and wholesalers be made adjustable against the final tax liability.
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Meritorious Article
Another Hurdle on the Road to Compliance
Assessing Company Level Controls

By J. Stephen McNally CPA
This is one of the Articles of Merit, judged as such under Professional Accountants in Business - Articles of Merit Programme 2006, for distinguished contributions to Management Accounting, established by the Professional Accountants in Business Committee (PAIB), (under its former name of FMAC) of IFAC.
he Public Company Accounting Oversight Board says public companies must assess the design and operating effectiveness of company-level controls in addition to examining detailed control activities at the process and transactional levels. This article provides a six-step process CPAs can use to meet this critical aspect of section 404 compliance. The steps are based in part on the author's experiences as director of finance for Campbell Soup Co. Although only public companies subject to section 404 are required to formally assess company-level controls, non-public companies and other types of organizations may wish to do similar evaluations as a best practice.
What are company-level controls? How do CPAs go about evaluating their effectiveness? As the compliance deadline for section 404 of the Sarbanes-Oxley Act approaches for some companies, many have yet to face a critical hurdle: the assessment of their company-level controls.
and responsibility, management's risk assessment processes, fraud-prevention efforts and other company-wide programs that apply to all locations and business units. Company-level controls also monitor the results of operations and the functionality of other controls, including selfassessment programs and internal audit reviews. Oversight activities by senior management, the audit committee and the board also demonstrate these controls. Section 404 says senior management at public companies must: o State its responsibility for establishing and maintaining adequate internal control over financial reporting and disclosure. Assess the effectiveness of the company's internal controls for the current fiscal year. Identify the framework used to make this evaluation.
Controls are Everywhere

Company-level controls permeate an organization and have a significant impact on how it achieves its financial reporting and disclosure objectives. One example is the control environment itself, which includes the tone at the top, the corporate code of conduct, policies and procedures, the assignment of authority
A Role to Play
In what areas of Sarbanes-Oxley compliance work was internal audit involved during 2004? Process documentation Process walk-throughs Process test design Management testing General controls review Other 0% 10% 20% 30% 40% 50% 60%
o o
Source: PricewaterhouseCoopers LLP, 2004 survey of 441 companies, www.pwc.com
To comply, many companies have adapted the COSO internal control framework and its five components control environment, risk assessment, control activities, information and communication, and monitoring.
Meritorious Article
Company-Level Control Objectives

Control Environment
o o o o o o o o o o o Through its attitudes and actions, management demonstrates character, integrity and ethical values. Management's philosophy and operating style are consistent with a sound control environment. Management assigns authority and responsibility. Human resource policies and procedures are consistent with and reinforce the control environment. The audit committee and overall board of directors are actively involved and have significant influence over the organization. Management has established practices for identifying, evaluating and appropriately mitigating risks. Information and Communication Management gathers information from and disseminates information to the appropriate people on a timely basis. Management has established an effective whistle-blower program as it relates to financial reporting. Management has established effective ongoing monitoring activities. Management performs separate evaluations of the organization's internal control environment to confirm its effectiveness.
Risk Assessment
Monitoring
The PCAOB says public companies must give adequate consideration to all five components, including detailed control activities at the process and transactional level as well as the other COSO components known collectively as company-level controls. In Auditing Standard no. 2, An Audit of Internal Control Over Financial Reporting Performed in Conjunction with an Audit of Financial Statements, the PCAOB says the external auditor should evaluate whether management's documentation includes all five components of internal control over financial reporting when determining whether it provides reasonable support for management's overall assessment. Auditors should test and evaluate the design effectiveness of company-level controls first and adjust their approach for evaluating the other aspects of internal control over financial reporting accordingly. CPAs should consider ineffective company-level controls a deficiency that might affect the scope of work performed in an audit, particularly when a company has multiple locations or business units.
company-level control aspects of section 404, CPAs can recommend companies follow six steps. In general the steps include defining key milestones, building an assessment structure for company-level controls, documenting control design, testing control effectiveness and engaging in gap remediation and continuous improvement efforts. STEP ONE: Define project plan and key milestones. The first compliance step CPAs should take involves planning -- outlining the project (including key activities and timelines) and identifying critical milestones. This helps assess the resources needed to complete the company-level controls effort in a timely manner and gauge the team's progress compared to expectations. In this instance the key activities in the project plan may represent overlapping tasks to be performed in parallel rather than in sequence. For example, management typically needs to determine the existence and nature of a process- or transactional level control before collecting evidence to test its effectiveness. However, when it comes to company-level controls, evidence collection may occur at any point during the overall compliance effort. Some evidence (codes of conduct,
Steps to Compliance
As part of the internal process of ensuring compliance with the
EXECUTIVE SUMMARY
o THE ASSESSMENT OF COMPANY-LEVEL CONTROLS is a critical part of complying with section 404 of Sarbanes-Oxley. The PCAOB says public companies must assess the design and operating effectiveness of these controls in addition to examining detailed process- and transactional-level control activities. COMPANY-LEVEL CONTROLS ARE THOSE THAT PERMEATE an organization and have a significant impact on how it achieves its financial reporting and disclosure objectives. These controls are exemplified by the control environment itself including the tone at the top, corporate codes of conduct and policies and procedures. CPAs CAN FOLLOW SIX STEPS TO HELP ENTITIES comply with company-level control requirements. These steps are defining the project plan and key milestones, building a structure to assess the controls, obtaining input on the design of company-level controls, documenting and assessing the controls, testing their effectiveness, and engaging in gap remediation and continuous improvement. THESE STEPS ARE REQUIRED OF PUBLIC COMPANIES, but private companies and not-for-profit organizations also can benefit by looking at the process as a best practice that leads to stronger governance and better financial results.
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Meritorious Article
corporate policies, organization charts and the like) may facilitate the building of a customized assessment structure or provide insight into the design of the organization's companylevel controls a n d a l s o represent evidence to support the effectiveness of these controls. For instance, when we reviewed the charter for Campbell's audit committee, it provided insight into the oversight activities this committee performed, in addition to offering evidence that such a document existed. STEP TWO: Build an assessment structure for companylevel controls. To methodically evaluate these controls, companies need a formal structure within the context of the overall internal control framework adopted by management. To build this structure, CPAs should first review appropriate authoritative literature -- including COSO's Internal Control -- Integrated Framework, PCAOB Auditing Standard no. 2 and Sarbanes-Oxley itself -- and solicit the input of the company's external auditors and any consultants providing subject matter expertise on the company's overall section 404 compliance efforts. CPAs also should talk to peers at other companies, attend seminars on company-level controls compliance and use other available tools (for example, KPMG's www.404institute.com website). A customized assessment structure likely will consist of 20 to 30 objectives across the four COSO components that relate specifically to company-level controls (excluding the control activities component). Because these objectives represent management's control expectations for complying with section 404 company-level controls, management will need to formally assess the design and operating effectiveness of each. If management can determine it meets each objective based on these assessments, it can conclude that the organization's company-level controls are adequate overall. (See page 34 for an example of company-level control objectives.) To facilitate management's assessment, CPAs should support each company-level control objective with underlying guidance, or points of focus, representing key considerations in examining each objective. For example, one of Campbell's objectives related to the COSO control environment component concerned whether management, through its attitudes and actions, demonstrated character, integrity and ethical values. This objective was supported by several points of focus: Management sets the appropriate tone at the top; maintains codes of conduct and other policies regarding acceptable behavior; follows ethical guidelines in dealing with employees, suppliers, customers and others; removes or reduces temptations that might cause staff to engage in unethical acts; and responds in a timely and appropriate manner to violations of the company's code of conduct. When making their overall assessment of a given objective, CPAs should carefully consider each point of focus and the implications of any bestpractice controls that seem to be missing. STEP THREE: Obtain input on the design of company-level controls. Gaining insight into the design of company-level controls is sometimes more challenging than assessing detailed process- or transactional-level control activities. Company-wide controls often are not readily apparent; management gave little consideration to them in the past with the result that nobody perceived them as formal controls, making them harder to identify. To solve this problem CPAs can leverage section 404 and other documentation already created to assess the organization's internal control activities. For example, section 404 documentation covering the safeguarding of cash, inventory and fixed assets can support the company-level control objective that management's philosophy and operating style are consistent with a sound control environment. CPAs also can review corporate, accounting and human resources policies; employee standards of conduct; organization charts; internal communications; board of director materials and other existing documentation, as well as interview appropriate subject-matter experts. Representatives from the corporate controlling, internal audit, IT, legal and HR functions can provide insight into high-level oversight and other companylevel controls performed at, or dictated by management at, the corporate level. Business unit experts can help CPAs understand how such controls are implemented at the local level, for example clarifying how the local team translates the entity-wide strategies and objectives into its plans and activities. Finally, senior executives can discuss how they set the tone at the top, provide oversight, assign accountability, perform risk assessment and in other ways directly influence the organization's company-level controls. At Campbell, for example, the corporate controller explained how the company established its corporate accounting policies, the interaction between corporate and local finance staff, the competency of financial talent and, most important, the activities performed by Campbell's disclosure committee. The corporate secretary and vice-president of audit helped us understand risk management, fraud reporting, management's response to reported improprieties, audit committee and overall
Meritorious Article
board oversight activities, and the development of Campbell's annual internal audit plan.
TIPS
To get started with the evaluation process, review the insights you obtained from existing documentation and interviews with functional experts, business unit contacts and senior management. Then examine each point of focus for a given objective, considering the adequacy of existing company-level controls relative to best practices. In other words, assess whether the design of the organization's current controls is adequate for each objective. Finally, to the extent you identify any gaps in the design of these controls, document and begin implementing appropriate remediation plans as soon as possible. STEP FIVE: Test the effectiveness of company-level controls. Traditional validation testing is typically used to assess the operating effectiveness of controls at the process and transactional levels; the type and frequency of a control activity drives the extent of testing CPAs perform. But few company-level controls lend themselves to selecting a sample size and then doing this traditional testing. Testing the operating effectiveness of an organization's company-level controls requires creativity. CPAs must use other techniques -observing disclosure committee meetings, interviewing members of the senior leadership team, reviewing board minutes, obtaining a copy of the organization's internal communications plan and evidence of its execution, selecting a sample of reported improprieties to assess how management responded or conducting an employee survey. An organization-wide survey in particular can provide solid evidence about the effectiveness of company-level controls, enabling CPAs to gauge employee awareness of the company's mission, vision and core strategies; adherence to its code of conduct; and use of its whistleblower hotline. A survey also can provide a benchmark against which to measure improvement in controls over time. STEP SIX: Engage in gap remediation and continuous improvement. If you do identify gaps in the design of companylevel controls while testing their operating effectiveness, you should initiate remediation efforts as soon as possible. For example, one control objective related to the COSO control environment component involves management demonstrating character, integrity and ethical values through its attitudes and actions. But, if management has not implemented an anonymous whistleblower hotline or established procedures for appropriately handling improprieties reported via the hotline, there likely is a gap in this company-level control. To remedy the problem CPAs should help management take appropriate
PRACTICAL
STEP FOUR: Document and assess company-level controls. The next step in the compliance process is to formally document and evaluate the design of company-level controls. CPAs should begin by detailing the company's control activities that support each objective in the assessment structure they built in step two.
o When building a structure to assess company-level controls, solicit input from external auditors and any consultants who advised the company on its overall section 404 compliance. Talking to peers at other companies also can provide useful feedback. o Talk with internal audit, IT, legal and human resources to gain insight into company-level controls performed at the corporate level, and to business unit managers about how they implemented them at the local level. o When testing company-level controls, use an organization-wide survey to gauge employee awareness of the company's mission, vision and core strategies, adherence to the code of conduct and comfort level with the whistleblower hotline.
actions, including setting up a hotline, improving the handling of complaints or establishing a timeline for responding to calls. In the spirit of improving overall corporate governance, CPAs need to recognize the difference between adequate and bestin-class company-level controls. CPAs should focus on continuous improvement, looking for ways to make the process of assessing company-level controls more efficient and the controls more effective. For example, although an organization's internal audit team may already use a comprehensive risk-assessment process to support the development of its annual audit plan, it may be able to enhance the process by using a detailed questionnaire on fraud risk factors.
Improved Governance
Documenting and assessing company-level controls are key to overall compliance with section 404. More important, CPAs who focus on such controls are likely to find ways to enhance them and ultimately improve the organization's overall governance. Stronger corporate governance for Campbell Soup and other public companies should translate into stronger business results and increased shareholder value. It could likewise mean greater value for owners of private companies and help nonprofit organizations fulfill their mission. The bottom line: Identifying and assessing company-level controls, performing gap remediation and maintaining a continuous-improvement mindset benefit public companies, private companies, NPOs and other entities alike. J. Stephen McNally is Director of Finance of Campbell USA, a division of Campbell Soup Co.
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Article Section
Entry Level Career of Females

By S. Ahmad Ashraf, FCMA*
n the developed world, women in their career have mostly come to a level where they are on equal footing with the men. In contrast the developing countries or under developed country such as Pakistan, women are still struggling to mark footprints in their professional career. We may be able to trace many reasons in history as to why women are not as successful as the men? If traced one will find reasons, that go back almost to the medieval era that have been encompassed with religious or social norms. But as we notice, the percentage of women is showing a rising trend in all spheres of life. For example we see more female population in our universities, professional colleges specially the medical colleges, this rising trend then makes one question as to why the majority of women do not make it to the top level as compared to men in the business world. There might be exceptions to this statement, but statistics prove and the fact remain that when males and females begin their careers at the same level at the same time the men are always leading in career growth than women. When asked this question to equal number of men and women, one will get an answer which most of the time shows the personal bias rather than the logic. No sound and logical reasons are forwarded but fingers are always pointed from both side as to discrimination, male chauvinism, lack of opportunities and above all lack of skills. Keeping the special circumstances of our
Seven Hurdles to
society, I have tried to list down the reasons, all of them starting with M as to why the women in their professional career do not progress.
1) Mobility
When it comes to getting the first job or to move upward in the career women are generally restricted by their mobility. Their willingness to leave the city and do a job in any other city is very narrow. There are sound reasons for this limitation but the fact remains that most of the women will rather decline the job than to move out of the city.. The result is that the job is immediately grabbed by a male candidate and the foundation is laid for the limitation of future prospects of women.
2) Mother
The next hurdle comes in the shape of the mother, who is as important in making a decision as the woman herself. The nature of job, the environment of the job the working condition all have to be approved by the mother to the incumbent before she lands the job. The mother's actions and decisions may or may not synchronize with the ambitious daughter but ultimately she has the winning arguments. Moreover all the mothers' have future plans for their daughters such as marriage, family. All mothers' plans have their own plan to fit in the new job offer of their daughter; and if the daughter does not compromise with these the trouble is around the corner for them.
The percentage of women is showing a rising trend in all spheres of life. For example we see more female population in our universities, professional colleges specially the medical colleges, this rising trend then makes one question as to why the majority of women do not make it to the top level as compared to men in the business world.
3) Marriage
Now if you have managed the mobility or are lucky enough to get a job in the home
Article Section
town and are able to overcome the anxiety of mothers, don't think that you can comfortably pursue your career. Our society expects young woman should get married as soon as they are out of college or immediately after getting a job Your mother might be looking for a suitable match for you probably before your graduation. Since you have completed your education and considered to be lucky to have a job, your mother will consider herself very unlucky till the time she see's you married off to someone. To find a match who is accommodating enough to let you continue with your job and is not so pressing about the wife to stay at home is not an easy catch. After marriage you intercity mobility may also not fits into your husband plan as husbands are not willing to leave town for the sake of wife's job) But having all said and done, if you get a good match and after the honey moon, prepare yourself to get back to your job and make a career out of it, be prepared to face the next challenge. What is that? Read below. 4) Mother in Law The next hurdle is to handle your mother in law if your husband is having a joint family and living in the same house according to the wishes of her mother. Out of the frying pan and into the fire, yes believe it or not this extra baggage will break your dream of becoming the chief executive officer of your organization. You will for the most of the time get some contributory remarks from your mother in law which after the whole day of hard work will raise your fretfulness level. It all depends on as to how much strong nerves you have to bear that or ignore that. But you have to live with it till the time you are dissolved like s sugar in the cake or become a hard like rock.
will take over and will dominates over all other relationships of yours. Now you will be thinking more about your kids than the job. It has been noticed that with the advent of the cell phones the women call their kids more than the clients or customers. You will not be aware but your motherhood will start killing your career like slow poison. Your focus is not totally shifted but will be divided between the job and the family. You will sometimes give priority to the family which will result in a negative marking in your career. Women of very strong nerves are able to give the priority to job than to family or being able to maintain a balance. Unlike men the tilt of women is always towards family and this sometime can become a non jump over hurdle. A piece of advice here: be wise in jumping over the hurdles two, three and four as they might become a savior to cross the sixth hurdle.
7) Men
All said and done; it should not be forgotten that in ninety nine percent of the cases it will be the man who is going to decide the carrier growth in the organizations and the gender bias cannot be ruled out. Gender discrimination and sexual harassments are not new in the corporate word. They are always the talk of the corporate world and the women are facing it day after day. From the day women enter the job and the day they leave they have a story to tell about the male colleagues. Stories are more common about the men spoiling the career of the women then the vice versa. So be prepared to get frustrated by your male colleague/boss and try to be realistic. As it is going to happen sooner or later stages of you career. Unlike the famous Seven Habits of The Highly Successful Men or the Five M of management (men, material, money, market & method) which are adaptable The Seven M hurdles (mobility, mother, marriage, mother in law, maternity, motherhood & men) of career growth of women are difficult to cross, adopted or eliminate. In our society these are there for centuries and are expected to remain there for times to come. Good luck to those women who are able to manage all the M's hurdles and are able to finish their careers without any tremor. For those who do not; there is no recipe or cure. These are our society norms and are silently accepted rules of the sport.
* Chief Financial Officer, Century Paper & Board Mills Limited
5) Maternity
Congratulations! You have jumped over the first four obstacles but still are far from the finish line. The natural consequence of the marriage is maternity and is the next point of worry for you. Once the pregnancy gets noticed the job environment will certainly change. Boss will be worried about the days when you will be on the leave, husband will be worried about the travelling in the later stages of pregnancy, and your subordinates will be worried about as to who will be the boss during your maternity leaves. You will start planning as to how you will manage the affairs and the office after you have taken the baby shower. Will it be possible for you to continue the job and you boss will have definitely be thinking as to what the replacement will be if you decide not to come back to the job and decide to prefer the family life over the professional life . All the above thoughts will come and go with each passing day of your pregnancy and will make your make your blood pressure jump up and down. This hurdle will sometime end the career of many young ladies.
6) Motherhood
Well done all the hurdles for till this time have been successfully jumped, but psychologically after giving birth your motherhood
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Article Section
Stages of Moral & Ethical Behaviour

By Assad Mahmood, FCMA*
thical integrity is the collection and consolidation of the values such as truthfulness, honesty, up-righteousness, morality, civilization and other factors governing any society and culture. Institutional integrity principles translate into a person's personal life, which in turn enlighten the values and virtues in a society. Each and every person at any point of time is at any one of the stages of morality. This depends on the family background, education, training, life experiences, future expectations, income level and the environment in which he has dwelled. Other factors may also have direct and indirect impression on the moral and ethical state of the person in the long as well as in the short run. Repeatedly exhibiting the same behavior has the tendency to develop and mature the ethical stage. Experiences in life polish the behavior and accelerate the journey from one to the next stage. Each stage has its own fruits which one enjoys over the period of time. The benefits derived strengthen the beliefs vested in a particular stage. The first 18 to 20 years of one's life are extremely important in developing one's ethical behavior. Whatever good or bad one has learnt has a long term effect on the way one behaves in different situations during the course of his life span. After this period the set direction is extremely difficult to change without breakage and damage caused to the overall personality of an individual. Study and a habit of continuous reading help to develop the insights of one's personality. One can overcome the shortcomings in one's personality by research and development in various media in and around him. Comparative analysis of subjects, religions and doctrines help to transform from one level to the next level. Taboos and beliefs which are ingrained in one's personality can be overcome by comparative analysis on an absolute basis. With the advancement of technology, the pace of life has increased multifariously. Despite the technological advancements the corporate world has to incorporate and revert back to the basic principles of morality and ethics. This reminiscence is also noticed at the national level in many advanced and developed nations across the globe. One of the reasons for revisiting the basics is the ethical and moral dilemmas being faced and witnessed in different corporate frauds and financial embezzlements which have triggered the recent meltdown and recession in the last years of the previous decade. Stages of ethical development were initially pointed out and conceived by a Swiss psychologist Jean Piaget (9 August 1896 16 September 1980) who is known for his epistemological studies with children. Since then these have been used by teachers and academicians across the globe. In the mid of the last century the stages of ethical behavior were further developed. Lawrence Kohlberg a student of psychology at the University of Chicago further developed and advanced the concepts
through continuous research which started somewhere in 1958 and worked on the expansion of the theory throughout his life. Broadly speaking Lawrence Kohlberg divided the stages into three levels which are Pre-conventional, Conventional and Postconventional. Two stages were identified in each of the levels. A fourth level identified as the 'Transcendental Morality' was also identified by Kohlberg. A brief of these levels is as follows:
LEVEL 1 (PRE-CONVENTIONAL)
1. Obedience and Punishment Orientation: This is the basic level. This stage can be compared with the psychological behavior of children towards different events and the outcome that may or may not happen. Once the consequences of the outcome are no longer present, the chances and probability of happening/not happening of a certain event becomes very high. The moral standing of the individual or a class of individuals is either extremely weak or they have an instilled intrinsic feeling that sans the action / inaction of a third party the happening / not happening should / should not take place. Daily wagers and the un-skilled labour usually operate at this orientation stage. There operations need to be monitored closely as the probability of an error and mistake is high when the monitoring is low. 2. Self-Interest Orientation: (What's in it for me?) (Cost / Benefit) This is based on the self-interest of an individual. A person will / will not do on the basis of his own self-interest i.e. only when the person is convinced that a benefit is going to be derived. This is a purely selfish approach and actions and motives are achieved / not achieved only when a person foresees a quantifiable achievable benefit out of it and the benefit always exceeds the cost.
LEVEL 2 (CONVENTIONAL)
Interpersonal Accord and Conformity: (Norms of the society) (The good boy/good girl attitude) This stage gives the prime weightage to the norms and standards set forth by the society. The individuals at this stage adhere to the rules, procedures and practices of a society in which they live and operate. A famous adage Do in Rome as the Romans do may give a precise definition of this stage. The individuals tend to do / not to do a certain practice on the pretense that such is the generally accepted norm in the society without going deep into the long term repercussions of the practice or behavior. 4. Authority and Social-Order Maintaining Orientation: (Law and order morality) Morality still being dictated from an outside force. Majority of the members of the society are at this stage. There is an inherent built-in 3.
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feeling inside the individuals which bound them to follow certain path. They follow a course to preserve the bedrock on which the entire edifice rests. They have a very strong feeling that if every individual starts to violate a law or principle set forth, the basic edifice may crumble. The individuals at this stage need a constant follow-up and a refresher of the rules, regulations, laws and principles. As time passes, the individuals tend to forget the teachings and may digress from the divine path. Moreover, revision and updates need to be incorporated in the built-in unconsciousness which ultimately governs the consciousness. for the stage 6 at the post-conventional level, however led him to emphasize the speculative nature of transcendental morality. LEVEL 4 (TRANSCENDENTAL MORALITY) 7. Transcendental Morality or the Morality of the Cosmic Orientation: This stage links religion with moral reasoning. This stage is inspirational in nature which deals with not only this world but also the world hereafter. One of the basic fundamentals of this stage is the existence of the eternity and the belief that whatever good or bad is done is accounted for and is the basis for the reward and punishment not only in this world but also in the life hereafter. This stage cannot be understood unless and until one has a complete understanding of the dynamics of the religious doctrines.
LEVEL 3 (POST-CONVENTIONAL)
5. Social Contract Orientation: Briefly this is the basis of the democratic governance. Rules, laws and principles must serve the benefit of the majority of the society. Individuals elevate themselves to a level wherein their own judgment always plays a positive role in following the rules and procedures. Dictums that do not serve the benefit of the majority need to be adjusted for the greater benefit of the mankind. 6. Universal Ethical Principle: (Principled conscience) This is the universal ethics driven stage. At the advanced level this stage is somehow hypothetical. Laws are valid only when they are based on the principles of justice. Decisions are made in an absolute manner as in the philosophy of Immanuel Kant. This involves a person imagining to be in other's shoes, what he would do believing the fact that the other person is true. The action in itself is very important. Actions are understood to be paths which lead to a certain destination. One destination can be reached by a number of paths. It is the choice of the individual to choose any of the path. This choice is determined on the basis of consciousness based on principles. The person performs an act because it is right and not merely on the disposition that it is legal, expected or previously agreed upon. Kohlberg faced extreme difficulties in obtaining empirical evidence
LEVEL 1 STAGE
PRACTICAL IMPLICATION OF KOHLBERG'S STAGES:

Kohlberg used a famous druggist dilemma captioned Heinz Steals the drug in Europe in explaining the stages developed in his research. A woman was suffering from cancer. The only drug available in the market was a special dose of Radium which was developed recently and was being sold for 2,000 bucks. The price was highly inflated and was 10 times higher than cost. The sick woman's husband Heinz ran pillar to post but could borrow only 1,000 bucks which were half of the price of the drug. Heinz requested the druggist to sell the drug at low price but the druggist refused to do so. In sheer desperation, Heinz broke into the shop and stole away the drug. Possible explanations to the Heinz's behavior in each of the stages are given in the table mentioned below in given table. From theory's perspective it is not imperative what the reader thinks Heinz should do. The response however explains the moral and ethical standing of the individual. Judgment of the quality of the response is used in psychological analysis of individuals.
Probable Course of Action on the Basis of Thought Process Should Steel the Medicine Should Not Steel the Medicine Obedience and Punishment Orientation Obedience to his wife and family. Obedience to law and order. Self-Interest Orientation Because it will make him happier as Because doing so might put him in prison and his wife's life will be saved even if he his life will be ruined. He will face more has to serve the prison. hardships in the prison than due to the death of his wife. Interpersonal Accord and Conformity Doing so is very much expected Because he has done everything he could have from him. done. He cannot be blamed for not being able to arrange the medicine. Authority and Social-Order Because he has to save his wife' life. Law prohibits stealing and therefore stealing Maintaining Orientation Subsequently he should serve the should not be done. penalty and the punishment as per the law. Social Contract Orientation Everyone has a right to choose the The druggist has the right to charge whatever course of action irrespective of the price is deemed fit. rule of law. Universal Ethical Principle Saving a human life is more divine than Life of other human beings is equally sacred and the profit of the druggist. they might need the medicine. Stealing the medicine will make it unavailable to them. Transcendental Morality or the Dictums of the religion are supreme. He should adopt a course of action as per the religious Morality of the Cosmic Orientation doctrines. Islamic Religious doctrines prohibit the stealing of any kind but at the same time responsibility of provision of all the basics of life including healthcare and medicine rests| with the state. State is responsible to provide every type of sustenance to the citizens. Had the state been functioning properly, such a need would be provided by the state. Societies operating in such a state will have ideally no crime rate.
* Corporate Financial Controller, Serena Hotels Ltd.(South & Central Asia)
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Do GDP and KSE Dictate the Destination?

By Shahid Tanweer, ACMA
The stock market is a game of words and patience. One of the most difficult businesses is to earn money from these words and can only be known to person(s) who has experience of putting his money in this word game market. An investor's position at KSE and a football manger position in the ground are same. An investor sitting in the trading hall or at his laptop and football manager standing at his technical area in the ground has to watch the game till the referee blow the final whistle. One stock from the portfolio or one goal from eleven players can turn the game but both has to trust and expose a great deal of patience. In the nutshell, one losses his money and the other is sacked.
Prelude
There are three (03) stock exchanges in Pakistan. However, over the years the KSE has remained the pre-dominant stock market because of: o Majority of shares traded; o Most of equity and debt listing; o Trend of KSE is followed by the other stock exchanges of the country. Therefore, the discussion on stock market relationship with Gross Domestic Product (GDP) centers on the Karachi Stock Exchange (KSE). I would not let the reads to sleep by providing history of stock markets in Pakistan because that is a long list by any standards and tons of material is easily available on the internet, Karachi Stock Exchange web site and State Bank of Pakistan web site, rather would confined my paper to the topic. The paper will end with the reader's agreement about KSE that in many aspects, Pakistan's stock market appears to be operating as a typical emerging market with high return, high volatility, high market concentration and relatively inability to mobilize new investment.
stock markets of slow growing economies. Peter Lynch, a legendary fund manager and stock guru, think investors are wasting their time with economic analysis and forecasts, since they believe that stock market has already priced in expectations for the economy. Those who invest based on economic forecasts would therefore be late to the game missing out an attractive investment opportunity. Looking ahead, stock return will continue to depend on prospects for earning growth, dividend yield and valuation change. It is, in fact, Earning per Share (EPS) and not overall corporate profits that matter to stock market return. At best, there is no relationship between GDP and KSE-100 index performance and the same cannot be considered similar to other indicators that track various sectors of the Pakistan economic activity such as the gross national product, consumer price index. My findings to believe the same is based on the reasons and justifications presented in the part II.
Part II : Justification to support the conclusion

The data for GDP and KSE-100 index from 2000 through 2012 has been analyzed in support of my conclusion and i have tried my best to classify and map the index data according to the GDP composition by considering following available guidelines: o Best of my knowledge, belief and understanding; o Reasonable care has been taken to present the accurate data; o Market capitalization re-calculated using the GDP format; o SBP and PBS classification of large scale manufacturing industry; o PBS considers constant growth of 7.50% for small scale industries; o SBP annual report 2011-2012 (state of the economy); o Wholesale and trade sector has some sort of share in stock exchange; Following points would adequately justify my belief that KSE has not any kind of relationship with GDP:
Constituents of the paper

The paper has been divided in to the following parts: Part Focus I Conclusion II Justification to support the conclusion III Factors affecting the stock market performance IV Glossary V Annexure VI References
Part I : Conclusion
A company that operates in slow growth economy but with strong competitive advantage, good management abilities, and excellent corporate governance can be a great investment opportunity. Similarly, if valuations are attractive, it makes sense to invest in the
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1. The annual GDP growth during the period under review ranged from 1.72% to 8.96%. In contrast, the KSE-100 index annual return were much more volatile ranging from ve 41.72% to 92.22% (annexure 1.4) Agriculture being top GDP component is 21% but 0% of market capitalization. (Annexure 1.2) The top 2 GDP components are agriculture and wholesale and retail trade but only 1.43% of the market capitalization; Roughly, 35-38 (%) of GDP activity can expect to be reflected in the stock market performance. The index composition is weighted more towards Large Scale Manufacturing (LSM) and Finance & Insurance (F&I) being (79% market cap) whereas these sectors comprise only 24 % of GDP. GDP has never revealed negative growth but the KSE has posted negative returns for three (03) times. (Annexure 1.4) Annexure 1.4 sorts the data by GDP growth. The year of lowest GDP growth, 2009, also featured the lowest return for the KSE-100 index. Nevertheless, in the year of second lowest GDP growth, 2001, KSE posted only 10.15% negative returns. In the year 2008 and 2012, GDP growth remained almost same, but KSE posted negative 10.77% return and positive 10.45% return respectively, a flip-flop that highlights the inconsistent relationship between the two variables. Annexure 1.5 sorts the data in annual order. In the year of 2004 to 2008, GDP growth remained very strong, but KSE100 index gains were lower than 2003 when the GDP growth was only 4.73%, also, growth in all strong GDP growth years was not consistent. Another flip-flop. Only about half a percent of the population of Pakistan invests in the stock market; At KSE, some sectors are represented in very different proportions from their share in the economy, which is an indicative of the KSE not being driven by macroeconomic fundamentals. For example, textile is dominant industrial sector, which accounts for 60% of the Pakistan's export but they are not market leaders in the stock market. KSE has limited role in meeting the financing needs of the economy, which can be seen by the time FY09 during which KSE declines unabatedly despite the virtual closure of market for almost 4 months, and had a negligible impact on financial stability. MNCs like NESTLE, UNILEVER etc and Government-owned companies like OGDC, PPL, NBP etc tend to be larger companies and enjoys larger market-cap weighted dominate the indices. Consequently, they may exaggerate the differences between the GDP growth and stock market return. Financial markets plays an important role in transmitting monetary policy signal in an economy. However, the KSE is clearly not closely integrated to other institutions of financial markets like money and forex market, as the impact of intervention in one was not clearly reflected in the KSE e.g. interest rate hike have had a discernable, albeit temporary, negative impact on the KSE-100; MNCs like NESTLE operate around the globe and is listed in Switzerland and Pakistan. As a result, Swiss GDP growth and the performance of NESTLE stock are unlikely to be highly correlated. 15. KSE has performed more as a trading platform for speculation activities rather than an avenue to raise financing and diversifying risk and can be gauged by following points: a. Number of listed companies has considerably been reduced from 762 in FY 2000 to 572 at today date; b. Subsequent to March 15, 2005 crises, the KSE-100 index lost approximately 25% of its value in only 8 trading sessions; c. Again, subsequent to April 04, 2008 crises, the KSE-100 index declined by around 71% by August 27, 2008. Further, the KSE management placed a floor of 9,144 points on the KSE-100 index, incidentally, there is not known procedure of such an action in any developing, frontier, emerging, or advanced economy. 16. As of February 17, 2013, market capitalization has reached US$ 44.800 Billion of which free float is only US$ 11.000 Billion representing only 24.553%, thanks to net foreign buying, as foreigners hold about 30% of the free float. 17. General level of illiteracy and in particular financial illiteracy; investors invest solely based on media and research reports issued by so called top brokerage firms like AKD, AHIL etc. (Findings of SECP Task Force on March 2005 crises) 18. Ownership structure of listed companies at KSE is very concentrated and about 64% is closely held by prominent business groups and families of Pakistan. Public sector institutions, mutual funds, and retail investors hold the reminder. The situation is even worse in case of MNCs in which the parent companies routinely tend to have holding in excess of 60%. This in-turn leads to illiquidity and failure of stock prices to reflect the intrinsic value; 19. An empirical study have revealed that KSE is among the most concentrated market in the world which causes an additional risk since the poor performance of few companies like PTCL, OGDC, PPL, NBP, MCB etc damage the value of entire market. Trading at KSE is also very concentrated, the turnover percentage of top 05 volume leaders accounts for more than 60% of the total volume and make no sense whether the volume leaders are from the blue chip counters or from the third or even fourth tier stock. 20. Market capitalization is correlated with stock prices and not GDP. Large-cap and illiquid stocks can swing the index with relative ease and increase market capitalization to GDP ratio and particularly true for KSE where free float is only 24.50%. 21. The performance of private, Government-owned and newly formed companies generally is not reflected in the stock market, but is captured by GDP. In Pakistan, there are only 61,000 registered companies against three million businesses as per the SBP. It means only 2% of the businesses are corporatized. The number of listed companies at KSE is 572 which means only 0.937% companies are listed. 22. Stock prices generally reflect investors' expectations for future corporate earnings and not GDP. 23. The stock market works on only one principle strategy buy on rumors and sell on news. 24. GDP is analogous to sales i.e., it represents the value of all the goods and services produced in a country during a year; it does not reflect the profitability of these sales. However, stock returns depend on corporate profit.
2. 3. 4. 5.
6. 7.
8.
9. 10.
11.
12.
13.
14.
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25. Poor corporate governance affects share price performance but GDP is not harmed. 26. Poor uses of investment in projects or acquisitions that make a company larger without providing economic benefits-can help GDP but hurt share prices. 27. It is difficult to calculate GDP accurately. Furthermore, politicians may be inclined to distort the data for political reasons. 28. There is always a fear that the Government can use the balance sheet of public sector companies for its own budgetary support; another display of distorting relation between the variables. 29. When a company issued additional shares to raise capital, the value of current investor's shares may be diluted and this hurts shareholders returns and ultimately stock price but not to GDP.
Part III : Factors affecting the stock market performance

Following are the main factors that are considered to have an overwhelming effect on the KSE-100 index performance: 1. Low interest rate environment; 2. Investor friendly policies of the Government; 3. Positive geopolitical developments; 4. Strong corporate earnings; 5. Increased investor's confidence; 6. Liquidity issues; 7. Turnaround in the macro-economic conditions; 8. Media and other stakeholders (Task force finding on March 2005 market crises); 9. Manipulation of the available finance and market by major market participant (Forensic report issued by Diligence USA, LLC on March 2005 market crises) 10. Professionalization of asset management business; 11. Privatization of the management of public funds; 12. Expectation of political stability in the country; 13. Continuity of the economic policies; 14. Speculation though integral part, an excess of it increases settlement risk; 15. Continuous depreciation of Pak rupees; 16. Rising commodity prices; 17. Bearish spell across global equity markets; 18. Outlook report on market or specific sector (s) by the international investment firms like Goldman Sachs, Morgan Stanley, Merril Lynch etc. 19. Foreign participation; 20. Pakistan sovereign rating by Moody's Investor Services and S&P. 21. Implementation of new trading or settlement system like T+3 system; 22. SECP action against brokerage firms; 23. Trading volume i.e., easy entry, easy exist; 24. Availability of different trading products i.e., stock future, index future; 25. The financing effect in the corporate sector is another factor among equities for stock market decline because the more companies rely on the stock market for financing, the more
they are held back by bear markets. 26. High market concentration like change in the sentiment for OGDCL, MCB, NESTLE etc being top weighted index company (ies) have a profound effect; 27. Sector outlook on Govt. spending like cement sector will perform well because of allocation towards public sector development program. (PSDP) 28. Insider trading;
Part IV : Glossary
Gross Domestic Product (GDP) GDP, of a country is one of the ways of measuring the size of its economy and is defined as, total market value of all final goods and services produced in a country in a given period of time. Stock Exchange The stock exchange provides electronic interface to either buy or sell shares to investors via member brokers. KSE-100 Index The KSE-100 index is a benchmark by which the stock price performance can be compared to over a period. In particular, the KSE 100 is designed to provide investors with a sense of how the Pakistan equity market is performing. The KSE-100 Index was introduced in November 1991 with base value of 1,000 points. The Index comprises of 100 companies selected on the basis of sector representation and highest market capitalization, which tracks over 85% of the total market capitalization of the companies listed on the Exchange. Market Capitalization Outstanding shares multiplied by current market price. Market Capitalization to GDP Ratio The capitalization to GDP ratio measures the extent of stock market penetration in an economy. The ratio is effected by nature of financial structure and liquidity in the stock markets. Free- Flot The free-flot index takes into account only those shares, which are available for trading in the stock market i.e., available for purchase in the market. Earning Yield The earnings yield is the inverse of the P/E ratio and shows the percentage of each dollar invested in the stock earned by the company. Earnings Growth (Latest EPS minus last year EPS) divided by last year EPS and is used by many investment managers to determine optimal asset allocation. Dividend Yield Dividend yield is a measure of how much the company is paying out in dividends compared to the price of the company's stock and is
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derived by dividing dividend per share by current market price. Earning per Share After tax earnings available to common shareholders and is derived by dividing profit after tax by maximum total outstanding shares. Corporate Governance Corporate Governance is a system by which companies are directed and controlled through board and senior management involvement. Insider Trading Buying or selling of shares by person (s) that has an access to price sensitive information not known for general information for undue gain or avoidance of possible loss from holding. Market Concentration Market concentration means the dominance of few stocks in the marker. Blue Chip Company Companies with long record of earning, dividends, and trading. Competitive Advantage A company's ability to perform in one or more ways those competitors cannot or will not match. Financial Market All institutions and procedures for bringing together buyers and sellers of financial instruments like shares, bond etc together. Liquidity Ease in buying and selling of securities. Corporatization The conversion of sole proprietorship concern or partnership firms in to limited liability company (ies) or registration of new companies with SECP. Multinational Companies (MNC) The companies with significant operations in more than one country. Speculation Speculation is opposite to hedging where speculators take positions in the market in the pursuit of profits and assume price risk in the endeavor.
Part V : Annexure
Annexure 1.1 (Mapping of index according to the GDP composition)
Market Capitalization as of 17.02.2013 GDP Sector 1 Construction and Materials (Cement) 184.226 Industry 2 Electricity 151.361 Industry 3 Multiutilities (Gas and water) 32.618 Industry 4 Automobile and Parts 59.509 Industry 5 Beverages 5.713 Industry 6 Chemicals 391.368 Industry 7 Engineering 36.172 Industry 8 Food Producers 572.003 Industry 9 Forestry (Paper and Board) 4.471 Industry 10 Industrial metals and Mining 17.025 Industry 11 Lesiure Goods (Miscellaneous) 344.67 Industry 12 Oil and Gas 1,396.506 Industry 13 Personal Goods (Textile) 219.775 Industry 14 Pharma and Bio Tech 52.530 Industry 15 Tobacco 32.818 Industry 16 Media 2.389 Service 17 Commercial Banks 872.022 Service 18 Equity Investment Instruments 26.266 Service 19 Financial Services 29.044 Service 20 Life Insurance 14.893 Service 21 Non Life Insurance 65.790 Service 22 Real Estate Investment and Services 1.185 Service 23 Technology Hardware and Equipment 1.651 Service 24 Fixed Line Telecommunication 82.991 Service 25 Industrial Transportation 27.767 Service 26 Software and Computer Services 1.525 Service 27 Support Services 3.245 Service 28 Travel and Leisure 30.705 Service 29 Electronic and Electrical Goods 1.393 Service 30 General Industrials 42.618 Service 31 Health Care Equipment and Services 2.190 Service 32 Household Goods 16.468 Service KSE sector classification has been revised on January 01, 2010 4,378.58 PKR OR 44.68 USD S. No. Sector Name
(Rs in Billion)
GDP Composition Cons 184.2264.21% EGD EGD 183.9794.20% LSM LSM LSM LSM LSM LSM LSM LSM LSM LSM LSM LSM 2,788.23463.68% CSPS 2.3890.05% FI FI FI FI FI 1,008.01523.02% OD 1.1850.03% TSC TSC TSC TSC TSC TSC 147.8833.38% WSRT WSRT WSRT WSRT 62.6701.43%
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Annexure 1.2 (Relationship b/w GDP composition and Market cap of KSE-100 Index as of June 30, 2012)
A) Commodity Producing Sector i. Agriculture ii. Industry Manufacturing Large Scale (LSM) Small Scale Mining & Quarrying (MQ) Construction (Cons) Electricity & Gas Distribution (EGD) Service Sector Wholesale & Retail Trade (WSRT) Transport, Storage & Communication (TSC) Finance & Insurance (FI) Ownership of Dwelling (OD) Public Administration & Defence (PAD) Community, Social & Personal Services (CSPS) Gross Domestic Product (A+B) % of Total GDP 46.5 21.1 25.4 18.6 11.9 6.7 2.4 2.2 2.2 53.5 17.1 9.6 4.8 2.7 6.6 12.7 100 % of Market Cap 72.09 0 72.09 63.68 56.18 7.5 0 4.21 4.2 27.91 1.43 3.38 23.02 0.03 0 0.05 100
B)
Table 1.3 (Market Capitalization, KSE-100 Index and GDP)

Market Cap Ratio GDP GDP Index to GDP at MP Growth at MP Growth at FC Growth SBP Rate 2000 3,826 3,562 394 1,520.73 10.30% 30.22% 3.91% 44.19% 13.00% 2001 4,210 3,632 342 1,366.43 8.12% 10.04% 1.97% -10.15% 10.00% 2002 4,453 3,745 412 1,770.11 9.25% 5.77% 3.11% 29.54% 7.50% 2003 4,876 3,922 756 3,402.47 15.50% 9.50% 4.73% 92.22% 7.50% 2004 5,641 4,216 1,422 5,279.18 25.21% 15.69% 7.50% 55.16% 7.50% 7,450.12 31.82% 15.23% 8.94% 41.12% 9.00% 2005 6,500 4,593 2,068 2006 7,623 4,860 2,801 9,989.41 36.74% 17.28% 5.81% 34.08% 9.50% 2007 8,673 5,192 4,019 13,772.46 46.34% 13.77% 6.83% 37.87% 10.00% 2008 10,243 5,383 3,778 12,289.03 36.88% 18.10% 3.68% -10.77% 15.00% 2009 12,724 5,476 2,121 7,162.18 16.67% 24.22% 1.73% -41.72% 12.50% 2010 14,804 5,644 2,732 9,721.91 18.45% 16.35% 3.07% 35.74% 14.00% 2011 18,033 5,815 3,289 12,496.03 18.24% 21.81% 3.03% 28.53% 12.00% 2012 20,654 6,029 3,518 13,801.41 17.03% 14.53% 3.68% 10.45% 9.50% 2013* 20,654 6,029 4,379 17,894.90 21.20% 29.66% 9.50% Note: * 17.02.2013 and all figures are stated in Billion Rupees except % figure. All data relates to fiscal year end. KSE-100 index on June 1999 was 1054.67. FC mean factor cost of 1999-2000 and MP mean market price Year GDP at MP GDP at FC Market Cap KSE 100 Index
Annexure 1.4 (GDP growth in ascending order)

Year 2009 2001 2011 2010 2002 2012 2008 2000 2003 2006 2007 2004 2005 GDP Growth 1.72% 1.97% 3.04% 3.07% 3.11% 3.67% 3.68% 3.91% 4.73% 5.82% 6.81% 7.48% 8.96% KSE-100 Index Growth -41.72% -10.15% 28.53% 35.74% 29.54% 10.45% -10.77% 44.19% 92.22% 34.08% 37.87% 55.16% 41.12%
Annexure 1.5 (GDP yearly data)

Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 GDP Growth 3.91% 1.97% 3.11% 4.73% 7.48% 8.96% 5.82% 6.81% 3.68% 1.72% 3.07% 3.04% 3.67% KSE-100 Index Growth 44.19% -10.15% 29.54% 92.22% 55.16% 41.12% 34.08% 37.87% -10.77% -41.72% 35.74% 28.53% 10.45%
Part VI : References
State Bank of Pakistan Karachi Stock Exchange Pakistan Bureau of Statistics The Nation Newspaper The Dawn Newspaper West LB Mellon Asset Management Brandes Investment Partners Virtus Mutual Funds About the Author: Mr. Shahid Tanweer is an associate member of ICMA Pakistan and currently working in Bank Alfalah Limited at Faisalabad as Assistant Manger - Credit Administration Centre. The writer can be reached at elbshahid@yahoo.com
Pakistans Economic Horizons
Pakistans Economic Horizons

State Bank of Pakistans Monetary Policy Decision
n the monetary policy statement of February 2013, the SBP highlighted two main challenges for monetary policy: to manage the balance of payment position and to contain the possible increase in inflation. Since then, SBP's foreign exchange reserves have declined by another $2 billion; from 8.7 billion at end-January 2013 to $6.7 billion as of 5th April 2013, mainly due to debt payments. Contrary to expectations, however, year-on-year inflation has come down by 1.5 percentage points; from 8.1 percent in January 2013 to 6.6 percent in March 2013. These developments pose divergent policy choices for the SBP. While the former calls for caution, the latter indicates a possible resumption of ease in the policy rate. The balance of payments position continues to be driven by low financial inflows and high debt payments. A cumulative net capital and financial inflow of $34 million during July-February, FY13 is insufficient to finance the external current account deficit of $700 million for the same period. While the external current account deficit is expected to widen further in the remaining months of FY13, the net capital and financial inflows are not likely to increase considerably. It is important to emphasize that it is not the size of the external current account deficit, which is projected to be small and manageable, but the lack of adequate financial inflows that is exerting pressure on the balance of payments. In addition, the SBP has to retire another $838 million of IMF loans during the remaining period of FY13 after making payments of $2.2 billion during the first three quarters of the current fiscal year. Thus, the pressure on foreign exchange reserves is likely to remain in the coming months. So far the SBP has played an active role in managing the conditions, but only a consistent increase in foreign exchange can ensure sustainable stability in the market. The role of interest rate is also important in this context as it determines the return on rupee denominated assets relative to foreign currency assets. The idea is to discourage speculative demand for dollars by keeping rupee denominated assets sufficiently lucrative. Real returns on rupee denominated assets have marginally increased due to a substantial decline in inflation. Moreover, led by a depreciation of 5.2 percent in the Nominal Effective Exchange Rate (NEER), the Real Effective Exchange Rate (REER) has also depreciated by 4.2 percent during July-February, FY13. This bodes well for the competitiveness of the external trade sector. However, real cost of borrowing has increased, which may be undesirable in the wake of declining private investment and low growth in the economy. Despite continued energy shortages and substantial fiscal borrowings from the banking system, credit extended to private businesses has shown some nascent recovery. During July-February, FY13, loans to private businesses have increased by Rs173.3 billion as opposed to Rs56.8 billion during the same period of last year. This has helped in a modest growth of 2.9 percent in the Large Scale Manufacturing (LSM) sector during July-February, FY13 compared to 1.9 percent in the corresponding period of last year.
A cumulative decline of 450 basis points in the policy rate of SBP since the beginning of FY12 has played a role in this uptick. Moreover, an analysis of the balance sheets of the main sectors supports this assessment. Thus, both the decline in inflation and the need to encourage further borrowings by the private sector point towards continuation of current monetary policy stance and a possible reduction in the policy rate. However, the current balance of payments position and a structural imbalance in fiscal accounts suggest vigilance. The main implication of fiscal imbalance for monetary policy is excessive borrowings from the banking system, including the SBP. During 1st July 29th March, FY13, the fiscal authority has borrowed Rs853 billion (on cash basis) from the banking system for budgetary support compared with Rs925 billion in the corresponding period of last year and against a full-year estimate of Rs484 billion for FY13. The high level of these borrowings has kept an upward pressure on the system's liquidity and thus market interest rates and is restraining growth in the private sector credit. The SBP can provide liquidity through short term Open Market Operations (OMOs), which has been the case during most of FY13, as long as inflation expectations remain manageable. However, even if inflation continues to remain within the announced target, this approach cannot be sustained for longer periods since it does not address the source of the problem. The source of the problem is untargeted subsidies and the absence of meaningful tax reforms to increase the tax base. The implications are high borrowings and a rising debt level, which have considerably increased debt servicing expenditures. One consequence of high level of subsidies is that the government has managed to keep a check on administered prices such as electricity and gas prices and some transportation fares. Apart from financing subsidies, high rate of fiscal borrowing is being used to pay for the already accumulated debt, which does not represent current government demand. Taken together, these two observations largely explain why despite substantial fiscal borrowings and high growth in M2 inflation has come down. In addition, muted private sector investment expenditures are also having a dampening effect on aggregate demand and thus inflation. Even inflation expectations seem to have moderated, having a broadbased effect on both food and non-food inflation. This is because a major factor in expectation formation is the recent experience of inflation. Thus, not only has year-on-year CPI inflation dropped to 6.6 percent but the 20-percent trimmed measure of core inflation has also declined to 8.4 percent in March 2013; the lowest level since October 2009. The pertinent question, from the point of view of monetary policy, is the sustainability of these subsidies and the overall fiscal position. Any fiscal consolidation effort, which is overdue, can potentially affect the level of subsidies at the expense of partially unhinging expectations of inflation remaining low. A prudent approach would be to gradually reduce the subsidy burden together with a credible and reform oriented medium term fiscal program. In conclusion, given the risks to the balance of payments position, the Central Board of Directors of SBP has decided to keep the policy rate unchanged at 9.5 percent.
Source: http://www.sbp.org.pk/m_policy/2013/MPS-Apr-2013-Eng.pdf
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