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Discussion Paper

Pakistan: Fiscal Management & Accountability

Pakistan Institute of
Legislative Development
A n d Tr a n s p a r e n c y

WWW.PILDAT.ORG

Discussion Paper

Pakistan: Fiscal Management & Accountability

Pakistan Institute of
Legislative Development
A n d Tr a n s p a r e n c y

PILDAT is an independent, non-partisan and not-for-profit indigenous research and training institution with the mission to
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Published: January 2014
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DISCUSSION PAPER

Pakistan: Fiscal Management & Accountability

CONTENTS
Preface
Profile of the Author
Introduction

09

Fiscal Deficit & Public Debt

13

Public Expenditure

14

Tax Potential

15

Conclusion

17

Annex I: Constitutional Framework for Fiscal Management

21

Annex II: Fiscal Operations [Data from website of the Ministry of Finance]

23

Annex III: Selected data from the Economic Survey 2012-2013

28

Annex IV: FBR's Performance (1996-1997 to 2012-1203)

36

DISCUSSION PAPER

Pakistan: Fiscal Management & Accountability

Preface
Preface

he Discussion Paper on Pakistan: Fiscal Management & Accountability has been authored by Dr. Ikramul Haq,
Advocate Supreme Court of Pakistan and international tax counsel.

The paper has been commissioned to serve as a Discussion Paper to a series of workshops on Consolidating Democratic
Devolution in Pakistan organised by the Forum of Federations and Pakistan Institute of Legislative Development And
Transparency PILDAT through January-March 2014.
The paper focuses on various aspects of fiscal management and accountability in the wake of the 18th constitutional
Amendment to the Constitution of Pakistan.

Disclaimer

The data and views expressed in this paper are those of the author and do not necessarily reflect the views of FoF and PILDAT.
Islamabad
January 2014
05

DISCUSSION PAPER

Pakistan: Fiscal Management & Accountability

Aboutthethe
Author
About
Author

Dr. Ikramul Haq, Advocate Supreme Court of Pakistan and international tax counsel, heads Huzaima & Ikram (Taxand
Pakistan), a leading law firm specialising in tax practice. Dr. Ikram is Visiting Professor at Lahore University of Management
Sciences (LUMS) and author of many books that include Pakistan: Enigma of Taxation, Law & Practice of Income Tax, Law &
Practice of Sales Tax, Law & Practice of Federal Excise, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of
Income Tax with Glossary, Master Tax Guide, Income Tax Digest 1886-2013 (with judicial analysis), Commentary on
Avoidance of Double Taxation Agreements signed by Pakistan, Pakistan: From Hash to Heroin and its sequel Pakistan: Drugtrap to Debt-trap. He was tax administrator with Federal Board of Revenue (FBR) from 1984 to 1995. He has 29 years'
experience of local and international tax practice. He has authored more than 1000 articles that have been published in various
tax journals in Pakistan and abroad. He is member of International Fiscal Association (IFA) and country correspondence of
International Bureau of Fiscal Documentation (IBFD). He has written for IBFD chapters on Transfer Pricing and Tax and
Business Laws of Pakistan. He is member of Supreme Court Bar Association and Pakistan Bar Council, besides life member of
Lahore High Court Bar Association.
07

DISCUSSION PAPER

Pakistan: Fiscal Management & Accountability

Results of the first half of the current fiscal year indicate

that the economy is on the track and that it is moving in the
right direction1 statement by Senator Ishaq Dar, Finance
Minister, during a meeting with representatives of the
Department for International Development (DFID) on
January 21, 2014.
The root cause of our economic destruction has been the
policy of 'reckless borrowing and ruthless spending'Dr.
Ashfaque H Khan, Economy in 2012-13, The News,
August 8, 2012.

Introduction
For the last many decades,2 fiscal management and
accountability in Pakistan has been a serious cause of
concern for allthe Government, people and donors. The
fundamental problem diagnosed by experts is a pathetic
tax-to-GDP ratio coupled with 'reckless' borrowing and
'ruthless' spending.
Fiscal decentralisation involving the transfer of taxing and
spending powers to sub-national levels of government is
totally non-existent in Pakistan despite clear command
contained in Article 140A of the Constitution of Islamic
Republic of Pakistan. Pakistan is in dire need of fiscal
decentralisationpresently major fiscal powers are
concentrated in the hands of federal government. Even the
Constitution denies the provinces right to levy sales tax on
goods within their respective territories. The provinces
also have shown apathy to devolve administrative and
fiscal powers to local governments. Since all broad-based
and buoyant sources of revenue are with the federal
government, contribution of provinces in total tax revenues
is only six percent and in overall national revenue base (tax
and non-tax revenue) just around eight percent. This has
made them totally dependence on Centre for transfers
from divisible pool. What makes the situation more
disturbing is the fact that right of provinces to levy sales tax
on services is encroached by federal government through
levy of presumptive taxes on services under the Income
Tax Ordinance, 2001, sales tax on gas, electricity and
telephone services and excise duty on a number of
services.3
1.

2.
3.

The provinces should have the exclusive right to levy

indirect taxes on goods and services within their
respective physical boundaries. Right to levy any tax on
goods should be restored to the provinces as was the case
at the time of independence. Despite levying of taxes by
federal government that should have been with provinces,
the Centre has miserably failed to reduce the burgeoning
fiscal deficit that is reaching the horrifying mark of Rs. 1.8
trillion this year. Had provinces been allowed to generate
their own resources, the present chaotic situation could
have been averted. Centre has been claiming that
provinces lack infrastructure to efficiently collect sales tax.
This has proved wrong as Sindh and Punjab collected
much more sales tax on services than by Federal Board of
Revenue (FBR) after establishing their own tax
apparatuses in 2011 and 2012 respectively. In 2013
Khyber Pakhtunkhwa also followed in their footstep.
We need amendments in Constitution to ensure judicious
distribution of taxation rights between the federation and its
units. Unless it is done, the provinces will continue to
remain hugely dependent upon federal transfers.
Transferring of indirect taxes on consumption of goods to
the provinces will empower the federating units and raise
the tax-to-GDP ratio. Sindh Revenue Board (SRB) and
Punjab Revenue Authority (PRA) are proving this point.
Collection of SRB in 2011-12 and 2012-13 at Rs. 25 and
Rs. 33.7 billion is impressive as compared to what Sindh
used to get from FBRnever more than Rs, 12 billion.
PRA in its very first year (2012-13) collected Rs. 37 billion
compared to Rs. 26 billion received in the same head from
the FBR in 2011-12.
The provincial performance in the case of sales tax on
services completely belies the impression that provinces
do not have the capacity to generate taxes. If sales tax on
goods is given back to provinces, as was the case at the
time of independence, they will perform much better as
experience of handling sales tax on services shows.
However, the performance of provinces in collecting
agricultural income tax is extremely poor. This is a
common issue both at federal and provincial level arising
from absence of will to collect income tax from the rich and
mightythe meagre collection of agricultural income

The Federal Board of Revenue Chairman says that because of SROs and different agreements, almost two-thirds of our imports are duty free and only
the remaining one-third is taxable. If only the SROs, which are nothing more than tax exemption to government's favourite businessmen and business
houses, are revoked, the government can easily double its revenues. If dishonest practices such as under-invoicing and tax evasions are eradicated, the
government can easily triple its revenues. Imagine the finance minister of any civilized nation, saying the economy is going in the right direction when
two-third of tax money is virtually stolen under his very nose.The Frontier Post, January 23, 2014
In economics and political science, fiscal management is the use of government revenue collection and expenditure to influence the economy. Two main
instruments of fiscal policy are changes in the level and composition of taxation and government spending in various sectors.
Centre-provincial harmony: Equitable distribution of fiscal rights needed, Business Recorder, March 13, 2006.
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DISCUSSION PAPER

Pakistan: Fiscal Management & Accountability

taxless than Rs, 3 billion by all provinces and

Centreshould be a serious cause of concern. It is
imperative that right to levy tax on income, including
agricultural income, should be with the Centre. In return,
the Centre should hand over sales tax on goods to the
provinces.4
For the current fiscal year, FBR is required to collect Rs.
2475 billion. The Federal government's total revenues
(both tax and non-tax) are estimated at Rs. 3420 billion,
out of which share of provinces is Rs. 1502 billion. The
federal expenditure under debt servicing is Rs. 1154
billion, defence affairs & services is Rs. 627 and running of
civil government is Rs. 275 billion. After charge of these
four items, there is deficit of Rs. 138 billionmeaning by
more borrowings! While the provinces have not been
allowed to levy and collect indirect taxes on goods within
their geographical boundaries, the federal government has
utterly failed to tap the real revenue potential. Failure of FBR
to tap real tax potential adversely affects the provinces. In
fiscal year 2012-13 due to massive revenue shortfall of
over Rs. 400 billion on the part of FBR, all the four
provinces could not get the promised amounts from NFC.
Any shortfall in FBR's revenues or exemptions through
statutory regulatory orders (SROs) jeopardise projection
of revenue collection and fiscal deficit.

4.
10

Taxing agricultural income: qua Constitution, Business Recorder, April 9, 2010.

DISCUSSION PAPER

Pakistan: Fiscal Management & Accountability

Position under 7th NFC Award

Salient features

Who will get what?

Vertical distribution

*
*
*

Final share of provinces: Punjab 51.74

percent, Sindh 24.55 percent, Khyber
Pakhtunkhwa (KPK) 14.62 percent and
Balochistan 9.09 percent.

7th NFC

6th NFC

Change

Center

44%

52.5%

-8.5

Provinces

56%

47.5%

+8.5

7th NFC

6th NFC

Change

Punjab

51.74%

53.01%

-1.27%

Sindh to receive additional transfer of Rs. 6

billion from federal government

Sindh

24.55%

24.94%

-0.39%

KPK

14.62%

14.88%

-0.26%

Provinces in agreement on multiple

indicators and respective weights

Balochistan

9.09%

7.17%

+1.92%

Federal collection charges to be reduced from

5% to 1%

Sales tax acknowledged as provincial subject

KPK to be given additional 1% from federal

divisible pool

FBR has been persistently failed to meet budgetary targets

for the last many years what to speak of realising the real
revenue potential, which is not less than Rs. 8 trillion5. In
20102-13, it even failed to collect Rs. 2000 billion. This
year target is less than Rs. 2500 billion. The failure to tap
the real tax potential is the real dilemma of Pakistan. Poor
performance of FBR adversely affects the provinces as
they are wholly dependent on what the Centre collects and
transfers to them from the divisible pool. Centre is
unwilling to grant the provinces their legitimate taxation
rights while it collects too little to meet their overall financial
demands. The size of the cakedivisible poolis so
small that nothing substantial can be done to come out of
debt enslavement and to spend adequately for the welfare
of the people, no matter in which part of the country they
live.
Track record of FBR shows remote possibility of collecting
even Rs. 6 trillion in the next three years to give enough
fiscal space both to the Centre and the provinces to come
out of the present economic mess, thus providing some
relief to the poor as well as trade and industry. Under the
5.

Position under 7th NFC Award

Horizontal distribution

Projected amount (in billions)

2009

2010

2014

Punjab

419

471

938

Sindh

197

223

445

KPK

118

133

265

Balochistan

53

83

165

given scenario, federation-provinces tax tangle will

continue unchecked and further taxation through local
governments, when elected, would not serve any useful
purposethere will be no relief to the people, rather tax
burden will increase manifold.
Pakistan will remain in debt enslavement and more and
more people will be pushed below the poverty line. If we
want to come out of this crisis, the parliament will have to
reconsider the prevailing social contract between
federation and the provinces. Provincial autonomy and
local self-governance without taxation rights and equitable
distribution of income and wealth is meaningless. We
cannot overcome perpetual economic and political crises
unless the provinces are given true autonomy; ownership
of all resources; generation of own revenue and exclusive
right to utilise it for the welfare of their denizens.
Fiscal decentralisation and municipal self-rule should
essentially be linked with a social policy based on the
principle of universal entitlements for all residents in terms
of access to social benefits and social services. Taxation

FBR: new chairman, old challenges, Business Recorder, August 2, 2013

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DISCUSSION PAPER

Pakistan: Fiscal Management & Accountability

without representation also means denial of spending for

the essential entitlements guaranteed in the Constitution.6
The principle of universal entitlements seeks to prevent the
formation of inequalities and the foundation of the poor as
a separate social group, whereas residualism/marginalism
takes the form assisting the poor and the needy, and thus
implicitly defining them as certain types of social groups.
The provincial parliaments in Pakistan should be
pressurized by civil society to enact laws for establishment
of local governments as ordained under Article 140A of the
Constitution on the basis of social policythey have so far
just copied the previous outdated ones with patch work
here and there. The ruling classes do not want to empower
people through self-governance. They want to enjoy total
control over resources. The local governments will not be
meaningful unless entitled, within national economic
policy, to have adequate financial resources of their own,
of which they may dispose freely within the framework of
their powers and for public welfare.
In a nutshell, for achieving the goal of fiscal
decentralisation, local governments' financial resources
must commensurate with the responsibilities provided for
by the constitution and the law to ensure the welfare of the
people and ensure sustainable growth at grass root level.
Part of the financial resources of local authorities shall
derive from local taxes and spend for providing universal
entitlements and development. Pakistan must follow the
model of welfare states where resources available to local
governments are based on a sufficiently diversified and
buoyant nature to enable them to keep pace with the real
evolution of the cost of carrying out their tasks.
There is no political will to implementing a well-defined
reform agenda, on which general consensus exists.
Addiction to borrowed money and lust for wasteful
spending are the main stumbling blocks for achieving the
cherished goal of self-reliance that can pave way for rapid
growth, employment generation and substantial spending
for social sectors.
The ever-widening fiscal deficit, amongst many other
reasons, has its roots in wasteful funding of a monstrous
Government machinery, especially corruption-riddeninefficient public sector enterprises (PSEs), and extending
of tax-free perks and perquisites to elites. These profusely
bleed the already scarce resourcesboth tax and non-tax.
The story of persistent failure of implementing a prudent
fiscal policy in Pakistan and poor management of
6.
12

Municipal self-governance, Business Recorder, July 19, 2013

economic affairs is thus, not unknown or untoldit is even

candidly admitted in all official documents, released from
time to time, relating to taxation, public expenditures and
public borrowing.
This paper briefly touches some vital areas posing
challenges to fiscal management and accountability vis-vis available solutions to overcome the prevalent crisis of
meeting huge budgetary gap.

DISCUSSION PAPER

Pakistan: Fiscal Management & Accountability

Fiscal Deficit & Public Debt

'The absence of prudent fiscal policy coupled with lack
of implementation and accountability has destroyed
macroeconomic stability during the last five yearsthe
last year of the federal government has proved to be the
worst, rather disastrous. At provincial level as well, the
performance of all the four governments has been
equally appalling'Fiscal Policy Statement for 2012-13
issued by the Debt Policy Coordination Office of Ministry of
Finance.
Managing high fiscal deficit (root cause of many economic
ills) coupled with massive debt burden is the toughest
challenge faced by fiscal managers of Pakistan. The welladmitted solution: substantial increase in resources and
drastic reduction in spending is easier said than done.
Fiscal austerity, critics7 say, in the past had failed in
reducing the debt burden of Pakistan.
From 2007-2012, Pakistan's fiscal policy remained under
immense pressure owing to continued security related
issues, greater than targeted subsidies, flood related
expenses and global financial crisis.8 The government
borrowed heavily from external and internal resources in
order to finance the fiscal deficit, due to which a huge
amount of money was paid towards interest payments. All
these factors relentlessly affected Pakistan's fiscal
capacity to finance the fiscal deficit.9 (please see
official data at Annex III & IV. )
Fiscal Policy Statement for 2012-2013,10 released by the
Debt Policy Coordination Office of the Ministry of Finance
in compliance of section 6 of the Fiscal Responsibility and
Debt Limitation Act 2005 [FRDLA, 2005], while expressing
grave concerns about overall fiscal scene, expresses
dissatisfaction over failures of provinces in meeting the tax
targets. It says the efforts of provinces in collection of

taxes were not in line with the understanding reached

during the 7th National Finance Commission (NFC) Award.
The provinces registered a deficit of Rs. 39 billion as
against targeted surplus of Rs. 125 billion, leaving a
significant shortfall in non-tax revenues for the fiscal year
2011-12.
The Fiscal Policy Statement for 2012-2013 also reveals
that despite transferring the functions of 17 ministries to
provinces, federal expenditure did not register any
reduction because majority of the employees of the
devolved ministries preferred to stay on the Federal payroll
rather than opting for the Provinces.
The second reason for increase in expenditure at Federal
level was creation of some new ministries and upgradation of some divisions. Since the Federal
Government agreed to finance the vertical programmes
under the NFC accord, the pressure on its fiscal balance
continued.
According to the Fiscal Policy Statement for 2012-2013,
the provinces were unable to support the Federal
Government as had been envisaged in the fiscal
devolution process. More specifically, it is observed, the
provinces' share in total expenditure increased from 31.5%
in 2011 to 34.5% in 2011-2012, whereas their share in
revenue generation remained almost the same at 6.0% of
the total (federal plus provincial) revenues.
It is revealed that the provinces posted surplus of Rs. 134
billion in 2010-2011 mainly due to upward revision in their
share (56%) in the divisible pool under the 7th NFC Award.
It is, however, disturbing to note that in 2011-2012, they
registered a deficit of Rs. 39 billion. They did not make
any meaningful efforts to raise their own revenues and
reduce unproductive expenditure. The deficit in 2011-12
was driven by sharp rise in provincial expenditures.11

7.

Dr. Akmal Hussain in 'The knife Edge of Fiscal Space' [Daily Times, January 22, 2004] aptly observed that: The history of economic policy in Pakistan
shows that economic disasters have befallen the hapless citizenry due to sins of commission as much as by sins of omission. We will show in this
article that there was a time over a decade ago when incorrect sequencing of the Structural Adjustment Programme led to disastrous economic
consequences. That was a sin of commission. Today we may be about to commit a sin of omission: The failure to translate the over 10 billion dollars
State Bank reserves into increased GDP growth and poverty reduction could lead to continuing and unnecessary increase in the misery of the people,
and an erosion of the reserves themselves. Successive governments stricken by the discreet charms of the IMF sought to reduce the budget deficit,
regardless of the cost in terms of rising poverty and declining growth. That elusive symbol of economic health is now at hand. After a decade of stringent
restrictions on development expenditure and more recently a sharp reduction in the debt-servicing burden (following debt restructuring), the fiscal
deficit as a percentage of GDP has fallen from 8.8 per cent in 1990-91 to 4.5 per cent in 2002-03, while State Bank reserves are at an all time high level of
over 10 billion dollars.
8. Economic Survey of Pakistan 2012-13, page 48.
9. Ibid
10. Fiscal Policy Statement for 2012-13, Debt Policy Coordination Office of Ministry of Finance
http://www.finance.gov.pk/publications/FPS_2012_13_web.pdf
11. Ibid
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DISCUSSION PAPER

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Huge opportunities accrued to the Provinces in the wake

of the 7th NFC Award and 18th Constitutional
Amendmentright steps towards fiscal independence,
accountability and efficient decision making for the
provision of local services and financing thereofbut
they failed to convert them for well-being of masses. It is
high time that the Provinces should stop blaming the
Federal Government for all their ills and fiscal
mismanagements. They should put their own houses in
order, exploit better opportunities available to them,
exploit natural and human resources to the optimal level,
tax the rich for the benefit of the poor, reduce expenditure,
go for long-term projects yielding more and more
employments and ensure sustainable economic growth
with social justice for all. So far their performances in the
wake of the 7th NFC Award are not satisfactory at all. 12
According to the Debt Policy Coordination Office, under
the 7th NFC award, around 70 per cent of the total
revenues are down-streamed to provinces both directly
and indirectly. The Federal Government is left with only 30
per cent of the total revenues, whereas, expenditure on
interest servicing, security and subsidies on food and
energy constitute 60.9 per cent of the total revenues.
Furthermore, total revenues also include State bank of
Pakistan (SBP) profit that will start declining once
Government starts repayment of SBP debt as envisaged in
the SBP Act and reduction in domestic interest rates. This
essentially means that the consolidated fiscal deficit of the
country will remain on the higher side till such time the
revenue generation efforts bear fruits and the tax to GDP
ratio is increased.13
The Debt Policy Statement 2012-2013 issued by the Debt
Coordination Office of the Ministry of Finance in
compliance of section 7 of FRDLA 2005 concedes that
the debt to GDP ratio has hovered around 60% since
2007-08. In 2011-12, public debt serving stood at
Rs.1024 billion against Rs.856 billion paid during 201011.14
The Debt Coordination Office claims that
soundness of Pakistan's debt position, as given by
various sustainability ratios, remains higher than the
internationally accepted thresholds. Total Public debt
12.
13.
14.
15.
16.

levels around 3.5 times and debt servicing below 30

percent of government revenue are generally believed to
be within the bounds of sustainability. Government is
making concentrated efforts to increase the revenues and
rationalize current expenditure to reduce the debt burden
and improve the debt carrying capacity of the country to
finance the growth and development needs.15
All economists are unanimous that during 2007-2012 both
at the Federal and the Provincial levels no concrete
measures were taken to foster fiscal discipline. No strategy
was devised to mitigate risks of falling foreign reserves and
increasing debt burden.16 Resultantly borrowings from
banks increased manifold to pay off liabilities of the PSEs.
According to the SBP, this has inflicted economy heavily
and resulted in billions of rupees increase in the stock of
total debt & liabilities (TDL).17
Pakistan has lost some US $ 12 billion forex reserve since
July 2011, when they stood at $14.8 billion. It has lost US
$ 2.0 billion reserve since the signing of the IMF
programme. The last five years of economic
mismanagement brought the country to the verge of
default. The present government sought the assistance of
the IMF to prevent that. The IMF approved a new
programme amounting US $ 6.68 billion on September 4,
2013.18
The unabated borrowings to meet burgeoning budgetary
deficit is sinking the economy. One of the major
weaknesses of economic governance is unchecked
wasteful spending on monstrous Government machinery
and inefficient PSEs. Our foreign debt is going to be US $
75 billion in 2015 and domestic debt Rs. 20 trillion if
immediate curative measures and tough decisions are not
taken.

Public Expenditure
Fiscal consolidation must emphasise persistent
structural reforms for resource mobilisation and
expenditure rationalisation over temporary fiscal
measures such as increasing tax rates and reducing

Ibid
Ibid
Debt Policy Statement 2012-13, Debt Coordination Office of Ministry of Finance http://www.finance.gov.pk/publications/DPS_2012_13_web.pdf
Ibid
Pakistan's public debt (both rupee and dollar components) have grown at an average rate of 21.5 percent per annum from 2008-12 as against an
average rate of 6.6 percent per annum during 2000-07. In absolute terms, public debt rose from Rs. 6,040 billion in 2007-08 to Rs. 14,255 billion by the
end of June 2013.
17. State Bank of Pakistan, Annual Report 2011-12 www.sbp.org.pk/reports/annual/arFY12/complete.pdf.
18. Dr. Ashfaque H Khan, External vulnerabilities, The News, December 31, 2013.
14

DISCUSSION PAPER

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expenditure across the board. Fiscal institutions including

the country's debt office can play an important role in
locking any gains. Reducing public debt takes time;
therefore, fiscal consolidation must focus on enduring
structural changeDr Ashfaque H Khan, A nation's
debt, The News, August 27, 2013.
During the past few years, greater than targeted budget
deficit together with deficit financing from domestic
sources, has resulted in a sharp increase in interest
expenditures. Interest payments have increased from Rs.
716.6 billion or 3.9 per cent of the GDP in 2010-2011 to
Rs. 901.9 billion or 4.5 per cent of GDP in 2011-2012.
In terms of the current expenditure, it stood at 28.9 per cent
during 2011-2012. The rise in interest payments during
the period indicates the growing unsustainability of the
fiscal account.
Another major revenue leakage relates to subsidies to
loss-incurring PSEs and power sector, together amounting
to Rs. 700 billion.19 The Economic Survey 2012-2013
says that share of current expenditures in total
expenditures has declined significantly from 84.0 percent
in 2010-2011 to 79.3 per cent in 2011-2012.20 It further
declined to 77.0 per cent in 2012-2013. There was also a
surge in defence expenditure that accounted for 16.2 per
cent of current expenditure in 2011-2012 against 15.5 per
cent in 2010-2011.21
Period from 2008-2013 was adjudged as 'financial harakiri' by some economists.22 Never in the history of this
country has the nation seen such a fiscally irresponsible
government. They have maintained a large budget deficit
year-after-year over the last five years, and accordingly
more than doubled the country's public debt ably assisted,
of course, by the exchange rate depreciation. Accordingly,
they damaged a relatively robust economy in a short span
of five years without guilt and shame. Because of
unwillingness to mobilise resources on the one hand and
reckless spending on the other along with an
unconsidered NFC Award, Pakistan's fiscal balance has
been destroyed thoroughly in the last five years. The nation
will witness further instances of financial hara-kiri in the
last two weeks of the present regime the impact of which
will continue to haunt the economy in the years to come.23
19.
20.
21.
22.
23.
24.

Experts are even critical of the present policies

emphasising that fiscal consolidation is not receiving due
attention. There is no serious work being done to control
the wasteful expenditure by right-sizing the government
apparatus. They argue that for effective fiscal management
and accountability, substantial reduction in unproductive
current expenditure is required through the following
initiatives:
i.

Twenty-five ministries can be either dissolved or

rationalised, thereby saving Rs 200 billion.
ii. Rs. 400-500 billion on financing the losses of PSEs
can be eliminated by restructuring and privatising
those entities.
iii. Badly targeted subsidies, consuming about Rs. 500
billion should be withdrawn and some part of the
saved money could be directed to expand coverage of
the social protection programme for the poor.
iv. The total public debt at Rs 30 trillion is unsustainable.
Debt servicing cost has reached Rs.1500 billion,
which is over 40 per cent of total government revenue.
Drastic measures need to be taken to reduce the debt
stock by retiring some of the debt with the proceeds of
privatisation of public sector corporations such as
PIA, Pakistan Railways and the Pakistan Steel Mills;
sale of some of the state-owned real estate which is
being used for unproductive purposes as perks for
government officials.24

Tax Potential
The people have to understand that the tax money stolen
by the corrupt rich of the country represent the good
schools, colleges, hospitals, roads and many other
projects of welfare stolen from us poorThe Frontier
Post, January 23, 2014
The government has relied on raising tax rates rather than
broadening the tax base. In other words, the government
has raised the tax burden of those who were already
paying taxes. Those who are influential have never paid
taxes, and have once again remained out of the tax
netHurting the poor, The News, June 14, 2013
In recent years Pakistan became target of severe criticism

Economic Survey of Pakistan 2012-13, page 52

Ibid
Ibid
Dr. Ashfaque H Khan, Financial hara-kiri, The News, March 5, 2013
Ibid
Dr. Akmal Hussain, Creating the fiscal space, The Tribune, February 14, 2011
15

DISCUSSION PAPER

Pakistan: Fiscal Management & Accountability

from many countries and donors for not collecting taxes

due, especially from the rich and mighty. It is an undeniable
reality that both centre and provinces are not collecting
taxes diligently. For fiscal year 2012-2013, the FBR
collected Rs. 1,939.4 billion against original target of Rs.
2,381 billion25 showing huge shortfall of Rs. 441
billion. The contribution of Provinces in overall tax
collection is less than 6 per cent of the GDP.
Pakistan's tax potential at the Federal level is not less than
Rs. 8 trillion. There are 10 million individuals having annual
taxable income of Rs 1.5 million,26 total income tax
collection from them at the prevalent tax rates comes to
Rs. 3,750 billion. If we add income tax collected from
corporate bodies, other non-individual taxpayers and
individuals having income between Rs. 400,000 to Rs.
1,000,000, the gross figure would be Rs. 5,000 billion.
The FBR collected only Rs. 739.7 billion as income tax in
2012-2013.
Similarly, due to leakages in sales tax, federal excise and
custom duties, the total collection is not more than 30% of
actual potential. In fiscal year 2012-2013, the FBR
collected Rs. 841.3 billion under the head sales tax.
Collection for customs and excise duties was Rs. 239
billion and Rs. 119.4 billion respectively. The total indirect
collection of just Rs 1199.7 billion was pathetically low. It
should have been Rs 3500 billion. If this tax gap is bridged,
the total revenue collection would not be less than Rs.
8500 billion without imposing any new taxes or raising
existing tax rates.

immovable assets.
vi. Imposition of sales tax on all kinds of services by the
provinces
Amending of tax codes each year through the Finance Bill
and in between, by way of statutory regulation orders
(SROs) is not serving any useful purposethis is not a
solution to improve tax administration.
The solution lies in converting the FBR into an autonomous
body run by independent Board of Directors comprising
professionals and answerable directly to the Parliament
and not the headquarters of the ruling party. Taxes should
be imposed by the Parliament and not any executive
authority.
The FBR must be insulated from all kinds of political
influences. Enforcement of tax laws without any fear or
favour should be the first and top most priority of the
Government if it wants to rescue the country from the
present economic mess coupled with expending taxes for
the benefit of masses and desisting from wasting funds on
white elephantsmonstrous public sector enterprises
sleaze with inefficiency and corruptionso that public can
see that the elected Government is a responsible one and
cares for them. This would promote tax culture and restore
people's faith in the tax system. Voluntary tax compliance
can be improved only through a strong deterrent system
where the compliant taxpayers are respected and
rewarded, while evaders are exposed and punished under
the law.

The following measures at the Federal and the Provincial

levels can increase the tax-to-GDP ratio from the present
8.5 per cent to 16 per cent, over the next two to three years:
i.

Bridging of tax gap through effective enforcement &

voluntary compliance
ii. Withdrawal of all concessionary Statutory Regulatory
Orders (SROs)
iii. Substantial property tax on the rich
iv. Presumptive agricultural income tax of Rs.5,000 per
acre on irrigated agricultural holdings above 25 acres
and Rs. 2000 per acre on un-irrigated holdings above
50 acres
v. A capital gains tax on transfer of all moveable and
25. The original target of Rs.2381 billion was however downward revised to Rs. 2007 billion. FBR has collected Rs. 1,939.4 billion. In absolute terms an
additional amount of Rs. 57 billion has been collected over the collection of past fiscal year. The growth in net revenue collection has been 3.0 percent
over the collection of FY: 2011-12 which is lowest during last 13 years. Similarly the tax-GDP ratio dropped from 9.1% in the preceding year to 8.5% in
2012-13FBR Year Book 2012-13
26. http://data.worldbank.org/country/pakistan
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DISCUSSION PAPER

Pakistan: Fiscal Management & Accountability

Conclusion
Effective fiscal management and accountability alone can help Pakistan to effectively overcome fiscal deficit.27 Once fiscal
space is created by good governance, the government can focus on providing basic amenities like safe drinking water, health
and education, transport and housing to the people.
Resource mobilisation should be given priority to build infrastructure, facilitate growth of small and medium sized firms in the
industrial sector and small farms in the agricultural sector for an employment intensive and equitable economic growth
process.
At the same time, large corporations with equity stakes for the poor can be established through public-private partnerships.
This would set the stage for a structural change that could help achieve economic growth for the people and by the people
which is presently confined to the elites only.

27. The Finance Minister of Pakistan during his meeting with a delegation of DFID on January 21, 2014 expressed satisfaction over results of economy and
its direction. He said that revenue collection has shown an increase of 16%, exports have gone up by 5%, remittances by 9% and growth in the economy
in the first quarter has been reported by the Pakistan Bureau of Statistics to be at 5%. Besides there has been an unprecedented surge in the Karachi
Stock Exchange Index which has crossed the 27000 points. On the foreign exchange reserves position, he said the government inherited a fragile
position and entered into an IMF programme to stabilize it. Admitting that Pakistan has negative inflows despite an IMF plan, Mr. Ishaq Dar said that the
government has chalked out a plan to increase the foreign exchange reserves to US$16 billion by the end of the current year. Earlier, the team of IMF at
the end of its first review visit to Pakistan [October 28-November 8, 2013] issued official statement that it expects growth to reach about 2 percent for
FY2013/14 as a whole. The mission said it was pleased with the strong fiscal performance in the first quarter of 2013/14 and the steady implementation
of the government's structural reform agenda.
17

APPENDICES
APPENDICES

DISCUSSION PAPER

Pakistan: Fiscal Management & Accountability

Annexure I
Constitutional Framework for Fiscal Management
The 1973 Constitution of Pakistan [the Constitution] provides explicit provisions for running the Islamic Republic of Pakistan
(a federation) with a three-tier system of governancethe federal, provincial and local. Till today, the third tier (local
government) is non-operativeArticle 140A of the Constitution requires establishment of local governments by all provinces
devolving political, administrative and financial responsibility.
The Federal Legislature may make laws on any subject for the entire federation, including for extra-territorial operations,
whereas Provincial Legislatures may make laws not enumerated in the Federal Legislative ListArticle 142 of the
Constitution.
The matters of common interest listed in Part-II of the Federal Legislative list are dealt with and settled by the Council of
Common Interests appointed by the President of Pakistan. The Council consists of the Chief Minister of each Province and an
equal number of members from the Federal Government nominated by the Prime Minister as the members of this Council and
is chaired by the Prime Minister himself, if he is the member of the Council, or by a person nominated by the President. All
aspects of public sector finance, such as currency, public debt, financial and accounting procedures are solely federal
matters. Accordingly relevant laws and regulations are issued by the Federal Government.
The Auditor General of Pakistan is the auditor of both the Federal and Provincial Governments and his duties and powers have
been given in the Pakistan (Audit and Accounts) Order 1973.
The collection of major taxes such as income tax, custom duties, excise duties and sales tax and borrowings from external
sources rests with the Federal Government, while the collection of revenues from local resources such as land revenue, sale of
land, and sale of water for irrigation are assigned to the Provinces. The proceeds of some taxes specified in the Constitution are
divided between the Provinces after deducting a percentage of collection charges by the Federal Government. In order to
distribute these taxes and coordinate important matters of Federal and Provincial finance, the Constitution provides for a
National Finance Commission consisting of the Minister of Finance of the Federal Government and Ministers of Finance of the
various Provincial Governments. This commission allocates a share for each Province from the divisible pool of taxes
collected. In addition, the Provincial Governments receive grants from the Federal Government.
As regards expenditure, each Provincial Government incurs outlays according to the commitments made in individual budget
estimates. Because of commonality in the financial provisions of the Federal and Provincial Governments, procedures and
practice in budgeting and accounting are similar and vary only in detail.

Financial Procedure
The executive authority of the Federation of Pakistan vests with the President and is exercised by the Federal Government
consisting of the Prime Minister and Federal Ministers. The Prime Minister is the Chief Executive of the Federal Government and
manages public funds, while those of the Provinces are managed by the Chief Ministers. The Prime Minister is assisted by the
Cabinet and, in financial matters, by the Finance Minister. Similarly, for the Provinces, Chief Ministers are the Chief Executives
who are assisted by the Provincial Ministers.
The Prime Minister makes known to the National Assembly each year the financial needs of the Federal Government. The
financial needs of the Provincial Governments are made known to the Provincial Assemblies by the Chief Ministers. These are
discussed and funded from revenues raised from taxes and other sources. No tax or duty can be imposed nor can any
expenditure be incurred without the authority of the National Assembly or by the Provincial Assembly, as the case may be.

21

DISCUSSION PAPER

Pakistan: Fiscal Management & Accountability

Consolidated Fund
The Government accounts are mentioned in two parts, viz the Federal and Provincial Consolidated Fund and Public Accounts.
Revenue receipts, moneys received in repayment of loans given by Government, and the loans raised by Government are
credited to the particular Federal/Provincial Consolidated Fund.
The current and development expenditure along with expenditure on debt servicing is debited to Government account.
The Public Account comprises all moneys received by or on behalf of Government or those deposited with courts of law such
as civil and criminal court Deposits. The Federal and Provincial Governments keep their own separate accounts with the State
Bank of Pakistan.
The Federal Government generally uses all branches of the State Bank, or the National Bank of Pakistan acting as agent of the
State Bank. The Provincial Governments are restricted however, to the branches of the two banks in their respective
jurisdictions.

22

DISCUSSION PAPER

Pakistan: Fiscal Management & Accountability

Annexure II
Fiscal Operations
BUDGET AT A GLANCE
[FY 2013-2014]
Rs. in billion
RECEIPTS
Tax Revenue*
Non-Tax Revenue

EXPENDITURE
2,598
822

A. CURRENT

2,829

Interest Payment

1,154

a)

Gross Revenue Receipts

3,420

b)

Less Provincial Share

1,502

Pension

171

I.

Net Revenue Receipts (a-b)

1,918

Defence Affairs & Services

627

II.

Net Capital Receipts (Non Bank)

507

Grants and Transfers

337

III.

External Receipts (net)

169

Subsidies

240

IV.

Estimated Provincial Surplus

Running of Civil Government

275

Provision for Pay & Pension

25

V.

Bank Borrowing

23

975

B. DEVELOPMENT

762

Federal PSDP

540

Net Lending
Other Dev. Expenditure
TOTAL RESOURCE (I to V)
*Out of which FBR Taxes:

3,591

TOTAL EXPENDITURE (A+B)

50
172
3,591

Rs 2,475 billion

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DISCUSSION PAPER

Pakistan: Fiscal Management & Accountability

Provisional

Table 1

Pakistan: Summary of Consolidated Federal and Provincial

Budgetary Operations, 2013-2014
(In Million of Pakistan Rupees)
July-Sept. 2013

Total Revenue

829,712

Tax Revenue

537,056

Federal

494,948

Provincial

42,108

Non-Tax

292,656

Federal

281,960

Provincial

10,696

Total Expenditure

1,116,620

Current Expenditure
Of which : Mark-up Payments
Defence
Development Expenditure & net lending
Statistical Discrepancy

868,377
301,141
146,464
170,149
78,094

Budget Deficit

286,908

Financing

286,908

External

(27,213)

Domestic

314,121

Non-Bank

116,086

Bank

198,035

Memo Items:
Total Revenue

3.2

Tax Revenue

2.1

Nontax Revenue

1.1

Total Expenditure

4.3

Current

3.3

Of which : Mark-up Payments

Defence
Development Expenditure and net lending
Budget deficit
GDP (Rs. in Billion)

1.2
0.6
0.7
1.1
26,001

Note: Figures based on information from AGPR/Provincial A.Gs./ SBP/EAD.

25

DISCUSSION PAPER

Pakistan: Fiscal Management & Accountability

Provisional

Table 2

Pakistan: Summary of Consolidated Federal and

Provincial Revenue 2013-2014
(In Million of Pakistan Rupees)

July-Sept. 2013
Total Revenue
Tax Revenue
Direct Taxes
Taxes on property
Taxes on goods and services
Excise duty
Sales Tax
Taxes on international trade

3,607
255,924
24,685
231,239
52,791

Other taxes
Stamp duties
Motor vehicles tax
Other taxes
Petroleum Levy
Nontax Revenue
Mark-up (PSEs & Others)
Dividend
SBP profit
Defence
Citizenship, Naturalization & Passport Fee

63,957
4,431
3,156
30,620
25,750
292,656
56,849
3,719
80,000
1,956
3,989

Development Surcharges on Gas

Discount Retained on Crude Oil
Royalty on Oil/Gas
Windfall Levy against Crude Oil
Gas Infrastructure Development Cess
Foreign Grants
C-01010 Others (Profit)
Others
Memo Items:
Total Revenue
Tax revenue
Direct Taxes
Taxes on property
Taxes on goods and services
Excise duty
Sales Tax
Taxes on international trade
Other taxes
Nontax Revenue
GDP (Rs. in Billion)
26

829,712
537,056
160,777

20,846
3,938
19,173
3,773
3,046
10,115
67,636
17,616
3.2
2.1
0.6
0.0
1.0
0.1
0.9
0.2
0.2
1.1
26,001

DISCUSSION PAPER

Pakistan: Fiscal Management & Accountability

Provisional
Table 3
Pakistan: Summary of Consolidated Federal and
Provincial Expenditure 2013-2014
(In Million of Pakistan Rupees)
July-Sept. 2013
Total Expenditure
Current Expenditure
Federal
General Public Service
Servicing of Domestic Debt
Servicing of Foreign Debt
Superannuation Allowances & Pension
Grants (Other than Provinces)
Other General Public Service
Defence Affairs and Service
Public Orders and Safety Affairs
Economics Affairs
Environmental Protection
Housing and Community Amenities
Health
Recreation Culture and Religion
Education Affairs and Services
Social Protection
Provincial
Development Expenditure and net lending
Total Development Expenditure
PSDP
Federal*
Provincial
Other Development Expenditure
Net lending
Memo Items:
Total Expenditure
Current Expenditure
Federal
General Public Service
Servicing of Domestic Debt
Servicing of Foreign Debt
Superannuation Allowances & Pension
Defence Affairs and Service
Provincial
Development Expenditure
GDP (Rs. in Billion)

1,038,526
868,377
639,530
451,994
286,262
14,879
36,437
41,819
72,597
146,464
18,281
6,240
144
81
2,283
2,062
11,704
277
228,847
170,149
87,126
79,538
44,949
34,589
7,588
83,023
4.0
3.3
2.5
1.7
1.1
0.1
0.1
0.6
0.9
0.3
26,001
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DISCUSSION PAPER

Pakistan: Fiscal Management & Accountability

Annexure III
Selected data from the Economic Survey 2012-2013
Fiscal Policy Development
It has been widely recognized that a prudent fiscal policy (low level of fiscal deficit and public debt) plays a significant role not
only in reducing the risks of economic crisis but can also improve country's fiscal capacity to finance larger fiscal deficit
without endangering economic stability and debt sustainability. Since the inception of global financial crisis in 2008-09,
countries around the world dealt with the issue of consolidating their budgets while at the same time sustaining the economic
growth. However, recent improvement in global economic situation has somewhat lowered short-term fiscal risks. Still
concentrated efforts are required to contain the spending at reasonable level.
Over the years, Pakistan's fiscal policy remained under immense pressure owing to continued security related issues, greater
than targeted subsidies, flood related expenses and global financial crisis. Although, Pakistan's economy was not directly
affected from financial crisis, however, in confluence with unplanned expenditures mentioned above during the past five years
resulted in mounting fiscal pressures. Besides, the government borrowed heavily from external and internal resources in order
to finance the fiscal deficit, due to which a huge amount of money was paid towards interest payments. All these factors
relentlessly affected Pakistan's fiscal capacity to finance the fiscal deficit. Nevertheless, during the past three years the efforts
to contain the fiscal deficit within reasonable limit through an expenditure management strategy, austerity measures and
reforms in Public Sector enterprises (Box-1) have yielded the result. Moreover, during past two years the government
consolidated the outstanding power sector debt of worth Rs. 511 billion (Rs 120 billion in 2010-11 and Rs 391 billion in 201112.). This one of settlement during 2010-11 and 2011-12 will be helpful in making substantial savings on interest payments in
coming year.
All the key fiscal indicators surpassed their budgeted targets set for relevant years, however several efforts to contain the
expenditures and to increase the revenues during past five years resulted in significant decline of fiscal deficit from 7.3 percent
of GDP in 2007-08 to 6.8 percent of GDP in 2011-12. Total expenditures as percentage of GDP declined from 21.4 percent in
2007-08 to 19.6 percent of GDP in 2011-12. It is expected to decline further by 0.6 percentage point to 19.0 percent in 201213. In total expenditures, current expenditures were contained at 15.5 percent of GDP in 2011-12 from 17.4 percent in 200708, while it is expected to decline further in 2012-13 at 14.6 percent of GDP. On the other hand development expenditures
stood at 3.6 percent in 2011-12 as compared to 4.2 percent of GDP in 2007-08. It is expected to rise by 4.4 percent in 201213. Out of total development expenditures, Rs 873 billion was earmarked to PSDP (allocation of Rs 360 billion to federal
government and Rs 513 billion to provincial government). On the revenue side, tax to GDP ratio remained within the narrow
band of 9.1 to 10.3 percent since 2007-08 to 2011-12. Total revenues declined from 14.1 percent in 2007-08 to 12.8 percent
in 2011-12 on account of decline in non-tax revenues from 4.2 percent in 2007-08 to 2.4 percent of GDP in 2011-12.
However, total revenues are expected to increase by 14.3 percent in 2012-13 owing to increase in tax revenues up to 11.1
percent and non-tax revenues up to 3.2 percent of GDP in 2012-13. The figure 4.1 reflects the widening of fiscal deficit during
the past 5 years due to decrease in revenues and increase in expenditures.
Structure of Tax Revenue
A well designed tax structure of the country not only improves the economic and industrial competitiveness but also
contributes toward stimulating industrial activity and accordingly growth in the economy. The strong base of a tax system
provides a more stable source of income needed to finance the public expenditure with an aim to relieve poverty and deliver
public services. Historically, Pakistan's tax system undermined due to structural weaknesses like narrow tax base, massive
tax evasion and administrative weaknesses etc. these structural weaknesses have taken a toll on overall tax collection as the
country has witnessed a lowest tax-to GDP ratio not only in the developing countries but also within the region.
Despite the increase in tax revenues, FBR tax to GDP ratio varied between 8.5 to 9.6 percent during the past 12 years. During
July-April, 2012-13 FBR tax to GDP ratio stood at 6.6 percent against 7.1 percent recorded in the same period last year.
Present tax structure of Pakistan is distortionary and incentivizing massive tax evasion. Additionally, some sectors are under
taxes and some are not taxed at all which reflects the narrow base. In particular, there is a least contribution in taxes from the
major sectors of our economy (agriculture and services), as agriculture is contributing 2.5 percent in tax against its 21.4
percent share in GDP, while services sector is contributing 36.7 percent against its major share in GDP i.e. 57.7 percent. There
is a broad consensus that tax to GDP ratio can only be enhanced if all sectors of economy contribute proportionately toward
tax revenue.

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DISCUSSION PAPER

Pakistan: Fiscal Management & Accountability

Table 4.1: Fiscal Indicators as Percent of GDP

Year

Real GDP

Revenue

Expenditure

Overall
Total

Current

Development

Total Rev. Tax

Non-Tax

2006-07

5.5

4.1

19.5

14.9

4.7

14.0

9.6

4.4

2007-08

5.0

7.3

21.4

17.4

4.2

14.1

9.9

4.2

2008-09

0.4

5.2

19.2

15.5

3.6

14.0

9.1

4.9

2009-10

2.6

6.2

20.2

16.7

3.5

14.0

10.1

3.9

2010-11

3.7

6.5

18.9

15.9

2.8

12.4

9.3

3.0

2011-12

4.4

6.8

19.6

15.5

3.6

12.8

10.3

2.4

2012-13

3.6*

4.7

19.0

14.6

4.4

14.3

11.1

3.2

*
: Real GDP estimated for 2012-13
Note 1: The base of Pakistan's GDP has been changed from 1999-2000 to 2005-06.

Fig: 4.1-Fiscal Deficit

22

Expenditures

18
Fiscal Deficit

16
14

2012-13
July-Mar

2011-12

2010-11

2009-10

2008-09

2007-08

2006-07

12

Revenue
2005-06

Total Revenues

20

Fig 4.2: FBR Tax Rev as % of GDP

11.0
10.0
9.5
9.0

2012-13
B.E

2011-12

2010-11

2009-10

2008-09

2007-08

2006-07

2005-06

2004-05

2003-04

8.0

2002-03

8.5
2001-02

Percents

10.5

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DISCUSSION PAPER

Pakistan: Fiscal Management & Accountability

Tax structure in Pakistan has witnessed substantial changes over the years as the share of direct tax increased from 35.3
percent in 2001-02 to 39.2 percent in 2011-12 and is expected to increase further by 39.1 percent in 2012-13. Sales tax share
in total tax collection increased from 41.2 percent in 2001-02 to 43.01 percent 2011-12. Share of Custom duty in indirect taxes
has increased from 18.3 percent in 2001-02 to 19.0 percent in 2011-12, whereas it is expected to decrease by 17.1 percent in
2012-13. On the other hand the share of excise duty in indirect taxes has declined from 18 percent in 2001-02 to 10.7 in 201112 and it is expected to decline further by 8.0 percent in 2012-13. Sales tax as an important consumption tax accounts for 74.3
percent of indirect taxes.
Review of Public Expenditures
Public expenditures can play an important role in physical and human capital formation over time and can be a effective tool in
boosting economic growth. In Pakistan, public expenditures remained under great pressure during the past five years.
During the past few years, greater than targeted budget deficit together with deficit financing from domestic sources, has
resulted in a sharp increase in interest expenditures. Interest payments have increased from Rs.716.6 billion or 3.9 percent of
GDP in 2010-11 to Rs.901.9 billion or 4.5 percent of GDP in 2011-12. As percent of the current expenditure it stood at 28.9
percent during 2011-12. It is expected to reduce by 4.0 percent of GDP in 2012-13. The rise in interest payments during the
period indicates the growing unsustainability of the fiscal account.
The other major fiscal leakage is subsidies to lossmaking PSEs and the power sector. During July-March, 2012-13 actual
disbursement against the budgeted subsidy of Rs.208.6 billion stood at Rs.270 billion, thus already surpassed the target by
Rs.61.4 billion in first nine months of current fiscal year. It is expected to increase further due to loss making PSEs and the
persistent rise in circular debt in the power sector.
Fiscal performance
According to the consolidated revenue and expenditure statement of the government, total revenues grew by 22.6 percent
during July-March, 2012-13 and stood at Rs. 2,141.9 billion compared to 1,747.0 billion in the same period last year. The total
collection in tax revenues amounted to Rs. 1,557.6 billion against Rs. 1,393.9 billion in the same period last year, posted a
growth of 11.5 percent. It was mainly on account of insignificant growth in federal tax revenues which are recorded at 8.4
(As % of GDP)

Table 4.3: Trends in Components of Expenditure

Year

Total Current Interest

Exp. (A) Exp. (B) Payments
(C)

Defence Develop
(D)
ment Exp
(E)

Non Interest
Non-Defence
Exp (A-C-D)

Fiscal
Revenue
Deficit Deficit/Surplus
(TR-Total CE)

Primary
deficit
(TR-NI

2006-07

19.5

14.9

4.2

2.7

4.7

12.6

4.1

-0.8

-1.2

2007-08

21.4

17.4

4.8

2.6

4.2

14.0

7.3

-3.3

-2.5

2008-09

19.2

15.5

5.0

2.5

3.6

11.7

5.2

-1.4

-0.2

2009-10

20.2

16.7

4.4

2.5

3.5

13.3

6.2

-2.7

-1.8

2010-11

18.9

15.9

3.9

2.5

2.8

12.5

6.5

-3.5

-2.6

2011-12

19.6

15.5

4.5

2.5

3.6

12.6

6.8

-2.8

-2.3

2012-13B

19.0

14.6

4.0

2.3

4.4

12.7

4.7

-0.3

-0.7

B: Budgeted
* Excluding Rs 120 billion in 2010-11 and Rs 391 billion in 2011-12 on account of debt Consolidation.
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DISCUSSION PAPER

Pakistan: Fiscal Management & Accountability

percent, of which FBR tax revenues increased by only 5.6 percent during July-March, 2012-13. While the remaining growth
was contributed by the receipts from Petroleum Development Levy as it stood at Rs. 81.0 billion during July-March 2012-13
against Rs.38.2 billion during the same period last year.
Table 4.4 Consolidated Revenue & Expenditure of the Government
Budget Estimates
2012-13

Prov. Actual

Growth

July-March
2011-12

July-March
2012-13

July-March
2012-13

A. Total Revenue

3,378.5

1,747.0

2,141.9

22.6

a) Tax Revenue

2,614.5

1,393.9

1,557.6

11.5

Federal

2,534.5

1,336.2

1,448.0

8.4

of which FBR Revenues

2,381.0

1,280.4

1,352.3

5.6

Provincial Tax Revenue

80.0

57.6

109.6

90.3

b) Non-Tax Revenue

764.0

353.2

584.3

65.4

B. Total Expenditure

4,484.2

2,641.9

3,188.1

20.7

a) Current Expenditure

3,452.2

2,154.1

2,642.0

22.6

Federal

2,339.2

1,478.7

1,887.1

27.6

- Interest

925.8

624.5

772.2

23.7

- Defense

545.4

348.0

405.8

16.6

Provincial

1,113.0

675.4

754.9

11.8

b) Development Expenditure & net lending

1,032.0

428.0

445.8

4.2

PSDP

873.0

375.6

407.4

8.5

Other Development

154.3

45.4

37.3

-17.8

4.7

6.9

1.1

-84.1

1,105.7

894.9*

1,046.2

16.9

4.7

4.5

4.6

1,105.7

894.9

1,046.2

16.9

i) External Sources

134.9

47.4

-4.1

-108.6

ii) Domestic

970.8

847.5

1,050.3

23.9

- Bank

483.8

443.8

856.7

93.0

- Non-Bank

487.0

403.7

193.7

-52.0

23,655

20,091

22,909

14.0

c) Net Lending
C. Overall Fiscal Deficit
As % of GDP
Financing of Fiscal Deficit

GDP at Market Prices

Source: EA wing calculations and Budget Wing, Finance Division
Note: Gas development surcharge is included in tax revenues.
* Excluding one of payment of Rs.391 billion on account of debt consolidation.

31

DISCUSSION PAPER

Pakistan: Fiscal Management & Accountability

FBR Tax Collection

FBR tax collection for the fiscal year 2012-13 was targeted at Rs.2,381 billion which was 26.4 percent higher over the actual
collection of Rs.1883.0 billion during 2011-12.
During the first ten months of 2012-13 registered a weak growth of 5.5 percent in FBR tax collection due to energy/gas
shortages, security issues, failure to implement tax reforms and decline in imports. The total collection stood at Rs.1,505.3
billion against Rs.1,426.2 billion during same period last year. Achievement of the current target is contingent upon not only on
better economic conditions but effective implementation of tax administration reforms is also crucial.
(Rs. Billion)

Table 4.5: FBR Tax Revenues

Revenue Heads

2011-12

July-April
2011-12

% Change

2012-13

A. DIRECT TAXES
Gross
Refund/Rebate
Net

738.4

607.9

596.7

-1.8

79.0

43.0

528.9

553.7

4.7

943.6

989.3

4.8

46.3

37.7

897.3

951.6

6.1

673.2

697.2

3.6

38.0

27.8

635.

669.4

5.4

95.8

91.2

-4.8

0.2

0.4

95.6

90.8

-5.0

174.6

200.9

15.1

8.1

9.5

166.5

191.4

15.0

1551.5

1586.0

2.2

125.3

80.7

1426.2

1505.3

B. INDIRECT TAXES
Gross
Refund/Rebate
Net

1,144.3

B.1 SALES TAX

Gross
Refund/Rebate
Net

804.9

B.2 FEDERAL EXCISE

Gross
Refund/Rebate
Net

122.5

B.3 CUSTOM
Gross
Refund/Rebate
Net

216.9

TOTAL TAX COLLECTION

Gross
Refund/Rebate
Net

1,882.7

5.5
Source: FBR

32

DISCUSSION PAPER

Pakistan: Fiscal Management & Accountability

Direct Taxes
The net collection of direct taxes has registered a growth of 4.7 percent during July-April, 2012-13, while the gross collection
witnessed a decline of 1.8 percent during the period under review. Bulk of the tax revenues of direct taxes were realized from
income tax. The net collection has gone up from Rs.528.9 billion to Rs 553.7 billion. Major revenue spinners of direct taxes are
withholding tax, voluntary payments and collection on demand.
Indirect Taxes
The gross and net collections of indirect taxes have witnessed a growth of 4.8 and 6.1 percent respectively. It has accounted
for around 63 percent of the total FBR tax revenues.
Within indirect taxes, growth in net collection of sales tax increased by 5.4 percent. The gross and net sales tax collection
during July-April, 2012-13 stood at Rs. 697.2 billion and Rs.669.4 billion respectively posting a growth of 3.6 and 5.4 percent
respectively over the corresponding period of 2011-12. The growth in sales tax was significantly affected due to the transfer of
services to provinces. In fact, around 52 percent of total sales tax was contributed by sales tax on import during July-April,
2012-13, while the rest was contributed by domestic sector. Within net domestic sales tax collection, the major contribution
came from POL products, telecom services, natural gas, fertilizers, other services, sugar, cigarettes, beverages, cement,
electrical energy etc. On the other hand, POL products, plastic, edible oil, fertilizers, iron and steel, vehicles, machinery,
chemicals, oilseeds etc contributed significantly to the collection of sales tax from imports.
Custom duty collection has registered a growth of 15.1 and 15.0 percent in both gross and net terms respectively. The gross
and net collection has increased from Rs.174.6 billion and Rs. 166.5 billion during July-April, 2011-12 to Rs.200.9 billion and
Rs.191.4 billion respectively during July-April, 2012-13. The major revenue spinners of custom duty have been automobiles,
edible oil, petroleum products, machinery, plastic, iron and steel, paper and paperboard etc.The collection of Federal Excise
Duties (FED) during July-April, 2012-13 has recorded a negative growth on account of withdrawal of excise duty on most of
the petroleum products and perfumery & cosmetics. The net collection stood at Rs.90.8 billion during July-April, 2012-13 as
compared to Rs.95.6 billion during the same period last year. The major revenue spinners of FED are cigarettes, cement,
beverages, natural gas, and international travel services etc.
Provincial Budget
The total outlay of the four provincial budgets for 2012-13 stood at Rs.1,761.7 billion, 19.4 percent higher than the outlay of
(Rs Billion)

Table 4.6: Overview of Provincial Budgets

Items

Punjab

Sindh

KPK

Baluchistan

Total

A. Tax Revenue

201112 RE
621.4

201213 BE
758

201112 RE
345.5

201213 BE
419.5

201112 RE
183.6

201213 BE
222.6

201112 RE
104.4

201213 BE
125.9

2011- 201212 RE 13 BE
1254.9 1526

Provincial Taxes

44.3

55

64

73.1

3.6

5.7

5.4

117.6

137.5

GST on Services

36.6

40.5

25

32

8.9

8.9

3.7

4.1

74.2

85.5

Share in Federal Taxes

B. Non-Tax Revenue

540.5
34.2

662.5
28.4

256.5
73.6

314.4
82.7

171.1
21.7

209.7
26

95
16.8

116.4
16.6

1 0 6 3 . 1303
146.3 153.7

C. All Others

-16.7

-10.6

24.8

48.3

31.1

34.8

33.5

52.1

72.7

Total Revenues
(A+B+C)

638.9

775.8

443.9

550.5

236.4

283.4

154.7

194.6

1473. 1804.

a) Current
Expenditure
b) Development
Expenditure
Total Exp (a+b)

468

532.9

309.5

315.3

161

191.6

85.2

107.3

1023.7 1147.1

165.5

250

156

231

84.5

97.6

45.7

36

451.7

633.5

782.9

465.5

546.3

245.5

289.2

130.9

143.3

1475.4 1761.7

Source: Provincial Finance Wing, Ministry of Finance

124.6

614.6

33

DISCUSSION PAPER

Pakistan: Fiscal Management & Accountability

Rs.1,475.4 billion last year. Punjab witnessed the highest growth of 23.6 percent in budgetary outlay, followed by KPK (17.8
percent), Sindh (17.4 percent) and Baluchistan (9.5 percent). The overall provincial revenue receipt is estimated at Rs
1,804.3 billion for the fiscal year 2012-13, which is 22.4 percent compared to last year. The increase is mainly attributed to the
transfer of GST on services to the provinces. During 2011-12 provincial revenues witnessed the growth of 25.1 percent.
Allocation of Revenues between the Federal Government and Provinces
Fiscal decentralization policy aimed at delegating fiscal powers and responsibilities from the national to sub national
governments in order to achieve economic efficiency, equality and macroeconomic stability. It also ensures effective
governance through financial autonomy of provincial governments.
In Pakistan the resource distribution is made through the National finance Commission (NFC) award. Historically the resource
distribution was based on the single criteria of population. Consequently the distribution of powers between the federation and
provinces remained a critical issue. Recognizing the importance of other factors, 7th National Finance Commission
accounted for revenue generation, poverty and inverse population density.
The most significant aspect of this award was that it has ensured the financial autonomy of the provinces by increasing their
share in divisible pool from 50 percent to 56 percent in 2010-11 and 57.5 percent from 2011-12 onwards. According to the
seventh NFC award, the distribution of the resources is based on multi-weighted criteria which consist of population (82
percent), poverty/backwardness (10.3 percent), revenue collection/generation (5.0 percent) and area or inverse population
density (2.7 percent).
On the other hand share of federal government in the net proceeds of the divisible pool stood at 44 percent in 2010-11 and
42.5 percent from 2011-12 onwards. Total transfers to provinces have been projected to increase to Rs 1,545.5 billion: an
increase of 22.1 percent in 2012-13 over the actual transfer of Rs 1,266.0 billion in 2011-12.

Table 4.7: Transfers to Provinces (NET)

2008-09
477.4
82.4

2009-10
574.1
81.2

2010-11
834.7
163.0

2011-12
1,063.1
145.6

2012-13 BE
1,303.0
155.9

Special Grants/Subventions
Project Aid
Program Loans

40.6
26.3
0.0

82.0
16.0
0.0

54.1
21.9
0.0

53.9
47.8
4.6

56.7
66.0
10.8

Japanese Grant
Total Transfer to Province
Interest Payment

0.0
626.8
18.5

0.0
753.3
18.7

0.1
1,073.7
18.5

0.7
1,315.0
12.9

0.8
1,592.5
15.4

Loan Repayment
Transfer to Province(Net)

21.0
587.3

24.0
710.6

32.4
1,022.8

36.1
1,266.0

31.5
1,545.5

Divisible Pool
Straight Transfer

Source: Various issue of Budget in Brief

34

(Rs. Billion)

DISCUSSION PAPER

Pakistan: Fiscal Management & Accountability

Figure 4.3 depicts the rising trend in provincial tax growth since 2007-08, particularly during first nine months of current fiscal
year it posted a significant growth of 90.3 percent.
Major part of this growth achieved through the collection of sales tax on services by Punjab and Sindh. Similarly provinces
received the significant amount of the federal government as their share from the divisible pool along with additional grants.
Hence the provincial resource mobilization performed remarkably well during the first nine months of fiscal year 2012-13 with
the growth rate of 20.8 percent as it stood at Rs. 1,125.5 billion against Rs. 932.0 billion in the same period last year.
Another significant feature of provincial fiscal operation is the containment of total expenditures, which reduced by 14.4
percent during July-March, 2012-13 on account of slow growth in current and development expenditures. On account of high
revenues and decrease in expenditures, the provinces posted a surplus of Rs. 103.3 billion during July-March, 2012-13.
Punjab posted the surplus of Rs. 42.0 billion followed by Baluchistan (Rs. 21.9 billion), Sindh (Rs. 20.1 billion and KPK (Rs.
19.3 billion).

(Rs. Billion)

Table 4.8: 5-Years Overview of Provincial Fiscal Operations

Items

2007-08

2008-09

2009-10

2010-11

2011-12

July-March

A. Tax Revenue

498.2

571.7

688.3

1,063.9

1,197.1

2012-13
1,002.8

Provincial Taxes

40.8

46.1

54.8

64.6

107.2

109.6

57.6

Share in Federal Taxes

457.4

525.6

633.5

999.3

1,089.9

893.2

762.2

B. Non-Tax Revenue

78.0

83.8

67.9

62.3

48.0

49.0

36.0

C. All Others

91.0

95.0

120.0

85.1

88.6

73.7

76.2

Total Revenues (A+B+C)

667.2

750.5

876.2

1,211.3

1,333.7

1,125.5

932.0

a) Current Expenditure

457.0

564.2

646.2

831.2

980.6

766.3

687.1

b) Development Expenditure

214.1

201.8

258.4

245.6

375.4

219.9

175.0

Total Exp (a+b)

671.1

766.0

904.6

1,076.8

1,356.0

986.2

862.1

2011-12
819.8

Fig: 4.3- Provincial Taxes

125.0
100.0
75.0
50.0
25.0
0.0
2007-08

2008-09

2009-10

2010-11

2011-12

2012-13
(Jul-Mar)

35

DISCUSSION PAPER

Pakistan: Fiscal Management & Accountability

Annexure IV
FBR's Performance (1996-1997 to 2012-2013)
(Rs. in billions)

36

Year

Targets

Collection

Growth in
Collection (%)

Target Achieved
(%)

Tax to GDP ratio

1996-97

286.0

282.1

5.2

98.6

11.6

1997-98

297.6

293.6

4.1

98.7

11.0

1998-99

308.0

308.5

5.1

100.2

10.5

1999-00

351.7

347.1

12.5

98.7

9.1

2000-01

406.5

392.3

13.0

96.5

9.3

2001-02

414.2

404.1

3.0

97.6

9.1

2002-03

458.9

460.6

14.0

100.4

9.4

2003-04

510

520.8

13.1

102.1

9.2

2004-05

590

590.4

13.4

101.8

9.1

2005-06

690

713.4

20.8

103.4

9.4

2006-07

935

847.2

18.8

101.5

9.8

2007-08

1.000

1008.1

18.9

100.8

9.8

2008-09

1,179

1157.0

14.8

98.1

8.9

2009-10

1,380

1327.4

14.7

69.0

9.0

2010-11

1,667

1587.0

19.6

95.2

8.8

2011-12

1952.3

1883.0

18.2

96.5

9.1

2012-13

2007

1939.4

03.0

96.6

8.5

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Legislative Development
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