FISCAL POLICY OF PAKISTAN

PRESENTED BY:
SADIA NOUREEN
TAMOUR IRSHAD
RAJA ALI SULTAN
ZOHAIB KHAN
WASIM BOSTAN

FISCAL POLICY
The term fiscal policy refers to the expenditure a

government undertakes to provide goods and services

and to the way in which the government finances these
expenditures.

What is fiscal policy?

According to Samuelson,

Fiscal Policy is concerned with all those arrangements

which are adopted by the Government to collect the
revenue and make the expenditures so that economic
stability could be attained/maintained without inflation
and deflation
According to Lee, Fiscal policy considers:
Imposition of taxes

Government expenditures
Public Debt
Management of Public Debt

Objectives of fiscal policy in

Pakistan
self reliance
expansion of exports

containment of import of luxury and non-essential

goods
promotion of investment
reduction in income disparity

How does fiscal policy works?

Fiscal Policy is based on Keynesian theory which states

that government can influence macroeconomic

productivity levels by increasing or decreasing tax
levels and public spending.

Types of Fiscal Policy

Expansionary:

An increase in government purchases of goods and

services, a decrease in net taxes, or some combination of
two for the purpose of increasing aggregate demand and
expanding real output
Contractionary:
A decrease in government purchases of goods and
services, an increase in net taxes, or some combination
of the two for the purpose of decreasing aggregate
demand and thus controlling inflation.

Methods of Raising Funds

Governments expenditure can be funded in a number of
different ways:
Taxation of the population.
Borrowing money from the population, resulting in a
fiscal deficit.
External resources: Foreign grant and loans
Privatization proceeds.
Change in provincial cash balance.

Types of Taxes
Direct:

Direct taxis the one paid directly to the Government by

the persons (natural or juristic)on who it is imposed.
Income Tax
Corporate Tax
Transfer Taxes-estate Tax & Gift Tax
Property Tax
Capital Value Tax

Types of Taxes (Cont)

Indirect:

An indirect Tax is a tax collected by an intermediary y

(such as a retail store) from the person who bears the
ultimate economic burden of the tax (such as the
customer ).
Sales Tax
Value Added Tax (VAT)
Federal Excise Duty

Common issue regarding collection

of Taxes
Tax Evasion:

It is an illegal practice where a person, organization or

corporation intentionally avoids paying his/her/its true
tax liability.

Causes for Tax Evasion

People do not want to disclose their true income
Too many unlawful business activities such as drugs,

hoarding, black money, etc.

No fear of punishment
Complex tax structure
Some economic sectors are exempted: Agriculture, real
estate and capital gain

Cont..
Tax payers see their taxes being used to further rich

citizens interests.
Uncontrolled inflation and high cost of living.
Low level of literacy among tax payers.

Why Pakistan faces large revenue

expenditure gap?
The principal reason lies in the structural weaknesses of
Pakistans tax system which is:
Complex
Inefficient
Unfair

Principles of Tax Policy

Widening the tax base
Lowering tax rates

Taxing all value additions including services, not just

manufacturing sector
Establish an effective and efficient tax system.
Overcome the culture of tax avoidance and evasion

Current Fiscal developments

The current expenditure 2011-12 was budgeted at 14.1%

of GDP as compared to 16.1% of GDP during last year.

In order to provide relief to the general public,
government brought down the GST rate from 17 to
16%, abolished special excise duties, reduced federal
excises on certain items, abolished regulatory duties
on 392 items out of the total 397 items.
Total expenditures are expected to decline by 18.0
percent.

Fiscal Performance: July-March,

2011-12
The budget target is set at Rs.495.2 billion for 2011-12

which is around 2.4 percent of GDP.

At present Pakistan is confronting unsustainable fiscal
deficits and unabated debt service charges on account
of both external and internal challenges including
electricity and gas outages that have restricted the
overall growth of the economy. Similarly insufficient
external inflows have resulted in increased reliance of
government on domestic resources.

Cont..
According

to the consolidated revenue and

expenditure statement of the government, total
revenues grew by 16.8 percent during July-March 201112 and stood at Rs.1,747.0 billion compared to
Rs.1,495.3 billion in the same period of fiscal year
2010-11. The increase is mostly due to a significant rise
in FBR tax collection, which increased by 25.5 percent
during the period under review.

Cont..
On the other hand non tax revenue declined by 2.6

percent as it stood at Rs.367.9 billion in July-March

2011-12 from Rs.377.7 billion in the same period last
year.
Total expenditures were recorded at Rs.2,641.9 billion
during July-March; 2011-12 compared to Rs.2,262.6
billion in the same period last year posted a growth of
16.8 percent.

FBR Tax Collection

FBR tax collection for the fiscal year 2011-12 was

targeted at Rs.1,952 billion which was higher by 25.3

percent over the actual collection of Rs.1,558 billion
during 2010-11.

Direct Taxes
The gross and net collection of direct taxes has

registered growth of 31.3 percent and 22.6 percent

respectively during the first ten months of 2011-12. The
gross and net collection increased from Rs.462.9
billion and Rs.431.3 in July-April, 2010-11 to Rs.607.8
billion and Rs.528.9 billion respectively during JulyApril, 2011-12. Major revenue spinners of direct taxes
are withholding tax, voluntary payments and
collection on demand.

Indirect Taxes
During July-April 2011-12, the gross and net collection

of indirect taxes has witnessed a growth of 23.1 percent

and 24.9 percent respectively. It has accounted for 62.9
percent of the total FBR tax revenues.

Misperception about our fiscal

history
Present crisis is the result o f mistakes made in t he past.
Following misconception about our fiscal study need to
be addressed
We dedicatedly continued taxation system o f colonial
regime. All our fiscal laws are those created with a
different mindset ; Country was run by Bureaucrats
and Generals. Economists were employees not policy
makers. Mostly they left the country when their
masters were not in power.
We never included public participation i n p
reparation of fiscal laws.

Cont..
Our Tax to GDP ratio was never 15 percent.
We always had fiscal deficits since inception 1947

(Except one of two years). Books never balanced.

Borrowed, sold our sovereignty or supported some
elses war.
We never had Agricultural Tax recovery.
Tax to GDP ratio lower than 1 0 percent; No
immediate chance to increase with extraordinary
measures .

Present Tax System

All t he major contributors of taxation system are

under Presumptive Taxation This includes exporters

traders property owners interest and Taxation . This
includes exporters , traders , property owners , interest
and dividend and importers.
Indirect taxes exceed 65 percent of total revenues .

This is anti-thesis of any progressive tax regime. This

means taxing the poor.

 Complete Non- Documentation with conscience and

effectively as a policy measure.

Effectively no tax on Retail Trade. Total collection o f
direct taxes from all retailers o f Pakistan below Rs.1
billion.
Bank Accounts totally out of control; no relation with
source of money
No elasticity in taxation system; When Rupee falls tax
collection increases because it is effectively import
based and presumptive.

THANK YOU