I thank the Almighty Allah with all humility for the honour reposed in me to once again present the national budget in this august house at this historic moment.

2. The day of 28th May, 1998, is a milestone in our history which will have deep imprints on our national life for many years.

3. The Prime Minister in his address to the nation yesterday has presented a revolutionary national agenda whose key pillars are self sufficiency, self reliance, well being of the people, austerity and simplicity. I will present before this august House through the budget the details of the concrete steps proposed for the fulfillment of these objectives. Through this budget I would also like to convey the message to the people that we are an honoured nation and are prepared to make any sacrifice for safeguarding our national security solidarity and interests. The nation is prepared to face any challenges posed by the sanctions and has the capability to prove to the world that these sanctions will strengthen rather than weaken our economy.

4. The traditional way in which we were pursuing economic development in the past had distracted us from the path of self reliance. With the domestic savings rate being only twelve to thirteen percent of national income we had increased our reliance on external loans for meeting the investment needs. Due to soft conditions and easy availability of loans and aid in the earlier period the debt burden was less. But in the past ten to fifteen years these conditions became difficult and the dependence on external loans increased sharply. This year our cumulative domestic debt has reached Rs.1128 billion and external debt at $ 27 billion; the two being 84 percent of GDP. Dependence on external resources has over burdened our fiscal system.

5. Though the imposition of sanctions after 28th May have created temporary difficulties, this has given us an opportunity to review our traditional approach and look for other alternatives. We have to transform this spirit into a new mold. We should be prepared to make sacrifices. We should translate the determination and expectations of the nation into a bold strategy capable of facing the new challenges. I therefore consider these sanctions as a blessings in disguise.

6. Our policy of self reliance will only succeed if exports increase to a level that after meeting import needs, debt servicing and other payments we are able to build foreign exchange reserves atleast equivalent to imports for three months. In the wake of sanctions, the first priority for us is the preservation of foreign exchange reserves. We need every dollar for our security and for meeting essential imports. With reluctance we had to impose restrictions on foreign currency accounts to forestall uncertainty. These accounts can however be operated in rupees at better exchange rates. There is no restriction on imports and payments of royalties and dividends. These restrictions will be lifted as soon as conditions improve.

7. I appeal to all foreign currency account holders to convert their accounts into rupee accounts and put their money in the national savings schemes. Pakistanis should bring back their foreign currency into the country to improve the reserve position and strengthen the defence of Pakistan by making rupee strong. Transferring foreign currency outside the country is weakening the rupee. For self reliance it is essential that confidence in rupee is restored and we show to the world that our currency is strong and stable.

8. In the past few years our exports have not recorded the desired growth which increased the pressure on the balance of payments. With grace of God the situation has improved in the current year mainly due to increase in exports and remittances and decline in imports. The current account deficit has reduced from $ 3.8 billion in 1996-97 to $ 1.5 billion in the current year.

9. Expansion in exports has now assumed top priority. If we increase our exports by fifty percent in the next three years, many of our problems can be resolved. It is, therefore, essential that national output increases rapidly and we generate exportable surpluses. The Government is committed to take all possible steps to boost exports. For instance:

The details of these measures will be announced in the forthcoming trade policy.

10. The business community should play their due role at this critical movement. They should reduce the cost of production, improve quality, marketing and competitiveness so as to establish high reputation for Pakistani products in the world market.

11. We are following a liberal trade policy. However, in the current situation there is no justification for import of luxury and unessential goods. We expect that people will economize in the consumption of such imported goods as petroleum products, edible oils, tea and other similar items with a view to save foreign exchange.

12. Smuggling has assumed a serious situation and is adversely affecting the economy, industry and revenues. A number of fiscal and administrative steps were taken in the past to control the situation which had inadequate results. We are suggesting some new measures in this budget. We hope that at this critical juncture the people would extend full cooperation and by desisting from the use of smuggled goods and help to eradicate this evil.

13. Over-invoicing is another mal-practice which should be eradicated. Banks and financial institutions are being directed to discourage this practice.

14. Remittances from overseas Pakistanis have acquired a key position in our economy. It is encouraging to see that in the first nine months of the current financial year such remittances have increased by 18 percent. We are confident that at this critical juncture our Pakistani brothers living abroad will increase their remittances through the banking channel and will discouraged the Hundi system. We hope that these remittance will double by the next year.

15. After exports agriculture, is the second pillar of the strategy of economic growth and self reliance. The Agriculture Incentives Package announced in April,1997 has had encouraging results. The growth rate in agriculture rose from 0.1 percent in 1996-97 to 6 percent during the current year. With the grace of Allah and the toil of farmers record productions of wheat of 19 million tons and of sugarcane of 53 million tons have been realized this year. Consequently import of wheat next year is likely to be less than one million tons as against 4 million tons this year. We are now self sufficient in sugar and also have exportable surplus. But for the damage to the cotton crop by untimely heavy rains the agricultural growth would have been over 6 percent.

16. The credit for the success of our agriculture policy goes to the growers. We are sure that with dedication and hard work they will help accelerate agricultural growth, make Pakistan self sufficient in food and help earn foreign exchange.

17. While continuing with the current policies, we are preparing a crash programme for agricultural development. The main elements of this programme are:

18. We are confident that these measures will yield positive results. We expect that the growth rate of agriculture will be atleast five percent next year and that we will achieve self sufficiency in major items.

19. It is a matter of satisfaction that after registering slower growth and stagnation in the past four years, industrial growth has since revived. In the current year the large scale manufacturing sector grew by 7.2 percent as against negative growth of 2.3 percent in the previous year and private investment in the industrial sector is likely to increase by 30 percent. This indicates that the Economic Revival Programme introduced by the Government in March 1997 is having positive impact. I am confident that the new investment policy will be a milestone in the promotion of this sector.

20. For the promotion of industries we are focussing on the following aspects:-

21. Development of infrastructural facilities are critical for the agricultural and industrial growth and the well being of the people. An amount of Rs.110 billion has been provided in the Public Sector Development Programme for the next year, most of which will be spent on physical and social infrastructure. In addition to the funds provided in the budget, the public sector agencies like WAPDA, KESC and gas companies will spend over Rs.63 billion by mobilizing resources on their own. We are also encouraging private sector to invest in this sector. The priority areas are power, fuel, irrigation and drainage and transport and communications. Among them some important programmes and projects are:-

23. The State Bank had announced an incentives package for recovery of stuck up loans and rehabilitation of sick units. We had hoped that the defaulters would make full use of the incentives package. Unfortunately progress on the recovery of outstanding loans is slow. We are now compelled to take strict measures. Cases are being registered in the courts against defaulters. Judges are being appointed for hearing the cases. As the Prime Minister has said in his address to the nation that it is now for the borrowers whether they repay their loan voluntarily or prefer to do it under the clutches of law.

to every citizen. In this context the following measures are notable:-

1. Providing new job opportunities particularly in the less developed areas.

27. It has been recognized that without adequate social services (like basic education, health, potable water etc) and physical infrastructure (such as electricity, water, roads and communications) neither the standard of living of the people can be raised nor investment in the area will be attracted. The Government is therefore giving special attention to the development of physical and social infrastructure in these areas. In the next year following specific actions will be taken in this regard:

28. I hope that these measures will help reduce disparity among the regions in particular in Baluchistan, NWFP and less developed areas of the other two provinces and will ensure more equitable dispersal of benefits of economic and social progress .

29. We are allocating a sum of Rs.650 million for the welfare and uplift of the minority community so that special programme can be formulated for them.

30. The welfare of women and children is an important component of our social agenda. The Social Action Programme contains specific measures for education of children, population welfare and mother and child care. The Poverty Alleviation Fund will conduct special programmes for training and self employment of women. NGOs and community organization are also being encouraged to give special attention to women development.

33. An outstanding feature of our national security is the success in the nuclear field. We are committed to use nuclear technology for peaceful purposes but will not tolerate a situation in which regional security balance is disturbed. Our success in nuclear technology has provided the nation with a sense of security which would not have been possible with any other means. It is my pious wish that we should achieve success in other scientific and technical fields as well. For this we have to lay greater stress on scientific and technical research and education.

35. There are some weak elements as well. These are:-

36. By the grace of God, despite these weaknesses the economy as a whole has revived during the year and the financial system has stabilized. We are therefore well prepared to face the difficulties and challenges.

38. We will continue with the liberal and deregulated framework of our policies. Foreign investment, in particular in modern, high-tech and export industries, will be encouraged.8

39. We will continue to give special attention to the social and physical infrastructure for which additional resources are being provided.

40. In the backdrop of these developments, the main targets laid down for the next financial year are:

1. to expand exports by 15 percent, contain imports and bring down the current account deficit to 1.5 percent of GDP; and

1. to further reduce the budget deficit to 4.7 percent of GDP.

41. These targets are difficult but not beyond our reach. We will take effective measures to achieve them. The emphasis will be on motivation of private sector to expand production, exports and investment. We are confident that the private sector will give us full support in ensuring economic growth and well being of the people.

42. Now I would like to present before you the situation of the budget for the current and the next year.

43. In the current year, revenue receipts were originally estimated at Rs.460 billion. The revised estimates are 449 billion and the estimates for the next year are Rs.502 billion. The share of provinces is estimated at Rs.135 billion and after this transfer, the Federal receipts will be Rs.367 billion.

44. Shortfall in revenues in the current year is mainly on account of two factors:(i) fall in imports leading to lower customs and sales tax receipts, and (ii) reduction in rate of taxes under the Taxation Reforms. Receipt from Surcharges and non-tax receipts have however increased substantially which has helped in reducing the gap between budget estimates and revised estimates.

45. For the current year the original estimates for expenditure were Rs.462 billion. The revised estimates are Rs.457 billion. In the next year the current expenditure is estimated at Rs.496 billion. The increase in the current expenditure of Rs.39 billion is mainly on account of additional Rs.32 billion provided for debt servicing.

Mr. Speaker!

46. Despite reduction in tax revenues we have been able to reduce the budget deficit. We have also kept the bank borrowing within the agreed level. This has helped in containing monetary expansion which had positive impact on inflation.

47. In brief the position of the Federal Budget for the next year is as follows:-

Mr. Speaker!

49. Taxation policy is a key component of our economic policy. It is being used for attaining such objectives as economic growth, self reliance, expansion of exports and investment and reduction in income disparity. The following macro aspects of the policy have been kept in view while formulating specific proposals:-

Mr. Speaker!

51. A Policy Board to be headed by the Prime Minister himself will determine the parameters within which PRS will operate and will also closely monitor its performance. At the apex, the PRS will be strengthened by employing professionals to effectively handle areas of tax policy, information technology, audit & implementation, taxpayers education, public relations, legal services and human resource development. Additionally, audit of selected cases of Income Tax and Sales Tax are being out-sourced to chartered accountancy firms of repute. A sizeable investment in technology is being made to automate the tax departments. CCTV and scanner equipment will be used extensively to augment the existing system to monitor production activity and to check smuggling.

52. We also plan to move quickly to introduce a system of common identifier numbers in respect of all taxes which will facilitate the tax collecting machinery in many respects and will be instrumental in streamlining the operation of tax assessments and collection. Simultaneously, the entire process of tax administration is being re-engineered to reduce the multiplicity of taxes. It will also lessen the number of steps involved in tax collection. This is being done to improve the service to taxpayers and to eliminate the malpractice of paying speed money at different stages. This system would be implemented before close of the next financial year.

Mr. Speaker!

54. Mr. Speaker! It may be appreciated that we are passing through an important phase in our national history. Despite increased demands on our resources we have avoided taking any measures that may have an adverse impact on economic growth. The approach is to continue the initiatives and to take further steps in the policy direction taken last year.

55. I would now like to lay before the house the income tax measures that we are proposing in this budget.

56. Sir, it may be recalled that last November, the Prime Minister announced a new investment policy package which included a number of incentives. Despite financial constraints government has honoured its commitment to maintain these fiscal incentives. The policy package includes accelerated depreciation of upto 90% as the First Year Allowance (FYA) to high value added industries like engineering, capital goods and information technology. A liberal First Year Allowance of 75% and 50% would be available to other industries specified in the Investment Policy. Moreover, sources of investment in new industries under this package, and for the purchase of assets being sold by Privatization Commission, would enjoy complete immunity from probe by tax authorities. From the viewpoint of promoting transfer of technology, the withholding tax rate on royalties is also being reduced to 15%.

57. The NGO’s are playing an important supportive role in our efforts to promote education, alleviate poverty, deliver social services and encourage population planning. The primary sources of funds for these NGO’s are donations which could be either in cash or in the form of goods. We are proposing that in addition to donations in cash, the donations in kind would also be eligible for tax rebates. The concession would be available to other charitable institutions as well. In addition, we propose that the present ceiling of an amount of Rs. 25 lacs on donations be removed and the proportion of income that could be donated by companies be increased from 10% to 15% and in other cases from 25% to 30%. This measure is likely to make more funds available to the health, education and social welfare sectors and contribute to the process of poverty alleviation.

58. Sir, the government is committed to making our tax system responsive to the demands of economic growth. However, efficient administration of taxes is crucially dependent upon the level of documentation in the economy. Last year government introduced certain incentives by way of rebates in order to encourage documentation. We also introduced measures that required compulsory filing of tax returns. The results of these measures have not been to our expectations so far. In order to ensure improvements in this direction, we are proposing the following measures:-

59. Being fully cognizant of the changed economic scenario I propose the following income tax measures.

60. It is part of our national agenda to signal a break with the past and to take radical measures to augment revenues. At this juncture, all tax payers have to make some sacrifice. A surcharge at the rate of 10% of the wealth tax and personal income tax payable is proposed to be levied. I am confident that this sacrifice would be willingly made and the people will gladly step forward to participate in the national effort to raise revenues.

61. Under the existing law, advance wealth tax is payable in two equal installments in cases where latest assessed net wealth is Rs. 1.5 million or above. No adjustment of any tax already paid is allowed. It is proposed now to allow set-off for any tax already paid.

62. In line with our policy to improve efficiency of the tax collection machinery, we propose to accelerate the disposal of wealth tax assessments. Accordingly, where assessments are delayed beyond one year from the end of the assessment year to which they relate, no additional tax shall be charged for short payment of tax. Instead, the delinquent officials would be taken to task in cases which go beyond one year.

64. The government is conscious of the importance of the capital market as the channel for mobilization of resources and for financing the development of the private sector in the country. The importance of capital market has increased drying up of international official capital flows. Our Government has initiated a bold and comprehensive programme for the development of capital markets in the country. We have already taken the initiative of strengthening the regulatory system by re-organizing the Corporate Law Authority into an autonomous and independent Securities and Exchange Commission and by changing the governing boards of stock exchanges to allow for the induction of out-side professionals.

65. We have completed automation of trading in the three stock exchanges and by operationalised the Central Depository. We have already taken a number of policy decisions pertaining to extension in the period of exemption of capital gains tax and bonus shares. We have provided an exemption also to tax on income from private sector mutual funds. We are committed to ensuring that there is a level playing field between the public and the private sector mutual funds.

66. In the budget for 1998-99 we propose a number of decisions to further strengthen the capital market institutions. These decisions meet a number of long standing demands from the participants in the capital market. In order to encourage members of the stock exchanges to corporatise their brokerage houses we have decided to allow a one time income tax exemption to sole proprietors holding stock exchange membership. I hope that members of the stock exchanges would avail this opportunity and establish corporate brokerage houses with adequate capital and research facilities.

67. Modarabas have been developed in the country as financial institutions based on Islamic principles of management of investments activities. Modarabas used to be exempt from Income Tax if 90% of the income was distributed. This exemption was withdrawn in 1992. In order to strengthen the Modarabas and to bring them at par with Mutual Funds the profit of Modarbas except trading Modarabas, would be exempted if 90% of the profits are distributed to the holders of Modarba Certificates. This is consistent also with the objective of promoting the Islamic financial system in the country. It has also been decided to allow tax deductibility in respect of amount paid to holders of Musharika Certificates. This measure should help the Modarabas to mobilize resources in accordance with the Islamic Shariah.

68. As you are aware we are promoting mutual fund industry in the private sector. This industry has for long been dominated by public sector institutions and it is only recently that mutual funds have been allowed to operate in the private sector. Besides taking other measures to provide a level playing field between mutual funds, both closed-end and open-ended, we have decided to amend the Trust Act which would allow provident funds to invest in private sector Mutual Funds established under the Assets Management Companies.

69. Insurance is an important part of the Services Sector in the economy. Its development can contribute substantially to Pakistan’s growth. It can also help to provide security for Pakistani citizens, whether in the public or private sector, in terms of health and old age benefits, or in respect of children’s education. Government has been examining the possibility of encouraging insurance companies to enter this very promising area with the support of appropriate legislation. The government will, during the course of the year, be preparing a comprehensive plan for the future development of the insurance sector. That will include measures which promote savings and cater for the critical demands of the public. The details of the programme will be announced shortly. Meanwhile, it has been decided that the exemption from capital gains for insurance companies which was due to expire on 30^th June, 1998, is extended by one year.

70. On the wealth tax side, we propose to give further relief on investments in the stock market. In the Finance Act, 1997, we had increased the exemption limit in respect of investments in shares of certain industrial undertakings. Government now proposes to double the exemption limit. Accordingly, investments of upto Rs. 200,000 or 50% of the shares held by a tax-payer, whichever is higher, would now be eligible for exemption. It is hoped that this would help stabilize the Stock Market, attract new industrial investment.

71. Now I come to indirect taxes. I first take up Customs. You may recall that in the March 1997 package, we had made far-reaching changes in the Customs Tariff whereby the maximum rate of duty was brought down to 45% and other rates were cascaded to 35%, 25%, 15% and 10%. Consequential anomalies were subsequently addressed by the Tariff Anomalies Committee. This was done in consultation with the concerned industries. Their fears were allayed and adequate protection was provided for the local industries to develop further. Although the entire customs tariff was not cascaded yet the most crucial fourteen chapters were addressed from this point of view. The tariff reforms of March, 1997 was a big step forward and a clear departure from the old adhoc tariff structure. This was welcomed by the local trade and industry.

72. In my last budget speech, I had indicated that customs tariffs would remain stable for some time and that this would enable the investors and the importers to take business decisions with greater confidence. In line with that policy, we did not tinker with the customs tariff during this financial year and we have decided to keep the overall tariff structure at the same level for the time being. This will enhance the confidence of the business community.

73. The above broad parameters notwithstanding, we have tried to accommodate the demands of the industrial sector wherever an anomaly still existed or there was an apparent need for rationalization of tariff structure or to promote the export-oriented industry. Keeping in view the genuine needs of local industry, a number of proposals have been made to adjust the duty structure which will reduce the duty, ensure cheap raw materials and reduce the respective prices (i) duty has been reduced from 20% to 10% on bovine animals, (ii)from 35% to 15% on manioc (Cassava), (iii) from 45% to 15% on coconut seed/copra, (iv) from 45% to 25% on bamboos and rattan, (v) from 45% to 35% on industrial glycerol, (vi) from 35% to 25% on paraffin wax, (vii) from 35% to 10% on carbon black, (viii) from 45% to 10% on precision steel for safety blades, (ix) from 35% to 10% on check valves for tubes, (x) from Rs.10,000/- per ton to 15% ad-valorem on palm stearin, (xi) from 45% to 35% on palm kernel oil, (xii) from 25% to 10% on densified wood, and (xiii) from 45% to 25% on felt dryer screen. Duty has been increased from 15% to 35% on glycerin, from 10% to 15% on iron oxide and titanium dioxide, from 10% to 35% on used tyres, and from 15% to 35% on DOP substitutes. Duty rates on some more items are also being adjusted accordingly. The specific rate of duty of 30 paisa per meter on cinematographic films has been abolished. It will now attract only 25% duty.

74. Additionally, we have also decided to introduce an innovative scheme of lesser rate of duty on bulk import of consumer goods. Present customs tariff structure is so arranged that it does not give any incentive for bulk imports. In order to promote local packaging and repackaging industry it is proposed to introduce a duty differential of about 10% between bulk and retail import of selected consumer goods e.g. milk, butter, cheese, honey, tea, coffee, spices, juices, miscellaneous food items, shampoo and washing preparations. This measure will open new avenues for the growth of packaging industry and for creating additional job opportunities.

75. In order to make available medical instruments and appliances at affordable prices in the country, it is proposed to reduce customs duty on disposable syringes from 35% to 25% and on a wide range of medical instruments and appliances from 25% to 10%.

76. With a view to promoting further the use of computers in the country, 10% customs duty presently leviable on personal computers is proposed to be exempted. Likewise CD ROMs are also proposed to be exempted from 35% customs duty currently leviable. Besides, automated cash registers are also being exempted from 10% duty to promote their use for the documentation of the economy and to expand the sales tax network to retail stage. This exemption will be for a year only.

77. War disabled defence forces personnel are allowed to import motor vehicles not exceeding 1300CC engine capacity fitted with special gadgets to overcome disability at 25% customs duty. On the contrary other disabled persons can import similar cars at 15% custom duty. To remove this apparent anomaly and to bring parity, it is proposed to reduce the rate to 15% for war disabled persons also.

78. In the modern day transport network, aviation and shipping play a very significant role. Their growth is very essential for economic development. There is an urgent need to provide them relief which would, in turn result in cheaper cost of transport. Tariff concessions to ships were withdrawn a few years back. This had an adverse effect on the development of the shipping industry. No new vessel has been registered in Pakistan since then. The Prime Minister had constituted a task force on shipping. This task force has made useful recommendations which are now being implemented. It is accordingly proposed that ships imported into Pakistan during the next five years would be totally exempt from customs duty and sales tax. For the transportation of cargo, containers for use on ships/boats are also proposed to be likewise exempted. In addition, it is proposed to levy a presumptive income tax equal to one US dollar per GRT. A further amount equal to fifteen cents per GRT will be payable per charter.

79. In aviation, PIA has enjoyed certain concessions which were not available to other domestic airlines established in the private sector. In order to provide level playing field, it is proposed to levy an import duty at a uniform rate of 10% on the import of aircrafts, their engines and spares. Airlines would further be provided the facility to pay 50% of the duty as down payment and the remaining 50% in two years in equal installments. The concessionary rate of duty shall also be extended to used aircrafts, engines and spares.

80. The warehousing period was drastically curtailed in the past to one month in case of perishable goods and to 3 months in respect of other goods. Besides, a large category of items were excluded from warehousing facility. In addition penalties in the shape of surcharges were levied on warehousing of goods. This system of restrictions and impediments resulted in a short term revenue gains but had a devastating effect on trade and industry. Pakistan is a signatory to the Kyoto Convention which allows a liberal warehousing period keeping in view the genuine trade needs. It is accordingly proposed to enhance this period to three months for perishable goods and to one year for all other categories.

81. Overseas Pakistanis are a priceless asset of our country. Their commitment to the country cannot be over emphasized. Their role in the overall economy of the country has assumed a new dimension in the aftermath of our decision to go nuclear. In order to recognize their constructive role, it is proposed to allow non-resident Pakistanis to send with their own foreign exchange resources, goods worth upto US$ 10,000/- without opening letters of credit or registering as importers. These goods could be cleared by any resident Pakistani on the payment of normal duties and taxes either in foreign exchange or in rupees supported by foreign remittance bank encashment certificate. The recipient will, however, have to get himself registered with the Sales Tax Department. Besides, it is also proposed to double, in US dollars, the existing baggage allowances. This measure will compensate for the erosion of original allowances as a result of depreciation of the rupee.

82. As the Prime Minister has announced that if an overseas Pakistani remits US $ 100,000 through banking channel, he will have tax exemption entitlement of Rs. 400,000 which can be off-set against liability of customs duty/sales tax on local purchase or imports. If he remits US $ 50,000 then the exemption of taxes will be to the extent of Rs. 200,000.

83. The menace of smuggling has played havoc with our economy over the years. Besides hurting the genuine interests of Pakistan’s local industry, it has cut deep into the moral fabric of our society. Even large vehicles are now also being smuggled in a big way. For quite sometime, the government has been taking steps to reduce incentives for smuggling. Efforts have been made to address the problem through fiscal measures but this was done in bits and pieces. For example the duty on some electronic items was reduced which gave some boost to legitimate imports. Again during the currency of the fiscal year 1997-98 we took a major step to reduce duty from 45% to 25% on the import of tea to discourage its smuggling. The measure has had a salutary effect since legal imports have shown signs of improvement. The price of tea in the local market has declined. Recently, the government announced a scheme for regularization of smuggled vehicles by voluntary payment of duties/taxes on the depreciated value, which has also yielded quite encouraging results.

84. Besides taking administrative measures to curb smuggling, it is also proposed to take significant fiscal measures to comprehensively address the problem of smuggling without compromising the interests of the local industry. It is, therefore, proposed to reduce customs duty on a wide range of smuggling prone items which include cheese (from 45% to 25%), betel-nuts (from Rs.22/kg to 35%), coffee (45% to 35%), spices (35% to 15%), toiletries (45% to 25%), printing ink (45% to 35%), Photographic films (25% to 15%), crockery (45% to 35%), blankets (45% to 25%), footwear (45% to 35%), TVs, air-conditioners and refrigerators (45% to 25%), toys (45% to 25-35%), stationery (35%-45% to 25%), auto-parts not manufactured locally (45% to 10%) and other electro-mechanical household appliances (45% to 25%).

85. While reducing duty on the finished products, we have not forgotten the legitimate interest of the local industry. Simultaneously, significant reductions in duty rates on the raw materials and sub-components/components for the local manufacture of the above items have also been proposed. It is expected that this measure will result in the full utilization of existing local capacities, thereby reducing the cost of production, enhancing productivity and competitiveness.

86. The government is also considering to launch a comprehensive scheme aimed at discouraging the sale of smuggled goods in Bara type markets. The owners will be allowed to dispose of the goods during a specified period whereafter strict punitive action will be taken against the culprits. The details of this scheme will be publicized shortly.

87. I have already mentioned that large vehicles have also entered the smuggling regime, and their smuggling has assumed alarming proportion. The incidence of taxation on large motor cars is indeed very high and this induces smuggling. After a careful analysis of the phenomenon, it has been decided to rationalize the duty structure on large vehicles i.e. 1800 CC and above to discourage smuggling. There is also an urgent need to bring parity in the duty structure of 4x4 wheel drive vehicles vis-a-vis cars of more than 1800 CC engine capacity. It is, therefore, proposed to apply a uniform rate of duty of 125% on cars of over 1800 CC engine capacity as well as 4x4 wheel-drive luxury vehicles.

88. It is hoped that this measure will not only help in containing the smuggling of large cars but would also encourage overseas Pakistanis to import these vehicles since these are generally not manufactured in Pakistan. It is proposed to allow the import of all these vehicles through the baggage/gift scheme provided the overseas Pakistanis have a minimum stay abroad of at-least six months new vehicles and to gift these to anyone in Pakistan. The existing restriction of making gifts only to specified close relatives is being withdrawn. Duties and taxes will, however, be paid from the foreign exchange arranged by overseas Pakistanis themselves or by local recipient supported by bank encashment certificates showing the conversion of foreign remittances to local currency.

89. I will now mention some administrative changes in the context of customs. You will recall that in last year's budget speech, I had proposed the creation of the post of Director General (Exports) in the Central Board of Revenue. This step was welcomed by exporters. The job is now being upgraded further by redesignating it as Member (Exports) in the CBR. The Survey and Rebate Wing of the CBR is also being strengthened by inducting technical experts with a view to removing bottlenecks in the fixation of realistic export rebate rates. It is hoped that this arrangement will help alleviate the genuine complaints of exporters concerning inordinate delays in the payment of duty drawbacks.

90. In order to curb the malpractice of import of serviceable articles in the garb of iron and steel scrap, it is proposed to install hydraulic presses so that such contravening imports are compressed into bundles so that they are in fact imported in the shape of scrape.

91. Pakistan is a signatory to the WTO agreement which, interalia, entails our adoption of the provisions on Valuation, corner stone of which is the acceptance of the transaction value in each case. Pakistan is obliged to switch over to this system latest by 1st January, 2000. The Central Board of Revenue has already embarked on a programme whereby certain categories of imported goods have been taken out of the purview of the ITP regime and presently their declared (transaction) value is being accepted by the Customs authorities. It is now proposed that all those commodities on which the statutory rate of duty plus sales tax is equivalent to or lower than 30%, or where the ITP is equivalent to or lower than US $ 480 per ton or where the annual collection of import duty plus taxes country-wise was equivalent to or lower than 50 million rupees may be taken out of the ITP regime.

92. In order to familiarize our tax officials with the future course of things, it is proposed to amend the relevant provisions of the Customs Act, 1969 to bring them in line with the WTO Agreement. The government will, however, notify the effective date of this provision at a later stage.

93. Now I come to central excise. Collections on this account have been satisfactory. An increase of over 13% in revenues has been registered during the first three quarters of this year over corresponding period of last year indicating a steady growth in most sectors of our domestic industry. This growth is mainly attributable to the measures taken in the last year's budget. These measures have borne fruit in the form of significant revitalization of economy characterized by greater production of goods and services. We are trying to rationalized Central Excise duties on items where presently both central excise duty and sales tax are levied. On certain items presently there is very little tax collected. The rationalization excise require some time and will be done in the near future.

94. Some items are subject to specific rates of excise duty. As a result the government is deprived of its legitimate revenue on account of increase in prices. It is proposed that excise duty rate on lubricating oil may be converted into its ad-valorem equivalent rate which comes to 10% of the retail price.

95. The Govt. is now moving in the direction of reposing greater confidence in the tax payers. In pursuance of this policy, certain administrative measures are contemplated. It is proposed that some items such as bank cheques, beverage concentrate and P.O.L. products like light speed diesel oil, petroleum wax, benzene, xylene and toluene which are presently under the supervised clearance system may be provided the facility of self clearance system. With this shift, only six commodities of central excise regime will remain subject to supervised clearance system.

96. In line with the over all policy to benefit from modern technology and to encourage its use, Internet service is proposed to be exempted from the levy of central excise duty. This exemption will, however, be restricted to such charges as are billed by ISPs (Internet Service Providers) rendering Internet service to their customers and are in excess of the duty paid charges of the Pakistan Telecommunication Corporation.

97. In the Economic Revival Package of March, 1997, we lowered the rates of sales tax from 23% and 18% to 12.5%. It gives me pleasure to inform this august house that the government's policy has yielded the desired results and despite the said lowering of tax rates, alongwith the major exemption on cement, the domestic output tax during the first 11 months of this year was Rs. 63.9 billion as against the corresponding figure of Rs. 62.7 billion for last year. This increase, despite major reduction in tax rates, shows better performance of the industrial sector in 1997-98.

98. However, sales tax still constitutes less than 2% of our GDP as compared to 2.9% in Thailand, 3.5% in Indonesia and Philippines and 5.7% in Kenya and Zambia. This is mainly for the reason that sales tax remains concentrated at import and manufacturing stages only and that too with major aberrations in the system. Fixed sales tax system on the 27 industries, non-payment of tax by the textile sizing, weaving and knitting sectors and non-application of GST to retail trade are major obstacles to extension of a real VAT-mode GST system. The voluntary Trade Enrollment Certificate Scheme, proposed by the trading community, has unfortunately not succeeded in achieving objectives. As against the expected target of Rs. 2 billion, an amount of Rs.166 million only has been reported as collection upto the 6th June, 1998.

99. The fixed sales tax scheme is not being extended in 1998-99 and is proposed to be replaced by invoice-based GST. All manufacturers, importers and wholesalers are being required to sell goods to registered persons against tax invoices. Persons not doing so, shall pay an additional 1% in lieu of the absence of full documentation. Persons supplying goods to government or semi-government departments or to autonomous corporations or to persons authorized to make deduction of with-holding tax, shall be required to register under the sales tax scheme for ensuring payment of tax.

100. Sales Tax is basically a tax on consumption and the objective of this tax can only be achieved by meaningfully extending it to the retail stage. However, at the same time, the Government is conscious of the fact that there are a large number of retail traders who are too small to be brought into the retail tax scheme at present. Therefore, it is proposed to adopt a gradualistic approach and to extend the retail tax scheme to only such large-size retail traders whose annual turnover is 5 million rupees and above. Retail traders whose annual turn-over is less than 5 million rupees will be exempt from retail tax.

101. The retail tax scheme shall be a simplified and practical scheme, having the following salient features:-

102. I may add that the retail tax scheme shall not have any significance in terms of burden on the registered retailer or his customer, because after input tax credit, there may be an additional marginal incidence of about 1% to 2% in the consumers’ price. I appeal to the business community to make this retail tax scheme a success as this tax on consumption is essential from the viewpoint of broad-basing the tax and also for greater documentation of economy.

103. With a view to broadening the sales tax base, it is proposed to withdraw the existing sales tax exemption on palm oil and soya bean oil. However, for providing relief to the consumers of oil and ghee against possible price-hike, it is also proposed that in addition to support sales tax to reduce the existing specific rates of customs duty on palm oil from Rs. 8,550 to Rs. 4,800 per ton and in the case of soya bean oil from Rs. 7,600 to Rs. 3,800 per ton. The Government expects that the prices of oil will not be increased in view of the aforesaid relief in customs duty coupled with continuing downward reduction in international prices of such oil.

104. Prime Minister, in his address to the nation, has announced a package for boosting agricultural sector. It is accordingly proposed to exempt the import of CKD kits of tractors, bulldozers, combined harvesters and agricultural implements from the whole of customs duty and sales tax. The local production of such agricultural tractors, bulldozers, combined harvesters and agricultural implements shall also be exempt from sales tax while the competing imports shall pay customs duty of 25% and sales tax at standard rate. This will also encourage local production of such agricultural machinery. Moreover, the scope of the existing exemption available to insecticides and pesticides is also proposed to be extended to weedicides, fungicides and herbicides for agricultural use.

105. At present, input tax adjustment of indirect inputs, except for the constituent ingredients of the output, is not being allowed which has caused major distortion in VAT-chain. Now that the VAT-mode GST is being extended, the system is being rationalized and sales tax paid on necessary indirect inputs, including electronic cash registers, are being allowed as input tax credit. This will also facilitate zero-rating on export of goods using such inputs. Similarly, with the extension of GST to retail stage, the assessment on retail price basis at ex-factory stage is being replaced on most of the items with ad valorem basis of assessment on the ex-factory price.

106. The refund of sales tax especially to exporters has become a major irritant. The procedure was cumbersome and had become even harsher in view of the detected misuse of this facility by some unscrupulous persons. The refund procedure is being streamlined and exporters' profile shall be developed and updated with the assistance of Export Promotion Bureau for allowing automatic export refund to genuine exporters. Other reforms for streamlining of the export rebate scheme will be announced in the Trade Policy.

107. Reforms in export refund regime shall be matched with investment in improving audit capabilities, both within the department and by hiring private professional accountants, coupled with computerization of the sales tax department for improving its efficiency and effectiveness and for awarding strict punishment for tax frauds.

108. At present, the tax receipts have to reach the designated bank branches by the 20th day of the month. The delay in clearing of pay orders and bank drafts causes imposition of additional tax on taxpayers. It is proposed to prescribe that the date on which a bank draft or pay order is presented at bank counter shall be deemed to be the date of payment. The last date for deposit of tax is proposed to be changed to 15th instead of the 20th.

109. For obvious reasons, the prompt recovery of taxes is very important. Currently a large number of appeals are pending in the tribunals and courts. If the taxes are not collected in time, their recovery becomes difficult. We are proposing a scheme for a one time settlement of tax arrears. The scheme would allow waiver of penalties and additional tax/duty. The details of the scheme would be released by the Central Board of Revenue shortly.

110. The afore-mentioned measures would yield a revenue of Rs. 16.4 billion while the total tax revenues have been estimated at Rs. 354.5 billion in 1998-99. This will result in a budget deficit to GDP ratio of 4.6%.

111. The government has also been focusing on the problem of multiplicity of taxes. There are as many as 104 different levies by the federal, provincial and local governments and other agencies on business establishments. This has led to a lot of harassment, unnecessary documentation and corruption in the system. The government has constituted a committee under the Deputy Chairman of the Planning Commission for formulating proposals in conjunction with the provincial governments on reduction in the multiplicity of taxes. The committee has submitted its recommendations recently which will be examined and implemented to the extent possible during the next financial year.

112. I am confident that you, Mr. Speaker, honourable members of this august House and the whole nation would have realized that the in the past fifteen months the Government of Pakistan Muslim League has sincerely acted upon its Manifesto. With the grace of Allah the short term programme to revive the economy, to restore business confidence and dispel the growing pessimism among the people about the economic future of the country has been successfully completed. For instance:-

113. Similarly implementation of the Medium Term Programme of Economic Transformation has also started. For instance:-

114. This effective implementation of the Manifesto is a unique example in our political history. We are grateful to Allah for giving us the strength to fulfil most of the promises that we have made with the voters.

115. The path of dignity that the nation has chosen for the future will take us to the new heights of successes and honours. To attain this is not an easy task. It requires determination and persistent efforts. It demands sacrifice and hard work. As Allama Iqbal has said"

It is encouraging to see that every Pakistani, women and man, young and old, is imbibed with this spirit and is determined to make all efforts for the progress, prosperity, security and solidarity of the country.

116. This budget has been prepared taking cognisance of these facts. The budget expects sacrifices and hard work from the nation. In this budget we have not only made an effort to ensure that the burden of taxes is minimal and in accordance with the ability of the respective groups to pay but in fact contains a number of proposals to lessen the tax burden and to help the nation in marching on the path of progress and prosperity. Our aim is welfare and well being of the people. In this context the focus is on poor and middle income groups. We can achieve these objectives by accelerating growth and ensuring equitable distribution of its benefits.

117. I am confident that, while realizing the sensitivity of the situation, our people, businessmen, industrialists and public and private institutions will extend full cooperation to the Government in the achievement of these objectives.