Federal Budget, 1999-00 - PakSearch.com

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Bismillahir Rehmanir Rahim
BUDGET SPEECH OF THE FINANCE MINISTER 2000-2001

Ladies and Gentlemen

It is my honor to present to the nation the budget of the federal government for the year 2000-2001. The presentation of the budget will be in two parts. In Part-I, I would start off by placing before you a brief description of the economic situation inherited by the Government of General Pervez Musharraf and the fundamental problems besetting the economy of Pakistan. I would then point out the immediate measures adopted by the government to stabilize the economy and the key features of the medium term framework that is guiding our economic policies in major economic sectors. This will be followed by the presentation of budgetary estimates for the next year together with a review of the fiscal performance during the current year.

In Part-II, I will outline in detail the tax strategy of the government and the tax proposals planned to be undertaken during the next budget.
As you are aware, our country is passing through a testing time of its history. In recent years, our economy suffered serious setbacks largely on account of mismanagement. Our growth rate came down to merely 3% last year while its average during the last decade fell to nearly 4% compared to more than 6% in the 80s. The volume of trade declined significantly whereas pressure on prices mounted. Investment also declined from nearly 20% to around 14%. The country had to seek rescheduling of its foreign loans. More importantly, the incidence of poverty rose sharply as nearly 30% of our population fell below the poverty line compared to less than 20% a decade ago.
Alongside the economic decline, our institutions of governance also suffered massive deterioration. The institutions designed for the service of the people or to ensure people’s participation in governance were politicized and made subservient to the arbitrary policies of the rulers.
It was under these circumstances that the government of General Pervez Musharraf assumed the onerous responsibility of rebuilding our nation. The 7-point agenda announced by the Chief Executive is a comprehensive identification of the ills afflicting the state and requiring urgent attention and concerted efforts of the government. Of critical significance in the 7-points agenda is the revival of the economy. For this purpose, the Chief Executive unfolded an economic revival program on 15-12-1999 that has set the direction for government’s economic policies. At the same time, many a task force were set up to recommend measures for the rebuilding of the institutions and making them responsive to the needs of the people.
In order to appreciate the efforts so far expended by the government, it is necessary that we take stock of the challenges that the nation continues to face. These are as follows:-

Our foremost problem is the huge debt burden we are carrying. The total public debt, by the end of this month, will stand at Rs.3,200 billion, of which 56% is foreign and the rest is domestic. More than half of this debt was accumulated in the last 10 years. At this level, the debt is not sustainable, and unless checked soon it would endanger our economy.
Our tax base is extremely narrow, with a tax to GDP ratio of 13% compared to 18% in countries at our level of development. Of the 18 lacs taxpayers in the country, only 36 thousands are companies or registered firms that pay the bulk of the direct taxes like income and wealth. Of the remaining 16 lacs 40 thousands, 6 lacs are salaried class taxpayers. They contribute Rs.7 billion to the income tax. Nearly 7 lacs small traders pay Rs.3.5 billion. Indirect taxes constitute 68% of the tax revenues, which is not a healthy sign as they distort economic choices. Growth in revenues has been negligible in the last three years, despite imposition of numerous new taxes.
With rising expenditure requirements, largely emanating from debt servicing costs, the overall fiscal deficit of the government has been rising. So long as this deficit is there, our dependence on borrowing would remain intact. Government borrowings limit the access of private sector to credit market and as such the investment in the country declines and leads to slow growth of the economy. Fiscal deficit is an impediment in the way of the growth of the economy, particularly when government’s own development expenditure has been declining.
An equally worrisome problem is that of the balance of payments. We have a narrow base of exports, inflexible imports with both imports and exports having low elasticities. This forces us to borrow from foreign sources so that the excess of imports over exports can be financed. Such borrowings in the past have not been put to effective use, with the result that though country’s foreign obligations increased its capacity to repay them did not increase correspondingly. Such a situation makes it difficult for us to pursue independent policies, as the lenders often require policy adjustments that we will not like to make. But we do it to cover our balance of payments account and avoid the possibility of default. It is here that one finds the burden of foreign debt putting the nation in a bind and compromising its economic sovereignty.
Our habit to save as a nation is weak, and with a government that incurs high deficit in its budget, the national savings rate remains low. With a national savings rate of 12-13%, we cannot afford to invest 20% or more of our GDP, which is what is needed to achieve high rates of growth that can significantly reduce poverty. The battering received by the private investors in the form of freezing of foreign currency accounts and IPPs problem has weakened their desire to invest in Pakistan, despite attractive profitable opportunities. Thus we see that investors’ confidence is still weak, which is not conducive to the achievement of higher growth rates.
We are still confronted with a highly inefficient public sector that continues to undertake commercial activities whose costs are indirectly booked in the budget. The latest estimates indicate that as much as 1.7% of budget deficit is contributed by the losses incurred by public sector corporations, such as KESC, WAPDA, Steel Mills, and Railways.
Because of a significant slowdown in growth, in the face of high population growth rate, there has been a sizable increase in the incidence of poverty during the decade of 90s.
To top this all, the institutions of good governance are in need of major repairs and grass roots transformation. The capacity of the state to meaningfully impact the lives of its citizens has largely been eroded. It is not merely the lack of resources that explains the poor state of social indicators. Rather, the institutions engaged in providing social and economic services, such as education, health and social welfare, have lost the capacity to deliver them to the target population. Thus no amount of additional resources could help the situation unless these institutions are reconstructed and revitalized.

In the eight months that we have been in the office, a number of measures have been taken to stem the deteriorating trends in the economy. As a result of these measures, the following positive trends are clearly visible:-

Economic growth has been significantly revived at 4.5% against 3.1% last year.
Agriculture has led the growth performance, where bumper crops in wheat, cotton, onion and potatoes have been registered along with a good crop of rice.
Except for sugar, that registered a decline of 28% in production, the large-scale manufacturing posted a healthy growth rate of over 6%.
CBR revenues have increased by 17%.
Monetary expansion was modest, and with good agriculture supplies, prices remained stable as the country experienced one of the lowest inflation rates in the decade at 3.4%.
Exchange rate has largely remained stable at Rs.52/$ and foreign exchange reserves have been maintained in an adequate range of about $1.2 billion to $1.4 billion. More importantly, all of this was achieved without any flows from the international financial institutions.

On the other hand, there are some developments in the economy that are not satisfactory. Of particular significance are the following:-

The fiscal deficit remained high, as a number of significant items of expenditures were not properly accounted for by the makers of the last budget. Obligatory expenditures, such as for debt servicing, were not budgeted. Similarly, many of the measures, on which the revenue estimates were based, were not taken on time, such as regular adjustment in petroleum prices. Consequently, against a fiscal deficit target of 3.5% of GDP, the actual deficit turned out to be 6.1%.
Investment at 15% of GDP remained below the average of 19% experienced a few years ago.
The process of confidence building has yet to gain speed and investor confidence needs to improve.
The incidence of poverty and unemployment has increased, particularly in the second half of 90s, when the growth had slowed down.

Although we can confidently claim to have stabilized an otherwise drifting economy, we are not complacent. The problems of the economy are deep rooted. They have not developed over the last few years, rather they are the manifestation of gross economic mismanagement the country was subjected to for the greater part of its history, most notably in the decade of 90s. Accordingly, it would be naïve to think that anyone can solve them overnight. It can only be done through sustained effort and dedication. Every citizen of Pakistan has to participate in this process of national rebuilding.

Ladies and Gentlemen,

Our nation is standing at a crossroad facing clear choices. We may continue to follow the path of inaction or incrementalism and remain an unrecognized entity in the world, or embark on the path of a radical break from the past and earn the place in the comity of nations that is in line with our potential. But this latter path is tortuous and filled with discomforts in the beginning. However, at the end of this road lies a state where our nation could be proud of itself, earn the respect it deserves and make its independent economic choices.
General Pervez Musharraf has a vision for Pakistan. He wants to see Pakistan as a truly self-reliant country not dependent on aid from foreign donors. It would be keen to engage in foreign trade and investment, not as part of its political alliances, but on the basis of pure economic considerations. It would surely borrow and lend, but for productive and profitable purposes. Pakistan would care for its poor, and for this purpose development spending would be radically redirected toward programs that are pro-poor and poverty alleviating. Equally important, the government would reconstruct and revitalize the institutions of governance and redirect their focus toward the objectives of service to people and their unhindered participation in the process of governance. In public matters, relating to appointments, conferring of privileges and award of contracts, total transparency will be adhered to, and the only consideration would be merit with a balance of regional representation. Finally, government’s role will be reoriented from that of the biggest economic player to one of a facilitator of economic activities and protector of the weak.

Ladies and Gentlemen

The federal budget 2000-2001 is not a routine document. The distinguishing feature of this budget is the fact that it is part of a three-year macro economic framework. The key targets to be achieved during this period are as follows:-

GDP growth will gradually increase to 6% per annum by the year 2002-2003.
Inflation, on average, will be contained at 4%.
Investment to GDP ratio will increase to 18%.
Fiscal deficit will decline to 3.5% of GDP.
Current account deficit will be brought down to about 0.5% of GDP from 2.4% during the current year.
Foreign Exchange reserves will increase to nearly 12 weeks of imports from the present level of 4 weeks of imports.

The thrust of economic policies during this three-year macro economic framework will be as follows:-

To decelerate the growth in public debt, through a stringent fiscal policy that attempts to significantly reduce the budget deficit.
To broaden the tax base, without burdening people with additional taxes, particularly on those already burdened with high incidence of tax. Every citizen must share the cost of governance, by paying a share of his income commensurate with its level.
To institute a transparent system of expenditure control and to effect material austerity in public expenditures.
To significantly increase the share of social sectors’ allocations and poverty reduction programs, while checking the growth in expenditures.
To encourage and facilitate investment in industry, particularly small and medium industry.
To encourage and facilitate export, particularly manufactured and non-traditional exports.
To effect savings, through a stringent control of losses of public sector corporations thereby relieving the budget of this hidden burden.
To reconstruct and revitalize the institutions of governance on the principles of merit, service to people and

Let me now give you the details of structural policies we plan to adopt during the year and in the medium term.

Fiscal Reforms

As I said at the outset, our salvation lies in our ability to lower the debt burden while simultaneously raising the resources for development. For this purpose, there is no option but to broaden the tax base and make every section of the population share the burden.
It was with this objective in view that survey and registration drive for tax compliance was launched with effect from 27^th May 2000. In the first phase, to be completed by the end of this year, 13 major cities of the country have been selected. Other areas will be covered in the second phase.
It is important that I give you the perspective of the government on this issue. This is not merely a drive to collect more taxes. Rather, it is an effort to build a fully documented economy, where every citizen will keep full record of his income and wealth, and identify their sources, so that they fulfill their obligations toward the state. It is also the foremost requirement to eliminate corruption from the society. No country can prosper whose citizens acquire wealth and income non-transparently. Indeed, such an environment would promote acute sense of deprivation and discontent among those whose options to conceal wealth and income are limited. Thus documentation is not just an instrument of collecting more revenues. It is the basic tool for establishing a just, fair and equitable system of state management.
The government has undertaken this drive knowing fully well that without it economic sovereignty of the country cannot be protected. Government’s determination was made possible by the widespread support it received from the public and the Press. Both these groups clearly saw the intentions of the government, which were transparent, clean and based on supreme national interests. The government is indeed highly grateful for this support.
While we have gone for the survey and registration drive with zeal and determination, we are conscious of the role the government machinery plays in promoting the culture of lack of tax compliance. To reform the tax machinery, some of the measures were announced prior to the launching of the survey. An important step in this regard is the appointment of a Task Force with the mandate to suggest radical changes in the organization, procedures and personnel policies of the CBR and its departments. This work will be completed by the end of this year and soon its recommendations will be implemented. We are confident that a reformed CBR would be taxpayer-friendly organization that efficiently handles people’s tax problems and works to promote a culture of tax compliance in the country.
We are also mindful of the other side of the revenues, i.e. expenditures. There is no doubt that waste and extravagance in government expenditures have alienated taxpayers. In a civil society, those who truthfully dispense their obligations toward the state have the right to question government on its choices of expenditures. However, such a tradition is missing in our society. We plan to promote this tradition. Before I state the measures we plan to undertake for expenditure control, let me point out that General Musharraf has taken keen interest in pursuing a strict policy of economy and austerity. Government has banned first class travel or lodging in hotel suites. The Chief Executive himself travels on commercial flights with minimum staff. There are no hangers-on that take a joyride on foreign visits. Similarly, we are cutting down significantly on our foreign missions and the staff posted there. It is estimated that after the reforms in foreign missions are put into place, the government would save more than Rs.1 billion in expenses.
Then government has set up a high powered committee to formulate recommendations for Civil Services Reform. An important component of this work would be the right-sizing in government departments with many departments either getting merged with others or disbanded completely. This is essential for moving toward an effective and efficient government.
To allow public oversight over expenditures, it has been decided that expenditure figures would be released on a monthly basis. This information would be available on the web site of the Ministry of Finance starting August 2000 when the details of expenditures during the month of July would be made available. This is a major departure from the past practice. Figures of expenditures were only revealed once in a year at the time of the presentation of the budget.
A Fiscal Monitoring Committee, consisting of Finance Division, State Bank and AGPR would be reconciling data on expenditures on a monthly basis so that the recent problem of mis-reporting is not allowed to recur.
The debt management committee has recommended that a strong debt management and monitoring system should be put into place, medium and long term debt reduction goals will be defined, medium term debt strategy will be made public and technical guidelines for external and public sector debt contracting will be adopted.

Privatization

The second most important area of reforms is the privatization. We are in the midst of promulgating a law that would guide the process of privatization. The law would smooth out the process of privatization, besides providing the guidelines to be adhered to while finalizing any transaction.
A timetable has been drawn by the Privatization Commission to privatize banks and other public sector assets in oil & gas, power and industrial sectors. Several major transactions relating to PTCL, banks and industrial units including PSO will be ready toward the end of the year.
Privatization has to play a key role in the achievement of self-reliance. The proceeds of privatization will be used to retire foreign debt to the extent of 90%, while the remaining 10% will be used for poverty reduction programs.

Investors’ Confidence

As you are aware, the freezing of foreign currency accounts and entanglement with the IPPs have eroded investors’ confidence. Although the situation has improved considerably, yet we have a way to go before the investors’ confidence is fully restored.
On the domestic front, vested groups in their bid to malign the on-going accountability process have created fears and doubts in the minds of business community with the result that they continue to remain ambivalent toward the new economic environment. On the other hand, bankers have also shown a degree of uneasiness in performing their functions apprehending that their professional work may be misconstrued.
Government has taken cognizance of these developments. In order to reassure the business community at large and the bankers, in particular, it has been decided that in future all cases relating to businessmen would first dealt be with by a Committee comprising the Minister for Finance, Minister for Commerce, Chairman National Accountability Bureau, Chief of Staff to CE and Principal Secretary to CE. More importantly, NAB will deal with cases involving bank loans only when referred by the State Bank of Pakistan.

Agriculture

For an agrarian economy, agriculture development is critical for the overall development of the economy. Accordingly, Chief Executive has accorded top priority to agriculture sector in his Economic Revival Program. The following policies are adopted for this purpose:-

Complete autarky in the production of wheat and edible oil is most important target in agriculture. For increasing the production of wheat, the government took a conscious decision of raising the support price from Rs.240 to Rs.300 per 40/kg. Coupled with good rains, the country has been able to achieve record wheat production of 21.5 million tons that is not only sufficient to meet our needs but will also allow us to export at least 1 million tons. This has saved us a precious foreign exchange of $250 million. Besides, the increase in support price has enabled farmers to earn an additional income of Rs.60 billion from the wheat crop.
A package for giving incentives for the local production of edible oils is under preparation and will shortly be announced.
Government is working to finalize a policy for introducing corporate agriculture in the country, where large farm holdings will be allowed to companies who would seek listing in the stock exchange. These companies will be subject to all corporate and industrial laws.
Last year’s bumper cotton crop created many problems for the farmers because of lack of proper government support. Our government inducted TCP to support the market. Although it helped the situation but not entirely. With a view to ensuring that such a situation is not repeated, government has announced a cotton support price well in advance and has also readied the TCP to come as an active second buyer. It is hoped that the presence of TCP from the outset would help farmers receive a fair price of their product. I may also point out that as per the announcement of the Chief Executive, the profits earned by TCP from its procurement operations during the year, would be used for the benefits of the farmers. In this regard, WAPDA is being paid the cost of subsidy it incurred in providing cheap electricity to tubewell users.
All restrictions on export of agriculture produce have been lifted with a view to enabling the farmer to obtain the best prices for his produce.
While the policies of the government will continue to to be formulated in the interest of farming community, it is also this government’s policy to ensure equity among all taxpayers in the country. As part of this policy, the provincial government in their budgets will be announcing measures for imposition of an agriculture income tax on farmers with high incomes.

Small and Medium Industry

The second priority sector is the small and medium industry. The future of Pakistan’s industry lies in the development of this sector. It is this sector that is employment intensive and export oriented. The following measures are adopted for the promotion of SMEs:-

A draft textile sector policy has been announced, to solicit industry’s views. The policy would redirect the focus on value-added apparel and finishing sectors. Government would extend all necessary support, through export promotion and credit facilities, to give a jump-start to this policy.
Small Business Finance Corporations is being revitalized to assist the development of SMEs.
A policy is being evolved, in consultation with the State Bank of Pakistan, to ensure adequate flow of credit to this sector.
Small and Medium Enterprise Development Authority (SMEDA) has been revitalized and has been asked to prepare packages for developing export capacity in non-traditional sectors, like gems and jewelry, marble and fisheries and to enable them to produce quality products.

Information Technology and Software

Information technology and software is the third priority sector in the economic revival program. This is the sector that holds the promise of transforming the basic character of our industry. Given the vast potential of developing the intellectual resources, it is clear that in this sector there is nothing that Pakistan cannot do what the world is doing. However, our response to this opportunity has not matched the potential it offers. Our government has accorded us the required priority and the measures adopted in this regard promise a rapid growth in this sector.
The following are some of the notable measures being adopted for the development of the sector:-

For the promotion of IT, a separate division has been established in the Ministry of Science and Technology, which is now functional;
A program that envisages investment of Rs.15 billion has been approved in principle for the promotion of science and technology in the country, with particular emphasis on information technology. This program will have a component that would focuses on imparting computer education to the urban and rural poor.
A detailed National Information Technology Action Plan will be announced in early July.
Cost of Internet bandwidth has been reduced by 53% to reduce the Internet end user prices and promote its use.
The budgetary allocations for research and development in science, in general, and in information technology, in particular, will be raised significantly in the next budget.
To facilitate investment in this sector, some significant concessions have been awarded to investors, including:-

For providing credit to software companies, banks are allowed to accept firm contracts with foreign principals as opposed to requiring opening of LCs.
Banks have been allowed to open Internet Merchant Accounts within the country. This will help the development of e-commerce.
Banks will also be allowed to invest in the form of equity in dedicated venture capital funds meant for IT industry.
Exports of IT software, hardware and internet-enabled services will be eligible for concessionary export finance under the State Bank’s export refinance scheme.
Software companies are allowed to retain 25% of their export earnings in foreign exchange to meet the expenditure on purchase of hardware/software, foreign travel, marketing and hiring of consultants.
An e-commerce cell has been established in the State Bank of Pakistan to develop proposals for enhancing its use in the financial industry.

Export

Export is the linchpin of our economic policy. Here again its significance has to be seen in the context of achieving self-reliance. Indeed, our dependence is largely due to our inability to export as much as we import, which creates the problem of balance of payment and the need for external borrowings. We are convinced that the export potential of Pakistan is several times its present level, whereas our balance of payments problems could be fully resolved if we can achieve an exports level of $12 billion without a significant increase in the present level of imports.
To promote exports the following measures are planned for adoption during the year:-

State Bank would follow an exchange rate policy that will maintain its competitiveness in relation to market forces and inflationary differentials between Pakistan and its major trading partners.
The export re-financing scheme would be refocused toward value added exports and its access by the small exporter will be improved.
The system of No-duty no-draw back would be further streamlined and made more convenient to use.
A detailed trade policy will be announced by the Minister for Commerce toward the end of June, which would have additional measures for encouraging exports.

Financial sector reforms

Financial sector is considered the backbone of any economy. A number of reforms were introduced in our financial sector during the 90s and the results so far have been quite positive. However, there is a need to sustain the momentum of reforms, as the sector is still underdeveloped and repressive. A major distortion in the financial sector is caused by the presence of national savings schemes that offer unduly high rates of return thereby crowding out the private demand for credit.
To correct this situation the government has lowered the rate of return on national savings schemes by two percentage points in January. Also, now only individuals are allowed to invest under these schemes. Since inflation is running at less than 4%, which is the lowest in the last two decades, there is a need for further rationalization of rate of return on national savings schemes. Accordingly, it has been decided to further cut the rate of return on national savings schemes by an average of 1.5 percentage points. I may clarify that the reduced rates will be applicable to investments henceforth made in the schemes. The existing investments would continue to enjoy the rates at which they were made.
The reduction in the rates of return on national savings schemes will release pressure from the interest rates in the banking industry thereby encouraging greater credit intake in the private sector and consequent revival of investment activity.
Government also plans to embark on a plan to turn the Central Directorate of National Savings (CDNS) into an autonomous and professional entity so that its resources are utilized more judiciously. There is also a need for exercising greater vigilance in the management of national savings and its accounting records. The new setup will be equipped to make greater use of technology in the management of CDNS.
An important part of reforms program is the restructuring of the public sector development finance institutions (DFIs). Through mergers and restructuring, the DFIs will be consolidated, made viable and ultimately suitable for privatization.
Health of the public sector banks is a major concern of the government. For this purpose, Corporate and Industrial Restructuring Corporation has been established which would acquire the non-performing assets of the banks and DFIs and either rehabilitate them or liquidate them. It is hoped that within the first three months of its operations, beginning July this year, the Corporation will be able to rehabilitate some 114 units of these banks with an assets value of Rs.7 billion.
The transfer of non-performing assets to the CIRC would make it possible for the Privatization Commission to expeditiously finalize the privatization of banks. Toward the end of this year, it is planned that the banks will be ready for listing in the stock exchange where a portion of their equity will be offered to general public.

Capital Markets

Capital market plays a critical role in the process of capital formation. In fact, this is the biggest source of risk capital. Government is working on a broad-based reform program in this sector.
The key element of the program is to strengthen the Securities and Exchange Commission. A new leadership has been provided to the Commission for this purpose. Other measures adopted for this purpose include:-

A draft law on take over of listed companies is under consideration of the Cabinet and will soon be promulgated.
Rules to allow new classes of shares have been framed and published for eliciting public opinion. This will soon be finalized and implemented.
The Information Disclosure Rules for the listed companies have been issued for soliciting public opinion. The Rules will be finalized and adopted in the month of July.
A complaint center has been established for receiving complaints from small investors, which are dealt with expeditiously.
More effective regulations for risk management of members of stock exchanges are being put into place in the light of recent experience in the stock exchanges.

A related area of reform is the insurance sector. A new insurance law that allows easier access to market, requires a level playing field between public and private sector insurance companies, affords greater flexibility for portfolio management and envisages more active and involved regulatory oversight is under consideration of the Cabinet and will shortly be adopted. The SECP will be the regulatory body for the insurance sector.

Oil & Gas Sector

The fourth priority sector in the economic revival program is the oil & gas sector. This is an area with vast development potential. Pakistan is located in a region that is considered as one of the most promising regions for oil & gas reserves. Yet we have failed to realize this potential in the last 52 years. Our dependence on imported energy is so critical that we spend the largest amount of our hard-earned foreign exchange on petroleum imports. This year, largely because of historic increases in its prices, in the first eleven months, we have spent $2.46 billion on oil imports compared to only $1.29 billion during the same period last year. This represented an increase of nearly 90%. For conserving our foreign exchange, it is imperative that we develop our indigenous resources, which are available in adequate quantities.
The Kirthar range in Sindh offers potential to inject nearly one billion cubic feet gas in our system. However, for this purpose we need to expand our transmission lines in the north where the demand for gas outstrips supply. With the availability of this gas, most power projects presently run on furnace oil can be converted to gas, which is not only a cleaner fuel but is also cheaper. This we must do on a war footing to save the country from the huge bill of POL imports. The problem of high electricity tariff would also be lessened with this development.
However, the development of oil & gas sector will critically depend on our ability to disengage the government from its present level of involvement, allow free entry of new firms and let the market play its role in the determination of output and prices. These three ingredients would dynamize this sector and unleash its growth potential.
For this purpose, the following reforms have been envisaged in this sector:-

Independent regulatory agencies, namely the Gas Regulatory Authority (GRA) and Petroleum Regulatory Board are being established to independently regulate the activities of oil & gas sector.
Public sector corporations in the oil & gas sector have been made fully autonomous by the appointment of professionals as directors in the Boards and giving them complete freedom to manage the affairs of these corporations.
Government would be gradually disengaged from the business of importing petroleum products. In the first instance, the private sector is allowed to freely import and distribute country’s needs of furnace oil. As a consequence, furnace oil will also be excluded from the freight pool.
The price of LPG will be deregulated from September 2000 with the commencement of production by PARCO refinery that would add 450 tons to the existing supplies of 540 tons in the market, which represents an increase of about 80% over the existing supplies. Indeed, with this development Pakistan might be in a position to export LPG, as the expanded supplies would be more than local demand.

Poverty Reduction

Poverty reduction is an integral part of government’s economic program. In a large measure the problem of poverty, on a sustainable, can only be tackled through the rapid growth of the economy. However, since the problem of poverty is acute it would be undesirable to wait for the growth to take place before any help can be provided to the poor. Accordingly, government has undertaken a number of special programs to help address the problem of poverty and provide social safety net to the most vulnerable groups:
First, as announced by the Chief Executive, an integrated small public works program is initiated at a cost of Rs.15 billion annually that would create employment and income augmenting opportunities for the rural and urban populations, besides improving their living conditions. This is a district level initiative under the guidance of provincial governments. However, the Army Monitoring System is acting as a third party audit to ensure maximum and efficient utilization of funds. Local community is also involved in the identification of schemes to be funded under the program. Furthermore, a targeting mechanism is evolved that would allow greater application of funds to areas facing extreme backwardness. In the current development program, an allocation of Rs.21.5 billion is made for this program, which is the highest ever in the development budget for small public works projects.
Second, a food support program is being launched from 1^st July 2000 to insulate the poorest segments of population from the adverse effects of economic adjustment. The food support program is essentially designed to mitigate the impact of adjustment in the wheat support price. About 1.2 million poorest households with a monthly income of up to Rs.2000 will receive an annual cash subsidy of Rs.2000 in two installments under the program.
Third, the system of Zakat and Ushr in the country is revamped and revitalized. While Pakistan can be proud of a system of social safety net that is working for the last 20 years in some 45,000 villages, experts believe that both in terms of its coverage of Mustahiqeen (beneficiaries) as well as the scope of Zakat, considerably greater effort could be possible. Accordingly, the Cabinet has constituted a Committee that is reviewing the system across all its dimensions and a report will be submitted for broadening the scope and operations of the system. In the interim, the monthly cash transfer level has been raised from Rs.300 per month to Rs.500 per month. There are some 1.3 million households that are recipients of various kinds of support from Zakat. It is hoped that through reorganization the coverage can be increased substantially.
Finally, the government has completed the necessary preparatory work for the launching of the micro-credit bank. In recent years, micro credit has emerged as one of the most important instruments of poverty alleviation. The Micro-credit Bank, however, is neither a commercial banking proposal nor a scheme of subsidized credit. It is a program that will transform the economic lives of the poor, by providing him access to credit, with which he otherwise deals only under conditions of extreme hardship and that too by dealing with loan sharks. The process of access is painful, as it is nurtured only a long period of time, through relation building and capacity creation. The bank will have to create its market, by organizing communities that can gainfully deploy credit. Experts are busy developing a framework for the bank that would be a pioneer effort in this area, though it will definitely build on the experience of many countries. The first operations of the bank will be launched on 14^th August 2000.
The above programs in the social represent a major shift in our spending toward the social sectors and poverty reduction. The allocations made for this purpose is estimated at more than Rs.83 billion for the next year, compared to only Rs.66 billion during the current year. This represents an increase of nearly 25% in the spending on social sectors and poverty alleviating programs, which is unprecedented in the history of the country.

Ladies and Gentlemen

Let me now turn to the budget estimates for the year 2000-2001 together with a review of budgetary performance of the current year i.e. 1999-2000.
For the current year 1999-2000, a fiscal deficit of Rs.117 billion or 3.5% of GDP was estimated. However, as we subsequently found, this was based on overstated revenue estimates and understated expenditure estimates. In case of revenues, required measures were not undertaken, whereas in the case of expenditures, even some of the obligatory expenditures were ignored. The revised estimates for 1999-2000 show that the budget deficit is Rs.193 billion or 6.1% of GDP. This high level of deficit is not good for the economy and accordingly the focus of our efforts will be to contain it to a reasonable level.
In the budget for 2000-2001, we are targeting a budget deficit of Rs.162 billion or 4.6% of GDP. This represents a significant fiscal adjustment. A combination of revenue raising and expenditure control measures has made it possible for us to shoot for this target.
CBR revenues will increase by nearly 24% from Rs.352 billion to Rs.438 billion. Current expenditure has been restricted to an increase of only 2% from Rs.566 billion to around Rs.578 billion. Development expenditure will increase by about 20% from Rs.101 billion to Rs.121 billion.
At the same time, transfer of resources to provinces will also increase significantly, in line with government’s plans to create local capacity to devolve power and strengthen federal-provincial relations. In the budget 2000-2001, total transfers work out to about Rs.183 billion compared to 141 billion in the current year.
The annual development plan for 2000-2001 includes an allocation of Rs.21.2 billion for integrated urban and rural small public works program, of which Rs.2.0 billion would be spent on human resource development in Information Technology. The rest of the program would be implemented jointly by provinces and the federal government. We have ensured that AJK, Northern Areas, FATA and ICT get their due share from the allocations earmarked for this program.
Based on the above estimates, we expect that our budget will promote fiscal discipline, accelerate the pace of development and improve the financial position of provinces.

Ladies and Gentlemen

As I said at the beginning, the budget has been made under difficult economic circumstances. Yet it represents significant advance toward the achievement of larger goals of economic policy. In particular, the following strengths of the budget are notable:-

Use of realistic estimates of revenues and expenditures has been the main feature of the budget. While revenue estimates are on the conservative side, expenditures are adequately provided so that no critical item of expenditure is left out. Furthermore, a broad identification of expenditures has been made that would be subject to cuts in case revenue estimates appear to be not materializing. Similarly, a list of expenditures has been prepared whose inclusion would only be possible if revenues are more than provided in the budget.
Revenue deficit will decline from Rs.207 billion (6.52%) to Rs.165.5 billion (4.7%) and overall fiscal deficit (OFD) deficit will decline from Rs.193.1 billion (6.1%) to Rs.162.1 (4.6%), representing significant effort to contain fiscal deficit. This is basically a result of the combined effort to raise revenues and contain expenditures.
Revenues are projected to increase by nearly 24%. This is, while on the conservative side, represents a significant major effort to increase the revenue base in the country.
Provincial share in revenue receipts has increased by 30%, which is unprecedented in the history of NFC Awards.
The Current expenditure is budgeted to increase by 2% over the revised estimates for 1999-2000, compared to the increase of 9.8% in 1999-2000 over 1998-99. This represents a decline in real terms.
The development expenditure is projected to increase by 19%, which is again the highest in recent years.

Before I move to the tax proposals, let me make two important announcements.
First, the government is fully conscious of the economic hardship facing the government employees. Their salaries and allowances have not kept pace with inflation, though some ad-hoc relief has been provided since 1994 when the last pay and pension revisions were made. The answer to their problems lies in revision of salaries and pensions on the basis of the pay and pension committee. Unfortunately, the committee has yet to submit its report to the government. I have directed the new Chairman of the Pay and Pension Committee to devote extra efforts to finalize the report at the earliest.
General Pervez Musharraf has desired that until the award of pay and pension committee is finalized, some interim relief must be provided to the low grade government employees. Accordingly, it has been decided that the federal government employees in the pay scale 1-16 can draw an extra salary during the year 2000-2001 on the basis of the minimum of their scale with a maximum of Rs.2000. This can be drawn on the eve of Eid-ul-Fitr and Christmas by the Muslims and Christians whereas others may draw on a suitable occasion in their religion.
The government has also taken cognizance of the plight of the victims of Taj Company and Cooperatives scandal. It is currently examining the status of compensation paid to the victims and the resources available for further compensation. It has been decided that after due examination, further relief will be provided to the victims. For this purpose, use of resources recovered by NAB from the corrupt will also be made.

PART-II
TAX STRATEGY AND BUDGETARY PROPOSALS

Ladies and Gentlemen,

I now turn to the second part of my presentation. At the outset, I would like to place before you the key elements of government's tax strategy.
As should be clear from my earlier submissions, the survival of country's economy will depend on its ability to generate its own resources for development, particularly to attack the problem of poverty.
The agenda of reforms that we have prepared to tackle the problems of tax system and administration takes a fair and equitable view of the menace. Undoubtedly, the government has to share the blame of bringing about the present state of affairs. The tax regime is plagued by numerous afflictions; multiplicity of taxes, cumbersome assessment procedures, inefficiency in tax administration, widespread delays in resolution of tax disputes and corruption, are only some of the problems that contribute to the lack of culture of tax compliance in the country. Then there is a more fundamental inequity in the system whereby a number of groups in the society have either been exempted from payment of taxes or their activities, despite being detrimental to government revenues, have not been adequately checked.
In an environment characterized by such failures, it would be imprudent to launch a documentation exercise unless of course such failures are addressed at the outset. This is the requirement of housecleaning. It reflects the side of the tax equation that belongs to the government, and it is only fair that this is straightened out before looking toward those who are either deliberately evading taxes or, by taking advantage of some lacuna in tax laws, are enjoying unfair exemption and immunities.
Thus our tax strategy is, on the one hand, to address the problems of tax administration in a frank and bold manner and, on the other, to plug all the loopholes and establish equity and fairness in the tax system. The areas that are covered under the reforms include:

(1) Reduction in number of taxes, both at the federal and provincial levels;

(2) Reduction in tax rates and penalties;

(3) Simplification of assessment and collection procedures;

(4) Reforms in labour levies;

(5) Efficiency in dispute resolution;

(6) Broadening the tax base; and

(7) Honesty and efficiency in tax administration.

The proposals we have developed on the eve of the launching of the survey and being presented today are reflective of the above strategy. These proposals are explained within the context of individual taxes.

INCOME TAX

Income Tax will increasingly occupy a central position in the tax system of the country. It is imperative, therefore, for the government to expend concerted efforts in improving the system of income tax and enhance its image and popularity. A number of initiatives have been taken in this regard, which are as follows:

Tax Amnesty Scheme

Those who wish to breakaway with the past and pay what is due from them have been offered a liberal Tax Amnesty Scheme. This scheme has generated great interest among taxpayers who are willing to extend their full support to Government's efforts to broaden the base of income tax. So far incomes and assets worth 21 billion have been declared under the Amnesty Scheme on which tax for an amount of Rs. 2.1 billion has been collected. We are aware of the difficulties of those who wish to declare their undisclosed incomes and assets but may not have enough cash available with them. We have therefore, decided to allow 50% payment with the declaration and of the balance in three equal monthly installments with delayed payment additional tax @ 1.5% per month. We have also extended, on public demand, the last date for filing of declarations upto 30th June 2000.

Survey & Registration Scheme (Broadening of Tax Base)

I have already touched upon the on-going exercise of survey and registration for broadening the tax base. We expect this would not only add to the number of tax taxpayers but also increase revenues from income and sales taxes. This is a monumental exercise to document the economy.
It is natural, in the background of documentation, to pass on the benefit of record keeping by allowing taxpayers the facility of self-assessment. Accordingly, we have reviewed the present Self-Assessment Scheme and have decided to bring it closer to its true spirit. A new scheme has been framed whose salient features are as follows:

Self Assessment Scheme

The Self Assessment Scheme will be significantly improved for effective use by the taxpayers. The scheme will be reflective of the government's resolve to document the economy and to achieve the objectives of the ongoing survey. It will apply to both corporate as well as non-corporate sectors with some exceptions. Persons having only salary or property income would also be eligible for the scheme. In areas where survey is being carried out, taxpayers’ assessments would be made on the basis of findings of the Survey Team. In rest of the areas the cases shall qualify for self assessment if tax paid is more than 5% of the last assessed tax. From amongst the self assessment cases, 15% to 20% cases will be selected for audit.
With the introduction of a genuine self assessment scheme, one the main objectives of tax reforms, i.e. to minimize the contact between the taxpayer and income tax officer will be materialized.

RELIEF MEASURES

With a view to lessening the burden on the existing taxpayers, the following relief measures have been adopted:-

(i) Salaried Class

We are conscious of the difficulties of the salaried class arising from the fact that while salaries have remained fixed, cost of living has been rising. Accordingly, to ease their problems, significant concession in tax liability is provided to salaried class taxpayers. The reduction in tax liability ranges from 80% for the low salaried group to 5% for higher salaried employees. Thus a taxpayer with low salary income will save 80 rupees from a tax liability of 100 rupees whereas for the same liability a high salary income taxpayer will save 5 rupees.
We feel that teachers and researchers are the backbone of our society particularly those working in non-profit educational and research institutions. With a view to improving incentives for joining research and educational professions, it has been decided to allow teachers and researchers a further reduction of 50% in their tax liability.
As an additional service to the salaried taxpayers we have made arrangements for computer processing of their returns. Those who properly file their tax returns or salary certificates in the prescribed forms, and have correctly paid the tax, will receive tax assessment within 90 days.

(ii) Information Technology

I have already indicated the significance attached by the Government to the promotion of Information Technology in the country. In this regard, following additional measures are announced to encourage the IT sector:-

(1) Income of computer training institutions set up between 01-07-1997 and 30-06-2000 was exempt. We are extending the setting up period upto 30-06-2005. Consequently, income of training institutions approved by the competent board of education or university etc. would be exempt for five years.

(2) Income from software exports is exempt from the payment of income tax. We are also exempting the software exporters from 0.5% minimum income tax payable by them.

(iii) Incentives for investment:

Encouragement of new investment and modernization of existing plant and equipment is critical for rapid industrial development. Under the investment policy a liberal first year allowance ranging from 40% to 80% is available to new industries. We are moving another step forward and introducing a provision for tax credit equal to 10% of investment in plant and machinery for new investments and investments for BMR made during two years starting from Ist July 2000. This tax credit would be in lieu of the first year allowance, at the option of the taxpayer.
To encourage investment in public listed companies, we are also extending the exemption of bonus shares for another year. This would induce listed companies to divert their earnings toward productive investments.

(iv) Corporatisation of brokerage houses

In order to encourage brokerage houses to corporatise themselves tax exemption was allowed for one year. We consider health and stability of stock markets very important for the economy. We are, therefore, allowing another one year tax exemption commencing 1st July, 2000, to facilitate corporatisation of brokerage houses.

(v) Exemption of Charitable institution from Minimum Tax on Turnover

Charitable institutions provide valuable support to Government's efforts in social sector development. Most of the sources of income of these institutions are already exempt. However, in some peculiar situations they are required to pay 0.5% income tax. This places burden upon such institutions. We are exempting these charitable institutions from the application of minimum tax.

(vi) Accrued interest on non-performing loans credited to Suspense Accounts by Banks

Banks have been demanding that the interest accrued on non-performing loans and credited to suspense account in accordance with Prudential Regulations of State Bank of Pakistan should not be taxed on accrual basis. We have considered the matter and are accepting their demand, despite the fact that this would cost the exchequer around Rs. 700 million annually. However, this would improve the profitability of banks and allow them to inject much needed capital in their balance sheets. This concession would be allowed from the assessment year 2001-2002 and the conditions under which it would be allowed are being incorporated in the law.

(vii) Relief for Disabled Persons

The federal government allows disabled persons to import free of customs duty, specially equipped motor vehicles or support equipment for personal use but they have to pay 5% withholding tax at the import stage. In order to help the disabled members of our society and to reduce this financial burden, imports of aforementioned equipment and motor vehicles are being exempted from the levy of withholding tax, subject to normal procedures for granting such permission.

(viii) Refund Policy

Delayed issuance of tax refunds has been a major source of complaints from taxpayers. We are adopting certain measures to facilitate prompt issuance of refunds besides taking steps to ensure that tax is not unnecessarily collected, which gives rise to refund claims later. Income tax authorities will now issue the tax exemption certificates with a validity period of one year. For this purpose, administrative instructions are issued separately.
As a matter of principle, it has been decided that no refunds will be held for want of payment. All cases of approved refunds will be settled within the stipulated period of 90 days. As a result of this policy, refunds worth Rs.10 billion that are outstanding will be cleared before 30^th June to start the new fiscal year with no backlog.

(ix) GP Rates

The use of fixed GP rates has been a major source of contention between taxpayers and the department. In the evolving documented economy, such ad-hoc procedures are unwarranted. To facilitate the assessment procedures, CBR intends to develop parameters and guidelines that would ensure fair determination of income. While determining these parameters and guidelines the business community would be involved and we will discuss them with the respective industry associations.

(x) Industry Specific Assessment Procedures

As part of its objective to simplify assessment procedures, CBR intends to expand and strengthen its assessment capacity and to ensure that common information is available in the department and is used in a uniform fashion. A system of industry specific tax jurisdiction is being introduced for this purpose. There would be special Commissionerates for certain industries. Since the existing resources are limited, this process will be initiated by establishing two special zones for the textile and cement industries. The northern zone will have office in Lahore, while the southern zone will be located at Karachi. Each zone will have jurisdiction over the textile and cement industries falling in their respective zones.

(xi) Tax Ombudsman & Settlement Commission

To further the objective of instituting efficient methods of dispute resolution, it has been decided to establish a new adjudication forum, namely the office of Tax Ombudsman. This will to allow prompt redressal of taxpayers grievances. A separate law is being promulgated for this purpose, and Mr. Justice (R) Saleem Akhtar, former judge of the Supreme Court, is being appointed as the first Tax Ombudsman. With the establishment of tax ombudsman’s office, the need for a settlement commission will no longer be there and hence the same is being abolished.

(xii) Industrial Undertakings in EPZs

The industrial undertakings located in Export Processing Zones are being extended the facility of presumptive tax like other exporters.

Ladies and Gentlemen:

While government has undertaken a number of initiatives to provide relief to various classes of taxpayers, with a view to ensuring strict fiscal discipline, it is imperative that some additional sources for revenues are also identified, particularly in areas where the capacity for additional burden is existing. It is with in view that the following tax measures are adopted:-

An additional 1% withholding tax is levied on imports. This will only affect those for whom the tax constitutes full and final tax liability. For others will be adjusted in their final assessment.
Similarly, presumptive tax rates on exports, introduced way back in 1992, are being increased by a nominal percentage of 0.25%
A surcharge will be levied @ 5% on companies other than the banking companies..

WEALTH TAX

As you will remember, the Chief Executive in his speech on 15th December 2000 had promised that at the federal level only three taxes will be levied. As a major step toward moving in this direction, it has been decided to abolish the wealth tax with effect from Ist July, 2001. Over the years, without yielding any significant revenues, wealth tax had become a major impediment for new investments. At a time when our energies should be focused on strengthening the institution of income tax, there is no justification in wasting energies on a tax that is perceived as a discouraging factor for enhanced investments in productive sectors of economy.
Since documentation is a primary concern in tax administration, while abolishing wealth tax, the taxpayers would be required to file a proper statement of their net worth, with the income tax returns. Furthermore, with the introduction of agriculture income tax, agricultural incomes will be appropriately taxed. This will stimulate investment in commercial, industrial and real sectors.

CENTRAL EXCISE

With a view to rationalizing the central excise tariff, certain adjustments in the duty structure have been made on locally produced goods. Similarly, as a measure of relief, central excise duty is being abolished on 16 items of import on which it is not chargeable on local production.
Furthermore, in order to reduce the burden of punitive levies, the rate of additional duty is being reduced from compound rate of 2% per month to a simple rate of one and a half per cent per month.

CUSTOMS

In keeping with government’s policy of trade liberalization, an attempt has been in the budget to rationalize the existing tariff structure to reduce rates of duty on a range of imported inputs of domestic industry, particularly to promote exports. This measure should encourage investment and generate employment. Likewise, a concerted effort has also been made, in a transparent way, to remove tariff anomalies on the basis of detailed studies carried out by the National Tariff Commission. It should be noted that in future government, where necessary, will be resorting to anti-dumping duties and countervailing measures, in accordance with the spirit of our new legislation. Looking ahead we intend to reduce maximum tariffs from 35% to 30% in June 20001. The policy of trade liberalization in the long run will be announced on the basis of a review, which the government is now undertaking.
The government is giving a bold and relief-oriented package and for first time in our history, educational and research institutions are given the attention they deserve. As a special incentive to promote educational and scientific research, customs duty and sales tax on the goods required by these institutions are being brought down from 25% to 0%.
Similarly, equally bold measures are adopted to boost the health sector. Recognizing the importance of cost free services provided by the charitable non profit making hospitals and government run medical institutions, it has been decided to exempt customs duty and sales tax on the import of all electro-medical and other equipment or apparatus required by these hospitals for the treatment of patients. This measure will open the doors for the establishment of numerous well-equipped modern health institutions for the common man in the country. Similarly, ambulances, reagents and disposables imported by charitable non-profit making institutions are also being exempted from duty and taxes for the treatment of kidney diseases and hepatitis B&C.
In continuation of the above mentioned relief strategy following steps are also being taken:

To improve the supplies of sugar in the wake of weak sugarcane crop, customs duty on sugar has been reduced from 35% to 25%. This will be in addition to the removal of 10% excise duty presently leviable on import of sugar. These measures will also help in the stabilization of sugar price in the local market.
To rehabilitate the sagging activity in the ship breaking industry, without affecting the local production, the rate of duty on ship plates is reduced from Rs. 1500/- PMT + 15% to Rs. 1000/- PMT + 15%.
To encourage publication of low cost books for poor students, the duty on newsprint is reduced from 10% to 5%.

(iv) The rate of duty on cars imported by disabled persons is being reduced further from 15% to 10%. In this regard the import of hearing aids and its parts will be exempt from duty.

To provide adequate protection to local industry, the rate of duty on viscose yarn filament is reduced from 25% to 10%.
To facilitate business travel, the outgoing passengers from Pakistan can now carry accompanied baggage without any limitation of value or quantity.
Penalty free storage/warehousing period for edible oils is being increased from existing 15 days to 30 days.
As a measure of promoting the IT industry, import of a large number of Information Technology items is exempted from duty to enable the sector to take advantage of the rapidly evolving dot.com revolution.

In view of their significance in government’s economic policy, a number of incentives are being provided to exporters. These include:-

Imported accessories required by exporters will be allowed duty free.
A new scheme is being introduced under which passbooks will be issued to exporter entitling him duty free imports of raw materials used in previous export consignment.
It has been decided to allow 70% of refunds on account of duty drawbacks within 24 hours of the filing of claim. The remaining amount would be paid within 30 days after verification of documents. This will be in addition to the gold and silver schemes.

This government is aware of the inflationary nature of indirect taxes. Therefore, this year a conscious effort has been made to restrict the upward revision in rates to only a few cases and that too where the local industry requires protection. Wherever feasible, the requisite protection has been provided by lowering rates of duty on raw materials etc.
In keeping with the relief oriented spirit of the budget, an attempt has been made to rationalize the tariff structure to reduce rates of duty on a range of imported inputs of domestic industry, particularly in the case of down stream chemical industries such as soap and plastic industries. This measure would not only make possible more investment but also make the product chains of domestic chemical sector more competitive, thus generating much needed employment.
To promote local industry and to discourage ostentatious display of wealth, the following measures have been adopted:-

Duty on imports of televisions is increased from 25% to 35%.
Duty on cars with engine capacity of more than 1800 CC is increased from 225% to 250%.

Government is taking concrete and multiple steps to eradicate corruption. In this regard major initiatives with a view to add transparency to the system are as under:-

(i) Remaining actionable points of EAB Sub-Group's Report on Tax Reforms are being implemented i.e. anti-smuggling drive, initiation of NTC's study to cascade tariff, reduction of diplomatic bonds, reduction in multiplicity of taxes etc.

(ii) Further reduction of tariff related notifications in order to make the customs tariff a transparent document. This year an effort has been made to bring about changes through the tariff in most cases in order to eliminate the SRO culture.

(iii) The existing structure of the customs tariff has been subjected to a major corrective/streamlining exercise to reduce discretionary power of assessing staff.

The anti-smuggling drive of this government may appear harsh to some people. In fact this initiative too is a relief measure if seen in the correct perspective. The menace of smuggling is eating away the very vitals of national economy. The smuggled goods, while populating markets, actually cause unemployment by damaging the local industry. Accordingly, to save local jobs, fight against smuggling shall not be abandoned.
Government is bringing about a new law to reorganize anti-smuggling efforts. Strict monitoring of international borders, Airports, Dryports and diplomatic bonded warehouses is being undertaken. Resultantly licenses of the 27 diplomatic bonded warehouses found to be contravening the provisions of law have been cancelled. The number of diplomatic bonded warehouses has now come down from 41 to 14.

SALES TAX

Sales tax is also the tax of the future. Broadening the base of the sales tax is one of the major objectives of the on-going survey for documentation of national economy. Just as in the case of Income tax, it is important for its widespread coverage that the sales tax regime is kept simple and easy to comply.
The focus of measures adopted in the budget is on the problems of taxpayers. In this regard, the following steps have been taken:-

(a) At present, persons defaulting on their sales tax liabilities have to pay compound additional tax at the rate of 5% per month. It has been decided to substantially reduce this rate to one and a half percent and to do away with the provision of compounding of additional tax.

(b) On taxable supplies to unregistered persons, a 3% further tax is leviable. Keeping in view the demands of the taxpayers, rate of further tax is being reduced from 3% to one and a half percent.

(c) Further tax is also leviable on taxable supplies to persons who are enrolled for the purpose of payment of turnover tax. For promoting the objective of documentation, it has been decided that further tax shall not be charged on supplies to such enrolled persons.

(d) Non-compliance of various provisions of Sales Tax Act attracts specified penalties. For encouraging taxpayers to discharge their tax liabilities, amounts of these penalties are being reduced to the extent of 40 to 50%.

The following additional measures have been taken to give relief to the taxpayers or promote certain important economic activities:-

(1) For achieving self-sufficiency in meat production at affordable cost, it has been decided that oil-cake used as cattle feed shall be exempt from sales tax.

(2) In the budget for 1998-99, a legal omission resulted in chargeability of sales tax on local supply of soyabean oil and palm oil. This levy negates the objectives of encouragement to local industry and price stabilisation of essential commodities. It has, therefore, been decided to grant retrospective exemption from sales tax on local supplies of soyabean oil and palm oil.

With a view to broadening the base of sales tax and removing certain unwarranted exemptions, the following measures have been adopted:-

(1) Exemption on import and local supply of CNG kits has been withdrawn.

(2) Exemption allowed on import of one passenger bus under NRI Scheme is also withdrawn, to protect the interests of local industry.

The present system of adjudication in sales tax negates the principle of separation of judiciary and executive. Entrusting of adjudication functions to executive officers, multiple appellate stages and absence of any time limit to pass an order have combined to create a slow adjudication process marred by inordinate delays. For providing speedy justice to the taxpayers the whole adjudication system is being revamped on the principle of separation of the judiciary from the executive.
For encouraging export and facilitating the exporters it has been decided to reduce the maximum time limit for payment of refunds to 30 days. While ensuring expeditious payment of genuine refunds, the government is committed to eliminate the menace of fraudulent refunds. For bringing the refund regime in line with the standard VAT mode, it has been decided that refunds of sales tax shall be allowed only against sales tax paid invoices relating to the same state in which these goods are exported.

REDUCTION IN PROVINCIAL TAXES

As a major initiative toward reducing the multiplicity of taxes, provincial governments will be reducing the number of taxes from the present high level of 29 to about 9. This would go a long way in simplifying the tax regime and promoting tax compliance as taxpayers would be saved from dealing with a large number of tax collecting authorities.

LABOR LEVIES

Another area of tax reform, where proposals will soon be finalized, is labor levies. At present, both provincial and departments are imposing and collecting a variety of levies for the welfare of labor. There is a need to reduce the number of such levies as well as to consolidate their administration. Measures in this regard will shortly be announced after consultations with the concerned parties.

CONCLUDING REMARKS

Before I conclude the budget speech, let me point out that this is a budget that represents the direction of government’s economic policies. Its primary focus is to create fiscal discipline, adopt stringent expenditure controls, expand the revenue base, provide larger resources for development and enhance the share of poverty sector programs.
While achieving these goals, we have made sure that those already burdened should not be subjected to any additional tax burden. Rather, we have provided them relief, particularly to those who belong to the fixed income groups, whose purchasing power has been increased. Since investments and exports require special encouragement, adequate incentives have been provided to stimulate their growth. Linked with the growth of investments and exports are the other concerns of the government, namely poverty reduction and employment, which would be positively impact by their growth. Accordingly, the budget provides a reasonable basis to expect lessening of poverty and unemployment in the country.
Undoubtedly, the success of the budget would depend on the seriousness and sincerity with which its proposals are implemented. Although it is difficult to make a prediction in this regard, one thing is quite sure, and that is that there is hardly a provision in the budget that is made without a clear thinking on its implications or how it would be implemented. We are, therefore, confident that nothing in the budget would prevent us from putting it into effect.
I seek the guidance and help of Allah that he enable us to achieve the targets we have in the budget.

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