PAKISTAN: Budget imposes new taxes, omits tariff reform

28 June 1996

The government's Rs 500,000 million ($14,304 million) budget for 1996/97, announced on 13 June, puts the highest priority on bringing the budget deficit down to 4 per cent of gross domestic product (GDP), to meet with IMF requirements. VA Jafarey, economic adviser to Prime Minister Benazir Bhutto, said the objectives of the budget were to cut the deficit, reduce borrowing and ease the debt burden.

The main features of the budget are:

deficit target of 4 per cent of GDP growth target of 6.3 per cent expenditure to be increased by 13.5 per cent, compared with the revised 1995/96 budget; defence and debt service spending to remain flat in real terms net revenues up 23 per cent with new tax measures to be introduced worth Rs 40.9 million ($1.17 million) maximum tariff rate to remain at 65 per cent 10 per cent regulatory duty on imports, imposed as a stabilisation measure in October 1995, to be maintained government borrowing to be limited to Rs 20,000 million ($572 million) - actual borrowing in 1995/96 had reached Rs 74,000 million ($2,117 million) by the end of May 1996 inflation target of 8 per cent.

The new tax measures make up more than 12 per cent of total budgeted tax revenues. More than half of the new taxes are to come from an increase in the sales tax rate to 18 per cent from 15 per cent.

Sales tax is to apply to imports and manufacturing, but not to retail goods. The budget removes nearly all exemptions - only sugar, edible oils, oil products, farm goods and unprocessed food remain exempt from the tax.

The president of the Lahore Chamber of Commerce, Tariq Saigol, described the sales tax as 'highly inflationary' and the main opposition Pakistan Muslim League attacked the changes as too harsh on the average citizen. There has also been disappointment that the government has failed to impose income tax on farmers.

Jafarey defended the measures, saying that they broaden the tax base and increase the share of revenue derived from direct taxes.

The new taxes serve to reduce the deficit target to 4 per cent of GDP. This compares with an estimated deficit for 1995/96 of per cent of GDP. In order to define the deficit the government has subtracted the new tax measures from its total resources giving an income of just under Rs 440,000 million ($12,600 million) and a deficit of just over Rs 60,000 million ($1,716 million) Whilst the target is in line with the standby agreement reached with the IMF in December 1995, there is doubt amongst economists as to whether it is attainable One of the fundamental criticisms of the budget is that the lack of expected cuts in corporate tax and tariffs will slow industrial growth. 'Costs of production are set to rise whilst disposable incomes will fall', says one economist. 'At the same time, the government is unlikely to stick to its borrowing targets, and more and more liquidity will be taken up by the state'. The implication is that slower growth will mean the government will not be able to meet its revenue - and therefore its deficit - targets.

Finance Minister Makhdoom Shahabuddin in his budget speech on 13 June, was more confident. The country 'intends to adhere to the standby agreement with the IMF and hopes to negotiate a medium-term extended structural adjustment facility' (ESAF), he said. Pakistan's original ESAF programme was suspended when the budget of 1995/96 exceeded agreed targets. A $600 million 15-month standby agreement was reached in December 1995, with the aim of eventually renegotiating an ESAF programme.

Although the government failed to incorporate reduction in the maximum tariff to 55 per cent, as agreed upon with the IMF, meeting the deficit target is likely to be sufficient for the continuation of the standby programme, economists say. An official IMF response will come after a visit in July. However, negotiations on the implementation of a new ESAF programme will be tough. They will be highly influenced by the ability of the government to reach its 1996/97 targets and this, economists say, is where the doubt creeps in.

A MEED Subscription...

Subscribe or upgrade your current package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications