Fiscal Policy Pakistan

Fiscal Policy of Pakistan

Presented by: r 

Introduction  The

term fiscal policy refers to the expenditure a government undertakes to provide goods and services and to the way in which the government finances these expenditures.

Definition 

What is a Fiscal Policy?  According

to Samuelson, ³Fiscal Policy is concerned with all those arrangements which are adopted by the Government to collect the revenue and make m ake the expenditures so that economic stability could be attained/maintained without inflation and deflation´

  According

to Lee, fiscal policy considers:

 Imposition

of taxes  Government expenditures  Public Debt  Management of Public Debt

Objectives of fiscal policy in Pakistan  self

reliance

 expansion

of exports

 containment

of import of luxury and non-essential goods

 promotion  reduction

of investment in income disparity

.

Fiscal  The

Performance during 2007-08

total revenue collected during the year 2007-08 stood at Rs 1,499 billion against the budget estimate of Rs.1,476 billion, thus surpassing the target by Rs.23 billion, mainly on account of  higher than targeted non tax revenues

Fiscal

Projections for 2008-09

 The

fiscal deficit is projected to decline to 4.2% of GDP in 2008-09 from 7.4% in 2007-08.

 The FBR

is targeted to collect Rs.1360 billion in 2008-09.

Projections (cont)  Non-interest

current expenditure is projected to decline by 1.5 percentage points of GDP

 The

elimination of oil subsidies by Decemberr 2008 and electricity Decembe subsidies by June 2009.

How Does  Fiscal

Fiscal Policy works

Policy is based on Keynesian theory which states that government can influence macroeconomic productivity levels by increasing or decreasing tax levels and public spending.

.

Types of Fiscal Policy 1.

Expansionary:  An increase in government purchases of goods and services, a decrease in net taxes, or some combination of two for the purpose of increasing aggregate demand and expanding real output 2. Contractionary:  A decrease in government purchases of goods and services, an increase in net taxes, or some combination of the two for the purpose of decreasing aggregate demand and thus controlling inflation.

Methods of Raising Funds 

1. 2. 3. 4. 5.

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

Types of Taxes 1.

ect: Dir ect: Dir ect ect tax is the one paid dir ectly ectly to the Govt. by the per sons sons (natur al al or  juristic) on whom it is imposed

    

Income Tax Cor po por ate ate Tax Tr ansfe ansfer  Taxes-estate Tax & G ift Tax Pr ope oper ty ty Tax Capital Value Tax

Direct

tax collection

Direct

collection

00               )

  n   o    i    l    l    i    B   n    i               (

  s    R

80 60 0 0 00 006-07

007-08  Year 

Types of Taxes (Cont) 2. Indirect: ect An indir ect

Tax is a tax collecte d by an mediar y (such as a r eta etail stor e) e) f r  om inter me r om the per son son who bear s the ultimate economic burden of the tax (such as the customer ).



Sales Tax



Value Added Tax (VAT)



Feder al al Excise Duty

Indirect

tax collection

Indirect Tax collecti c ollection on

   n    o     i     l     l     i     b    n     i    s     R

Year 

Who

collects tax revenues? Government of Pakistan

Ministry of Finance

Ministry of Fo Foreign Affairs

Ministry of Agriculture

Inland

Revenue Service

Revenue Division Federal Board Of  Revenue

Customs and Excise Department

Structure of taxes

Common issue regarding collection of Taxes Tax Evasion: It

is an illegal practice where a pe perso rson, n, orga organiz nizati ation on or corporati corp oration on inten intentiona tionally lly avoid avoidss paying paying his/her/its true tax liability.

Causes for Tax Evasion 

People do not want to disclose their true income



Too many unlawful business activities such as drugs, hoarding, black money, etc.



No



Complex tax structure



Some economic sectors are exempted: Agriculture, real estate and capital gain

fear of punishment



Tax payers see their taxes being used to furt fu rthe herr ri rich ch ci citi tize zens ns·· in intter eres ests ts..



Uncontrolled inflation and high cost of   living .

 Low 

level of literacy among taxpayers

Tax pilferage has become the rule, and co com mpli lia ance an exception

Why

Pakistan faces large revenue ² expenditure gap? The principal reason lies in the structural weaknesses of Pakistan·s tax system which is:  Complex  Inefficient  Unfair

Principles of Tax Policy  Widening

the tax base

 Lowering

tax rates



Taxing all value additions including services, not just manufacturing sector



Establish an effective and efficient tax system.



Overcome the culture of tax avoidance and evasion

Overview

Overview

Overview I

i

% % % % % % 9

Why Pakistan is Facing budget shortfall  Increase

in nondevelopment expenditure.

Subsidies in billion 4 35 3 25 2 15 1 5 2

-

2

-

Why Pakistan is Facing budget shortfall (Cont.) N

-D v

pm

t xp

d tu

600  400 

R

b 200  0  1

2 

2006-07 

250

3 70  

2007-08 

278

5 03

D f

t

t

Why Pakistan is Facing budget shortfall (Cont.) Too

many factories are closed or in partial production for want of power and gas Tax Evasion by well performing industries (cement) m inimal Stock Exchange and Real Estate pay minimal tax. Corruption by Tax Officials Law and Order causing burden on the Expenditure Expendit ure side by way of compensation to the affected and mobilization to to send forces to such areas.

How

Pakistan can avoid Surge in Fiscal Deficit?  CBR

should impose new taxes

 Increase

the price of utilities

 Decrease

in development spending

Conclusion Pakistan fiscal position worsened because of  unexpected events occurred on domestic and external scene.  High proportion of revenues being spent on defense and interest payments.  Lower industrial productivity leads to lower tax collection because of high interest rates.  Pakistan needs to increase tax base by imposing tax on agriculture and capital gain to increase revenue. 

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