World Bank gives 48-hour ultimatum to Pakistan

[Neither Right Nor Wrong]

the non productive expenditure has been put at 16.8b usd (8.5+5.3+3), then what is the investment being made in productive sector and if Pakistan is not investing enough in the productive sector then how does pakistan plan to come out of the vicious circle of further falling in the trap of debt because quite clearly the tax to gdp does not add up, and what guarantee is that the VAT will generate what is being projected?

does this non-productive expenditure add up to the projected budget figure?

also please share the savings to gdp rate for the current fiscal.

You know thats the irony of situation -

Public sector development funds for this year is pegged to be around Rs650 Billion ($7.6B)...but nobody expects this figure to be achieved...there will have to be some drastic revisions to it as the time passes.

Well only major investments in productive sector will be in the form of FDI and that made by China and US.

well if Pakistan is serious about coming out the "vicious circle" some serious steps will have to be taken.

Everybody will have to tighten their belt pay higher taxes, subsidies will have to go.
Public sector enterprises incurring losses will have to sold off (privatised ).
as of now I don't have tax to saving figures will have to look for them.

 

[Neither Right Nor Wrong]

Neither Right Nor Wrong, something’s amiss at my end, please help me understand.



pakistan says their tax to gdp ratio is between 8-9%, and throws up a figure of gdp as 175b usd for the fiscal ending june’10. assuming what they are saying is true then the revenue of the GoP from direct/indirect taxes should add up to somewhere between 14-15.75b usd and over this there will be numerous other receipts that add to the exchequer a figure I suppose should be between 2-3b usd, which means GoP’s total revenue generation and non debt funding for the next fiscal should be anywhere between 16-18.75b usd but you are saying it just amounts to 11b usd (20[budgeted figure]-9[debt raised to finance the budget]) then is the GoP lying on the GDP figures or are they lying on the tax to GDP ratio or is a part of the revenue being used to address the immediate pending debt?

8-9% tax to gdp ratio were figure was for last fiscal yr(2009-10)...In
2010-11 fiscal yr they want to considerably increase this ratio by introducing certain tax reforms and bring more population under the tax net.

$ 9 billion(5.5% of Gdp) deficit is a speculation and as 2010-11 fiscal yr is yet to begin so its merely an educated guess for the future.

Well I don' t think pak will be lying about its Gdp figures as these figures have bin confirmed by lot independent sources (UN) too.

However as you guessed correctly part of the revenue will also used for debt financing as there are very few other sources of income open for pak govt.. as of now.

 

[keeninterest]

Thanks a lot for taking time to address those points, much appreciated.

When you hint at 10% tax to gdp ratio then that means from this aspect alone the revenue realization is to the tune of 17.5b usd add to that another 2-3b usd (or more?) from other sources and to top it all 1.5b usd from the KLbill, so this together accumulates to something like 21-22b usd or more, not to forget the adb loans and a part of imf/wb loans being directed here, which all together should surge to something like 22-23b usd(+/- 1b usd), then why are they projecting their budget at just 20b usd and on top of that look for external funding to the tune of 9b usd, which if taken, adds to, if not more but certainly to 31b usd which is certainly not reflective in the account books and certainly not in the budget being presented.

This is the reason the figures being thrown at us casts a doubt about them or are planning to siphon off some 11b usd straight away from the account books add to that the usual high corruption which will happen at various levels off that budgeted figure of 20b usd at the time of implementing various projects both productive/non-productive in nature throughout the fiscal.

 

[Neither Right Nor Wrong]

^^^ In bureaucratic sys like ours and theirs corruption is unavoidable but degree of corruption has to be kept low..when there so much money flowing in to and out of the country surely some of it will be siphoned off .. surely same thing happens in India too.

 

[keeninterest]

^^^ In bureaucratic sys like ours and theirs corruption is unavoidable but degree of corruption has to be kept low..when there so much money flowing in to and out of the country surely some of it will be siphoned off .. surely same thing happens in India too.

just out of curiosity, does there exist a system where there is non-existent bureaucracy?

 

[Neither Right Nor Wrong]

just out of curiosity, does there exist a system where there is non-existent bureaucracy?

A perfect sys is yet to be developed ...because human by nature is a selfish animal ..but as civilizations gets more mature these things tend to reduce ..as can be seen Europe and Japan .

 

[H2O3C4Nitrogen]

The VAT measure will fail

A well-known authority on public finance, Richard Musgrave, used to say that taxation is the art of plucking the maximum feathers, with the minimum squawks. The proposed Value Added Tax (VAT) in Pakistan has already created more squawks than any other budget proposal, and is unlikely to yield any feathers. In addition, it will provide an incomparable feast for corrupt tax officials, tax evaders, and fraudsters.

A VAT is like a sales tax, except that it is imposed not just at final sale, but at each stage of production, with each one in the chain paying the tax on what they sell the product for, and taking credit for what they paid for the materials they purchased. Under both, business profitability, consumer price, and government revenue are identical.

Why then would anyone prefer the more burdensome VAT to Sales Tax? Largely, for aesthetic reasons, economic theory suggests that VAT will be an “efficient” tax, if the tax/credit chain is not broken, exports are exempted, and imports are taxed properly. Opponents of VAT cite the numerous practical difficulties involved, including the meeting of these conditions.

Even proponents of VAT do not expect it to yield an immediate increase in revenues. On the IMF’s authority, the government holds, in their last policy memorandum that: “It is estimated that the additional revenue generated could reach three per cent of GDP per annum over the medium term.” This may or may not be so, but its immediate impact will certainly be negative.

Reviewing the experience of 143 countries over 26 years, a paper published in July 2007 by two IMF researchers, Michael Keen and Ben Lockwood, finds that governments usually adopt the VAT under an IMF programme — they refrain from saying “pressure”. Their findings also suggest that the introduction of VAT in an agricultural economy with low tax ratio, like Pakistan, will most likely lead to a fall in revenues.

The IMF knows this. In their January 2010 review they note that, “the introduction of the VAT [may create] a significant workload for tax officials that could temporarily weaken tax collections.”

The government knows this. In their December 23, 2009 statement it explained why the General Sales Tax (GST) “did not work very well”, saying that “the base was gradually eroded as the weak administration was unable to cope with refunds”. The ‘temporary’ policy response led to widespread domestic zero-rating for the main productive sectors. The situation was exacerbated by a decision of the authorities in 2004 to dispense with the auditing function, which was effectively suspended.”

They could have added that the going rate of bribe demanded by tax officials was, and probably still is, 30 per cent of the assessed refund, and there was no getting around it. And, most retailers offered, and continue to offer consumers, two prices: one without receipt or tax, and another with both. These abuses will explode under VAT. Another IMF staff paper notes that “like any tax, the VAT is vulnerable to evasion and fraud. But its credit and refund mechanism does offer unique opportunities for abuse”.

In sum, it is no secret that the tax base has not widened. Enterprises still can’t obtain refunds, and are harassed by auditing requirements. When the much simpler GST “did not work well” because of these factors, why will the far more complicated VAT with “unique opportunities for abuse” do better? This is the question that the IMF needs to answer.

The writer has served as chief economist of Pakistan (arshad.zaman@tribune.com.pk)

Published in the Express Tribune, June 2nd, 2010.

The VAT measure will fail – The Express Tribune

 

[Neither Right Nor Wrong]

VAT or Value Added Tax is only applicable on processed goods for eg it is not applicable on milk but a 15% VAT will be applicable Cheese.

VAT is expected to do no wonders but it is expected in 1 yr from its application it will increase the govts revenue by $1Billion.

When VAT becomes applicable GST(Sales tax) will be discontinued.

In India we have 1% VAT on gold. So when a shopkeeper buys gold from a manufacturer, he pays the VAT, hence will have to charge VAT amount to consumer.
Before introduction of VAT when GST was in service shopkeepers usually use to sell goods without receipts and hence by keeping no record of the sales made, they use to escape paying sales tax to govt , but now with VAT introduced this is not possible.