Part-I

 Ladies and Gentlemen

 1. I feel honoured to present before you the budget of the federal government for the year 2001-2002. The budget will be presented in two parts. In Part-I, I would give you an account of what our government has done during the last 20 months, the performance of the economy during the period, main elements of reforms implemented for restructuring the economy, and a glimpse of the medium and long-term outlook likely to evolve from our policies. At the end of this part, I will place before you the budgetary estimates for the next year together with a review of the fiscal performance during the current year.

 2. 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.

 Ladies and Gentlemen

 3. It was 54 years ago that this God-gifted country came into existence under the dynamic leadership of our Quaid, Muhammad Ali Jinnah. Many had doubted if this country would survive for a few months. On 1st April, 1948, while addressing the Finance Minister, who presented to him the first Pakistani Coins, it was Quaid himself who responded to such cynics in the following words:

 When we first raised our demand for a sovereign and independent State of Pakistan there were not a few false prophets who tried to deflect us from our set purpose by saying that Pakistan was not economically feasible. They painted extremely dark pictures of the future of our State and its financial and economic soundness. The very first budget presented by you must have caused a shock to those false prophets. It has already demonstrated the soundness of Pakistan's finances and the determination of its government to make them more and more sound and strong. Although, it has meant the tightening of our belts, to a certain extent, but I am sure that the people of Pakistan will not mind making sacrifices in order to make our State in near future really a strong and stable State, so that we can handle more effectively and with ease our program, especially for the uplift of masses.

 4. Clearly the false prophets had only looked at the relatively weak economic conditions of the areas that formed Pakistan and ignored the resolve and determination of its people, who were willing to sacrifice everything for seeing the nascent state turn into a strong and viable country. Pakistan was, and remains an ideology, that gives its people strength to face adversities and a purpose in their lives. Within few years, Pakistan was made strong and economically viable.

 5.  In the last three decades, however, the economy of Pakistan has passed through a checkered history. Massive swings in economic policies - from nationalization to crony capitalism - have created distortions and set the economy in a drift. The self-inflicted wounds of this period, which turned into affliction in the 90s, have posed a dilemma for the country. While the country has successfully secured its defense by developing an indigenous deterrence, its economy is not in consonance with the imperatives of its sovereignty.

 6. I want to place before you a true description of our economy. It is extremely important that you fully understand the conditions facing Pakistan, the options available and their consequences, and the efforts that all of us will have to make in order to build a better future for our children. While doing so, we must also realize that not all of us are equally placed to share the burden. Thus while the nation as a whole will have to work together, its weaker segments will have to be helped, because for these people the challenges are much greater.

 7. Without blaming individuals and previous governments, we must honestly assess what had happened to the country during the decade of 90s. Without going into details let me list the most prominent of these developments:

* During the decade economy grew below its potential;

* Inflation was consistently higher than its average rate at any other time previously.

* Use of country's reserves for consumption resulted in balance of payments deteriorating seriously and posing a threat of default.

* The public debt quadrupled, with foreign debts doubling, which resulted in high debt servicing burden.

* The level of poverty assumed alarming proportion.

* Freezing of foreign currency accounts and entanglement with the IPPs, discouraged investment activity.

* Country's credibility with IFIs eroded as adjustment programs were routinely abandoned midway under implementation.

8.  This was the background in which the new government assumed office. It was open to us, whether to follow the path of evanescence or that of endurance. We chose the latter in view of the grave dangers the economy of Pakistan was facing. In fact, for anyone concerned with the viability of Pakistan, there was no other choice.

9.  It was this realization - of the challenges facing the economy - that enabled the government to take decisions which were difficult but scored high on the criterion of stabilizing the economy and reviving its potential of high growth. The reform agenda unveiled by the Chief Executive on 15 December 1999, was comprehensive in addressing the challenges and remains the guiding force to this day.

10.  I would seek your special attention so that you may appreciate the fundamental approach guiding our efforts.

11.  Our basic problem emanates from the fact that government's revenues from taxes and non-tax sources are significantly less than its expenditure. To meet excess expenditure government resorts to borrowing. In the beginning this was a simple process, as borrowing was limited only to meet part of development expenditure. However, gradually, as our investments failed to give good returns and our efforts to mobilize additional revenues remained dormant, this process was extended to meeting even the non-development expenditure from borrowings. Today debt servicing and salaries of government servants are paid out of borrowed funds. It is common sense that such a process cannot last for long. Sooner or later, it would become unsustainable leading to adverse consequences, unless of course it is reversed.

12.  A similar story can be narrated on the side of country's balance of payments. Since our exports of goods and services are significantly less than our imports, we need funds to finance excess imports. Here, because funds are required in foreign exchange, borrowing has to be done from overseas institutions. Initially, such borrowings were restricted to investment projects but gradually here too neither our investments yielded good returns nor our exports rose to the desired level, and consequently we ended up borrowing to make payments for debt servicing. Unlike in the case of domestic borrowing, here the debt burden impinges on our sovereignty also as lenders limit our policy options.

13.  In a nutshell, our country is afflicted with the problem of living beyond its means. Our desire to spend was not checked by the size of available resources. The government kept spending by borrowing and left the burden for future generations to bear.

14.  It is difficult to perceive a realistic development path so long the country remains dragged with this heavy debt burden, as it would preempt the resources of even the best development plans. Accordingly, the primary focus of our economic strategy is to relieve the country of this enormous burden.

15. As the common sense would guide, this strategy has two planks.

16.  First, we are seeking as much support from lenders, both in terms of postponement as well as additional lending on soft terms, as could possibly be achieved. This would give us some time space as well as meet the critical development needs to gainfully use the time space.

17. Second, we are tightly controlling expenditures, so as to minimize the need for additional borrowing, together with a massive overhaul of tax machinery and realization of the true potential of taxpaying capacity of the country. This will provide a sustainable basis to prudent management of country's fiscal affairs.

18.  Undoubtedly, the process of adjustment to a state where government balances its budget is painful. But it is inevitable. We are clearly burdened to meet the obligations that our previous generations have passed on to us, but we could be fortunate to bequeath a future free of such burden to our coming generations. This is indeed the path of endurance. Every citizen has to contribute to this process.

19.  At the end of this path we can hope to pursue economic policies without being dragged by the debt burden. Debts will be there, but as obligations against productive investments capable to service their obligations. Government will be reformed to a point where it would not borrow for meeting recurring expenditure, but for productive purposes only. This period would not be too long, as we feel a medium term of 3 to 5 years will suffice to relieve the nation of difficult economic conditions.

20. As I said earlier, our predicament is due basically to our own follies. We cannot blame others for difficulties we are facing. We have to look inside to find solutions to these problems. Incidentally, solutions are not complex. We have to live within our available resources. We have to grow, not by depending on others, but by reducing our own consumption and raising the savings for supporting higher levels of investment, which is a pre-requisite for growth. The two deficits - fiscal and balance of payments - will have to be brought to sustainable level.

21. However, fiscal or external balancing is not a simple accounting problem. It would call for major structural adjustments in the functioning of the economy and government's role therein. To this end, a major component of our economic strategy is structural reforms that we are carrying out in almost all the key sectors of our economy. I will give details of these reforms later in my speech. Suffice it to say for now that these reforms are aimed at improving the efficiency of the economy, allowing greater role of market forces, expanding the freedom of private sector and passing on the benefits of these efficiencies to the people.

22.  As I have stated earlier, the process of adjustment is indeed difficult, but it cannot be blind. Government is conscious of varying capacities of different segments of population in facing the costs of adjustments. This aspect gains further importance in view of the rising incidence of poverty that took place during the 90s. Accordingly, while carrying out the process of adjustment, government is doing as much as it could within the limited resources at its disposal to insulate the poor of the country from bearing the burden of adjustment costs and to provide them relief and jobs.

23.  In fact, as I will point out in my speech, the government has introduced innovative schemes and programs to help fight poverty, as it is the ultimate objective of our economic strategy. The poor of the country is the main focus of our economic policies. However, poverty will be reduced on a sustained basis only when the process of growth is fully revived and the quality of growth is appropriately controlled so as to benefit the poor. Thus we are targeting on such sectors of the economy, which have the greatest potential of unleashing growth by creating large employment opportunities.

24.  In an attempt to insulate the poor from the process of adjustment, we have kept a close eye on the price situation and adopted policies that are anti-inflationary. For the second consecutive year, inflation will be below 5%, which is indicative of relative price stability in the country. Even this low rate, does mean an increase in the price level, which we are striving hard to further reduce. It may, however, be noted that compared to recent past, this is low rate of inflation. While prices of some essential commodities have increased, those of other essential items have declined. Between July 2000 and 6 June 2001, the prices of kerosene oil, tea and gram pulse were increased by 24%, 14% and 12.7% respectively. However, in the same period, prices of red chilies, wheat flour and vegetable ghee decline by 19.27%, 7.32%, 7.21%, respectively. Evidently, the overall price increases are partly offset by decrease in prices. The fact is that prices are indeed increasing but the overall increase is much smaller as it is dampened by several decreases.

25.  This then is the approach that is guiding our efforts. I invite you to apply this test to everything that we have done. You would not find an occasion where a policy measure is taken not passing this test. Let me give you an example. It is not easy for us to pass on the burden of rising oil prices to its users, for the simple reason that alternatively government will have to increase my borrowing or print more money, which would be even more painful to everyone in the society. By the same token, government will not hold back the benefits of oil price reduction internationally for meeting any shortfall in revenue collection, as was frequently resorted when the world prices had crashed. These benefits will be passed on to the users. This policy alone can testify to our commitment to adhere to a stringent fiscal discipline.

26.  Even here, efforts have been made to insulate the poor, to the extent possible, from the adverse impact of these prices on the cost of electricity and gas. For both utilities, the life-line consumers, namely 0-50 Kwh for electricity and 100 cubic feet for gas, which nearly constitute 30-40% of total customers, no increase in tariff was allowed, against the increase of 9.2% and 20%, respectively, for all other consumers.

Economic Review

27.  As you are aware, the Economic Survey, published by the Ministry of Finance, has been issued a couple of days ago, giving complete details of the performance of the economy during the year. Accordingly, I would not want to take your time in repeating the details of the Survey. What I would like to highlight, however, are four important aspects of the economy:

(1) Due mainly to the large scale and unprecedented drought, which led to a decline in agriculture output, the overall economic growth will be 2.6% compared to 3.9% last year. Agriculture has 25% share in country's income and as such its performance affects the overall performance significantly. If we exclude agriculture, the rest of the economy has grown by 4.3% compared to 3.1% last year. Excluding full impact of drought, the increase will be 4.8%

(2) Strong growth in large-scale manufacturing sector of 7.8%, compare to a decline last year, is indicative of revival of industrial activities in the country. This change was made possible in part by a major increase in credit to private sector, which increased from Rs.30 billion to Rs.79 billion during the year;

(3) Perhaps the single most important achievement of this government is the reversal in the persistent trend of stagnation and decline in the collection of tax revenues. Revenue collections recorded 15% increase during the year. In terms of tax to GDP ratio, revenue collections at 11.7% for the year compare quite favorably with 10.9% for the last year. With this performance, we will cross the Rs.400 billion against an inherited tax base of Rs.308 billion in 1998-99. Thus in two years our government has given nearly Rs.100 billion in two years, which is unprecedented.

(4) Inflation remained low at below 5%, thanks mainly to a tight monetary policy and efficient movement of commodities and supplies throughout the country.

(5) Exports during the year will increase by more than 8% crossing the $9 billion first time in country's history. Imports also increased by 6%, but it was largely due to increasing international price of oil, which is now about 30% of our import bill. The balance of payments improved slightly, but the need for building reserves, exerted pressure on exchange rate, and consequently a tight monetary policy to ward off the pressure on exchange rate.

28. We are satisfied with the results so far achieved. Although we have yet to climb to a higher growth path, which is the key objective of our economic strategy, yet one should not lose sight of the fact that there is indeed a visible reversal in the downslide of the economy and an upward trend towards a stable and improved economic state is clearly in evidence.

Structural Reforms

29.  In fact, what we are doing for the country is not fully reflected in the review that I have just presented. As I said in the beginning, we are following a path of rebuilding the economy of Pakistan. For this purpose, we are transforming the fundamental bases that hitherto have run the economy. To appreciate all this, let me share with you the key structural reforms that we are undertaking in each of the main sectors of the economy.

Expenditure management:

30. At the outset, I had underlined the significance of expenditure control at a time when country is laboring under heavy debt burden. In a civilized society, public expenditures are always subjected to merciless scrutiny, for the taxpayers have every right to decide on which public goods expenditures should be incurred and constantly keep any eye to prevent any waste and pilferage in such expenditures. As I pointed out in my last budget speech, such traditions were absent in our society. The primary reason for this was absence of any reliable information on a timely basis that could enable people to engage in such a debate.

31. I had promised a number of measures that would improve public access to information regarding the extent of expenditure and its propriety. Let me give you a quick overview of these measures:

(1) Starting this year the government has begun to publish information on tax expenditure and contingent liabilities, which is appended to the economic survey published annually by the Ministry of Finance.  These two pieces of information have a great deal to reveal on the state of fiscal management.  Tax exemptions have a cost and it needs to be identified and the public has a right to know who the recipients of fiscal concessions are.  Similarly, contingent liabilities, though un-funded, have a significant cost to national exchequer.  It is important that proper information, in respect of issuance of guarantees against the Federal Consolidated Fund is reported as clearly as the debts contracted by the government.

(2) A web site of the Ministry of Finance is regularly publishing the monthly and quarterly data on expenditures since last July;

(3) The published data is fully reconciled among the concerned departments, Accountant General and the State Bank of Pakistan.

(4) Public Accounts Committees have been established both at the federal as well as provincial levels. We have broken new ground by making the proceedings of PAC public. The press is regularly invited to these meetings, which is a new tradition established by our government.

(5) In yet another historical effort, we have separated audit and accounting functions, which is a fundamental requirement of a transparent fiscal management. In line with the international best practices, these functions will now be performed by separate and independent entities. Government has promulgated two laws for this purpose.

32. However, it is not merely governance changes that we are counting on for controlling expenditures. Austerity and simplicity in public life style is the policy of the government. Some measures aimed at reducing expenditure are:

(1) We installed a new system of financial control and budgeting with effect from 1 July 2000 that delegated expenditure authority in return for a more vigilant monitoring by the expenditure wing of the Ministry of Finance;

(2) Purchases of transport and durable goods were kept to the minimum only to meet unavoidable needs;

(3) The ban on purchase of new vehicles, except for operational duties, was strictly enforced and that too only locally assembled brands;

(4) Ban on first class travel remains strictly in force;

(5) Re-appropriation from establishment charges was generally denied.

(6) Only essential and obligatory foreign visits of officials are allowed, while official delegations are kept small.

33. Because of the above measures, I am pleased to note that on the civil side there was no over-spending in the current expenditure

34. It is also important that we realize the sticky nature of our expenditures that renders them not amenable to easy and quick adjustment. The three main components of our expenditures are debt servicing, defense and establishment costs for running the civil government. Little is left after meeting these expenditures. In the short run there are no viable alternatives to effect savings in these expenditures. Both for debt servicing as well as for establishment costs we have developed detailed strategies for their curtailment.

35.  The defense expenditure has been kept flat after meeting all the operational needs of maintaining a credible deterrence against potential threats. It has voluntarily carried out a careful review of all the non-operational expenditures and effected significant savings in such expenses. Thus defense is all contributing its share to the process of economic adjustment. However, I would like to assure you, ladies and gentlemen, Pakistan's sovereignty and credible deterrence will never be compromised

36. An indirect expenditure that we are constantly incurring and which is posing serious danger to the budget is the losses of the public sector corporations. Although, 99 units have been privatized, 23 units have been closed, but the public sector corporations have been haemorrhaging the federal budget profusely. During 1999-2000, the government picked up a total liability of Rs.91.44 billion, equal to more than 3% of GDP, on behalf of these corporations. During the year, this expenditure is likely to be Rs.92 billion. In addition, major public sector corporations incurred a loss of Rs.33.7 billion in 2000-01.

37. This leakage of precious and scarce resources would continue so long as these corporations remain in the public sector. There is no other option available to us except to privatize the corporations, which we are committed to undertake as soon as possible.

38.  In view of the above measures, people should know that for this government no expenditure item in the budget is sacred and that every single item is subject to availability of resources, for which undoubtedly we are expending feverish efforts.

Tax policy and administration:

39. Both tax policy and administration have failed to inspire confidence needed for creating a legitimate tax regime, and consequently government's income is constantly lagging behind its expenditure needs. I have already underlined the centrality of improved revenue collection in any scheme of retrieving the country from the shackles of mounting debts. A large number of structural reforms have been undertaken to meet the challenge of evolving a tax-machinery that is capable to meet the development needs of the country:

(1) The pivotal role in our tax reforms has been played by the survey and registration exercise. It was a historic effort to lay the foundation of a fully documented economy. What have we achieved from the survey exercise? The following benefits are already evident:

(a) CBR is now equipped with a massive database that would significantly enhance its effectiveness in tax assessment;

(b) Based on the survey data collected, profiles of 600,000 taxpayers have been prepared, which are made available to assessing authorities;

(c) An additional number of 134,000 taxpayers have been added, which represented an increase of 7.4% in number of taxpayers;

(d) There was an increase of about 39% in the number of sales taxpayers, which increased from 75,538 to 104,602.

(e) Up to 63% increase in declared turnover has been voluntary made by the declarants to avoid the third visit;,

(f) There was a noticeable improvement in tax culture as a result of which tax compliance will further improve in future; and,

(g) Of the 26 cities selected for Phase-I and II of the survey exercise, the distribution and retrieval of forms stands completed in 12 cities. The number of third visits in the cities of Phase-I stands at 72,054 in visits. Since 3rd visits will be restricted to only 15% of retrieved forms, the objective has been substantially achieved in Sialkot, Gurjanwala, Quetta, Sukkur and Sargodha. I would urge the business community of other cities to cooperate for quick completion of this process, where their representatives are also present, so that we leave this issue behind and work together in other areas of cooperation.

(2) To consolidate and further exploit the increased willingness for tax compliance, simplification of income tax law is considered essential. A Committee was constituted last year under the Chairmanship of Mr. Saeed Qureshi to draft a new income tax law based on the principles of equity, self-assessment and audit. This report has been received and in the second part of my speech I will give details of the recommendations that have been accepted and are being implemented with effect from July 1, 2001.

(3) As I promised last year, the government had constituted a Task Force on Reforms in Tax Administration headed by Mr. Shahid Hussain. The report of the task force has since been received and it has been decided by the government to broadly implement its recommendations, for which a new office is being created in the Ministry of Finance to oversee the process of implementation. These reforms will lead to radical simplification in tax processes, intensive use of technology in tax assessment, virtually eliminating contact between taxpayer and collector, reorganization of CBR and restructuring of terms and conditions of service of revenue officials. However, these changes will take time as they are aiming to fundamentally transform a system that is centuries old and a people that are steeped deeply in the old traditions and habits. For the success of incipient changes, it is necessary that they are implemented gradually and smoothly.

40. The taxpayers are the heroes of the country and top of them deserve our special appreciation and respect. Government plans to suitably acknowledge their contribution through provision of awards and invitation to state functions. In addition, their views will be sought in the process of policy making, for which the advisory councils established earlier, and which did not function as effectively as we had expected, will be revived. Furthermore, a measure to encourage tax compliance and to recognize the contribution of those making due payments of their tax obligations, it has been decided that a directory of taxpayers will be prepared and made public.

41. These measures are supplemented by a strong effort to streamline each federal tax and promote voluntary compliance. In Part-II of the speech I will give you the details of numerous measures being adopted for improving the overall ambience under which the taxpayer and collector are operating, which is critical for ensuring that the improvements in tax compliance achieved are sustained in future.

42. A Ministerial Committee comprising Finance Minister, Commerce Minister and Privatization Minister would closely monitor the process of policy implementation. It will coordinate the interface between taxpayers representatives and CBR so that policy implementation remains on course and required changes, warranted by circumstances, are quickly effected. Ministry of Finance will provide secretariat support to this work.

Fiscal responsibility law:

          Before I leave the structural reforms on the fiscal side, let me disclose that government is considering promulgation of a fiscal responsibility law that would limit the government's access to borrowing for financing its expenditures. Such laws are now becoming very common as they tend to promote more responsible fiscal management.

          Indeed, the framers of our constitution had envisaged that such a law will be enacted by the Parliament. Article 166 of the Constitution, which empowers the federal government to borrow on the security of the federal consolidated fund, provides that this authority of the federation will be subject to such limits that the Parliament may fix from time to time. However, no such law has so far been provided, with the result there is no legislative bar on federal government borrowing.

          We plan to fill this gap by suitably limiting this power. Such a law would promote fiscal discipline in the country and would be an instrument of continuity of fiscal reforms being carried out by the government, which will thus survive in future also.

Agriculture:

43. Agriculture is the most important sector among the four sectors the government has selected for leading the process of economic growth. Pakistan is endowed with an immensely productive agrarian base, but its harnessing on a sustainable basis has always remained a distant dream. The vulnerabilities to which agriculture is exposed, was only brought to sharper focus in the wake of recent drought. There are essentially four challenges our agriculture sector is facing:

(1) Water shortages emanating from deficiencies in country's storage capacity and poor use of available water;

(2) Price uncertainty and poor marketing methods;

(3) Narrow export base of agriculture value-added largely confined to crop sector, at the cost of neglecting higher value added sub-sectors like fisheries, livestock, poultry and horticulture

(4) Limited supply of credit compared to actual needs.

44. These challenges are formidable, but we have to face them squarely for our survival depends on our ability to create a dynamic and vibrant agriculture sector, which is the main source of export-led economic growth. The following key measures in the agriculture sector have been taken to improve its performance and give it a new orientation:

(1) A medium term plan for radically augmenting water resources in the country is being undertaken at a cost of Rs.86.1 billion over the next three years, which will see construction start of new storage capacity through such projects as Gomalzam and Meerani dams, and new irrigation schemes like Thal and Katchi canals and lining of numerous water courses. These initiatives will provide an additional storage capacity of 4.5 MAF of water, nearly a million acres of land will be brought under cultivation and thousands of jobs will be created during construction of these schemes;

(2) A package of assistance is being drawn with the help of all the public sector financial institutions to provide funding for water conservation and development schemes by introducing new means of irrigation and extending loans for installation of tubewells, open wells desilting and brick-lining for water channels, precision land leveling, drip irrigation system, construction of mini dams, bed planters and water sweeter processing machines. Furthermore, 10,000 tube-wells will be installed in the provinces to increase the availability of water at farm level;

(3) To induce water conservation, farmers will be encouraged to substitute water-intensive crops with crops requiring less water. In particular, government is supplying cottonseed in parts of Punjab and Balochistan for substituting cotton crop with rice. Similar efforts will be encouraged for substitution of sugarcane with cotton.

(4) Price certainty is an essential need of the farmers. However, this objective has to be weighed against the need to provide the farmers the international prices, which were normally higher than the prices prevailing in the domestic market. Accordingly, last year we had abolished all restrictions on export of agriculture commodities except wheat. I am pleased to announce that the government has lifted all restrictions on movement of wheat within or outside the country. We have undertaken additional reforms in wheat procurement and release procedures with a focus on greater role of private sector and market forces. These reforms will have a salutary effect on the price of wheat. To give the necessary confidence to farmers, government will continue to follow its policy of announcing support price for wheat and indicative prices for other crops like sugarcane, cotton and rice. Role of TCP to stabilize prices as an active second buyer will remain intact.

(5) To give a big push to agriculture farming practices, government has designed a new policy for corporate agriculture, which will shortly be announced by the Minister for Agriculture.

(6) A Horticulture Export Board has been established, comprising all the stakeholders from farmers down to exporters, to promote exports of fruits, vegetables and flowers. Government will provide all the necessary infrastructure support to facilitate the export of horticulture products;

(7) Agriculture credit is receiving due attention by the State Bank of Pakistan. During July-April, total disbursement of credit to agriculture sector was Rs.31.3 billion as against Rs.30.1 billion last year, representing an increase of 4%.  For next year, State Bank plans to give as much credit to agriculture sector as can be absorbed by the farming community. This is an unprecedented move that would greatly enhance the flow of credit to the agriculture sector.

(8) To enhance the role of Agriculture Development Bank, a new management of Bank and Board of Directors with complete autonomy of operations have been appointed. The management will undertake a grass-roots reorganization of the Bank and adopt measures to significantly improve the participation of the bank in agriculture development.

(9) Government will be distributing land to landless farmers as a measure toward their empowerment. On the directive of the Chief Executive, 92,792 acres of land in Sindh and Balochistan has so far been distributed among 9601 landless Haris/farmers. This process will be further extended to ensure proper cultivation of such land. ADBP has been asked to design special package for providing credit to these farmers.

Small and Medium Industry:

45.  The second most important sector of our focus is the small and medium industry. As I had said in my last speech, the future of country's industry lies in the SME sector, which holds the promise of generating employment, adapting technology and creating an export-base grounded in country's true comparative advantage. During the year, following measures were adopted to give the necessary impetus to SME sector:

(1) Small and Medium Enterprises Development Authority (SMEDA) has been reorganized and given the necessary resources to lead the process of supporting the development of SME sector. The focus on the new organization is SME support, including easier documentation with financial institutions, free technical, managerial, and marketing advice through four provincial offices, information on sector briefs, pre-feasibility reports, and access to trade information regarding foreign demand for Pakistani products;

(2) On the basis of an extensive study undertaken by SMEDA, regulatory changes are being effected to allow SMEs the freedom necessary for their efficiency and growth. As a result of this, a large number of irritants impeding the growth of SME sector will be removed. Some of these details I will present in later sections;

(3) Small Business Finance Corporation (SBFC) has been repositioned to meet the financing needs of the SME sector. For this purpose, the financing limit of SBFC was raised from a maximum of Rs.1.5 million to Rs.30 million. SBFC has developed special financing packages for specific SME industries. Packages for fisheries, light engineering, garments and gems and jewelry industries have already been launched. Additional packages for other industries are under preparation will be launched during the next year.

(4) SBFC will arrange Rs.2 billion in the next year for the SME sector.

(5) A new management has been inducted in the First Women Bank, which has also been asked to develop an SME focus for women entrepreneurs;

(6) All NCBs are developing in-house capabilities to finance the SME sector;

(7) A number of incentives in the form of duty rationalization, removal of anomalies etc. are included in the current budget to give incentives to SMEs.

Information Technology:

46.  The third priority sector is the information technology and software. We are all aware of the significance of this sector in view of vast intellectual resources available in the country. Numerous initiatives have been launched to jump-start the process of developing IT sector in the country. The prominent among those are:

(1) An e-government project is being launched to improve the efficiency of public services. The project will generate significant opportunities for local software development and create new export capabilities in the country;

(2) COMSATS Institute of Information Technology has been established as a center of excellence. It will award masters and bachelor degrees in computer science, with a focus on JAVA technology;

(3) Pakistan Software Exports Board is revamped to meet the challenges of the new IT environment being evolved in the country with the main focus of providing marketing support to local IT companies. For this purpose, two incubators for Pakistani firms have been established in Singapore and San Francisco.

(4) After the successful launching of Islamabad Software Technology Park, similar projects are initiated in Lahore and Karachi.

(5) To significantly expand the use of internet, 400 cities have already been brought under the net while next year this number will be raised to 700 cities;

(6) Since 1998, the bandwidth charges of PTCL have been brought down, on average by 98%. Within two years, bulk availability of bandwidth has been increased 20 times.

47. The growth of IT industry will provide employment opportunities for the educated youth thereby reducing the problem of unemployment.

Oil, gas and mineral sector:

48.  The fourth sector of priority is the oil and gas sector. It has earned priority because of the leading role it can play in country's development by providing a dependable source of energy, which at present is met at the cost of a large amount of country's scarce foreign exchange resources. The following policy measures in this sector are noteworthy:

(1) A new investment policy for oil & gas exploration in off-shore areas was announced in January 2001, which envisaged additional incentives compared to the normal policy, in the form of lower corporate tax from 55% to 40%, exemption from mandatory government participation in the joint venture exploration and better well-head price;

(2) Import and pricing of fuel oil and high speed diesel oil has been deregulated, consequently the primary freight pool has been disbanded;

(3) For environmental protection, government has banned use of two low grades of motor gasoline, besides keeping a check on adulteration. In a gradual manner, use of unleaded gasoline will be eliminated.

(4) After commissioning of PARCO refinery the country is self sufficient in petrol and LPG. In fact, excess quantities of these petroleum products are allowed for exports depending on supply position compared to demand;

(5) Work on providing an additional gas of 1 BCF has already begun and about 100 MMCF were added to the national gas network during the year;

(6) An investment of $1 billion already stands committed for additional supply gas, covering both development of discovered fields as well as expansion in the transmission system;

(7) A mineral development policy is being designed to fully exploit country's mineral potential. Thar coal will be developed both as fuel for power generation as well for other commercial applications such as in cement industry. Marble and Gems industries will be encouraged near the point of deposits to add value to current low value added products of these industries.

(8) To revive the dormant SAINDAK project, an MOU has been signed with a Chinese firm to lease it for a period of 10 years. Revival of this important project will generate sizeable employment opportunities for the people of Balochistan.

Trade & Industry:

49. In a highly competitive world economy, trade policy will have to play a major role in determining the level of economic activity in the country. Pakistan is pursuing a liberal trade policy, which is quite in line with the evolving world trade regime manifested in the functioning of World Trade Organization (WTO). Increasing country's exports have to be the fundamental aim of our trade policy. The Minister for Commerce will announce the trade policy soon after the budget. Here I would restrict myself to outlining the measures adopted by the government to facilitate a competitive trade regime:

(1) A systematic effort is being expended to remove the major irritants impeding the smooth functioning of our main export industries. In this regard, I have already noted the significant reduction in the multiplicity of taxes both at the federal and provincial level. Each provincial government is undertaking additional measures to further consolidate this process. In particular, the number of agencies visiting industrial units will be cut down and for the remaining agencies there will be more predictability in the behavior of visitors. Government of Sindh has introduced one window approach for collection of three levies by one agency. Also, the number of three visits by labor department has been reduced to once in a year. Other provinces are also contemplating similar efforts.

(2) As a major simplification in labor levies, it has been decided to introduce a self-assessment scheme for EOBI. Establishments opting for the scheme will be excluded from visits of EOBI officials for a period of two years;

(3) Timings of Customs services for exporters will be extended depending on the needs of exporters to facilitate easy passage of export consignments;

(4) There will be further improvements in the process of refunds to exporters;

(5) The scope of GST audit will be clearly defined and agreed with the representatives of trade & industry;

(6) A competitive exchange rate regime is now firmly in place. Exporters have benefited immensely from this, which will remain operative in future also.

(7) For encouraging additional exports, it has been decided that exporters increasing their exports by more than 10% from their previous year's exports, will be allowed for up to 50% of their increased earnings to be kept in their foreign currency account in Pakistan to be used for purchase of raw materials or machinery. SBP will notify the details of this scheme.

(8) For target exports in target markets, special awards, including CE's exports trophy, will be announced in the Trade Policy; 

(9) To give boost to exports, government has negotiated a $150 Trade Enhancement Facility with the Asian Development Bank, which is specifically meant to SME exporters. This will be available concurrently with the existing export finance scheme of the State Bank. In addition, a private sector export finance guarantee company called the Pakistan Export Finance Guarantee Agency (PEFGA) is being set up under this project to provide guarantee support for banks giving pre-shipment capital and trade financing to local exporters.

Privatization program:

50. In our efforts to regain our economic sovereignty, privatization process plays a critical role. It is through this program that, on the one hand, we will reduce the hemorrhage to budget in the form of continuing losses of public sector corporations and, on the other, generate resources both for debt retirement as well as for poverty reduction. The following major actions have been taken to streamline the process and prepare transactions for privatization:

(1) A privatization law has been enacted to guide the process and create predictability of outcome in privatization deals;

(2) Major privatization transactions comprising PTCL, UBL, PSO, fertilizer plants and NIT will be brought to the market before the end of this year;

(3) Initial public offering of NBP up to 10% of its capital will be made through the stock exchange;

(4) A privatization fund based on a selected basket of shares of prospective units for privatization will be offered to the public.

51. We expect the process of privatization to accelerate and gain momentum in the next fiscal year.

Financial sector reforms:

52.  For an expanding economy, a well functioning and properly regulated financial system is essential. To enable the financial sector to meet the growing financing needs of the economy and improve the overall public trust on its functioning, government has taken a number of steps:

(1) The structure of national savings schemes has been rationalized and brought in line with the rest of the sector. The directorate of savings has been directed to introduce new products to meet the varying needs of depositors. In this regard, a pension product is under active preparation to be launched soon. The return on some of the schemes is being increased by 1%;

(2) To meet the needs of institutional investors for investing in government securities, a new instrument called Pakistan Investment Bond (PIB) has been launched and several auctions of the bonds have already been held. This instrument serves as the bench mark both for the private securities as well as for national savings schemes;

(3) Professional managements in three NCBs are effecting a turnaround in their performance and getting them ready for privatization;

(4) The corporate and industrial restructuring corporation (CIRC) is now fully functional. It has so far taken over 57 units representing Rs.8.7 billion in non-performing portfolio of NCBs and DFIs. CIRC has already sold 5 units, while 4-6 units will be sold every month.

(5) A new recovery law will soon be promulgated, which will greatly improve the existing framework for recovery of defaulted loans. We are also developing a bankruptcy law to facilitate the process of business closure. Together, the two laws hold the promise of radically transforming the dispute resolution mechanism in the financial sector.

(6) A Banking Ombudsman will be appointed to redress the grievances of banks' clients.

Capital market reforms:

53.  Capital market is an important source of funding investment activities. It also provide profitable opportunities of investment to small savers. Development of an efficient capital market capable of meeting the needs of the industry has been an important aim of our economic policy. The past year has witnessed major developments in the capital market as a result of a series of reform measures taken to promote investor confidence and strengthen the integrity of the market. These are expected, in due course, to yield dividend in the form of increased demand for and supply of capital. Some of the notable reforms undertaken during the year are:

(1) Strong capabilities are being developed to gear up SECP to play an active role in the development of capital markets;

(2) National Clearing and Settlement System has been made operational;

(3) T+3 system where all transactions will be settled on the third day has been launched with effect from July 2001;

(4) A new code of conduct has been specified for stockbrokers. The requirement of net capital for brokers has been significantly raised and capital adequacy has been properly defined together with enhanced margin requirements;

(5) Rules against insider trading have been issued;

(6) Use of fund managers is being encouraged for deployment of public sector funds, such as EOBI, in the capital market;

(7) Appropriate changes have been made in the regulations to allow sector specific mutual funds;

(8) Work is in hand to promote the growth of new products such as options, futures and other derivatives that will provide the necessary means to hedge risk and deepen the stock market.

(9) Special rules are under preparation to promote private pension funds to encourage savings and to mobilize medium to long term retail investment in equity markets. A framework for new pension products to be offered by non-bank financial institutions is also being designed by the SECP.

(10) Furthermore, SECP is developing a framework for the promotion of venture capital business in the stock market. This will meet and important need for the development of the IT sector.

Islamic Banking

          Government is committed to introduce eliminate Riba and promote Islamic banking in the country. For this purpose a number of steps are underway, which are:

(1) A legal framework is being designed to encourage practice of Islamic banking by banks and financial institution as subsidiary operations of their main operations;

(2) Consultations and exchanges are undertaken with brother Islamic countries and renowned institutions of Islamic learning such as middle eastern countries and Al-Azhar University of Egypt, to learn more about their experiences and practices;

(3) Amendments in HBFC Act are being made in line with the directive of the Supreme Court. With these changes, HBFC would be fully Shari'ah compliant institution, which will play an effective role both in promotion of Islamic financing methods but also in the development of the important housing sector;

(4) Shari'ah compliant modes of financing like Musharika and Murhabaha will be encouraged so that familiarity and use of such products is enhanced and their adoption at a wider scale made possible;

(5) The transformation commission established in the State Bank of Pakistan will continue to function and its recommendations whenever finalized will be considered by the government for appropriate action.

54. It is government's intension to promote Islamic banking in the country, while keeping in view its linkages with the global economy and existing commitments to local and foreign investors.

Poverty Reduction:

55. Let me finally turn to the supreme objective of our economic strategy, namely poverty reduction. Since all of us are fully aware of the state of poverty in the country, there is no point in recounting its various dimensions. I would restrict my initial remarks in this area to underline the fact that poverty would be reduced on a permanent basis only after the process of growth has been fully revived. Direct interventions to check poverty are basically of a mitigating nature, to enable poorest of poor to tide over the period till he benefits from the process of economic growth. Thus the programs we have initiated have to be evaluated within this framework.

56.  Government has initiated a number of special programs with a view to lessening the sufferings of the poorest segments of population. The performance of these programs and resources transferred through them are briefly presented to you:

(1) Khushaal Pakistan: This is a development program comprising small public works schemes, such as development of farm to market roads, water supply, sewage, garbage collection, spurs, culverts and repair of education and health facilities. Such schemes are known to have positive impact on employment generation and augmentation of income earning opportunities for the poor. A sum of Rs.11.5 billion was released. The funds were provided to the district administration through the provincial governments while the schemes were identified and selected at the district level through active community participation. The experience of this program has been extremely encouraging. In all districts, the program has generated economic activities including temporary employment opportunities for 2 million persons. It has resulted in the construction of 2055 farm to market roads, 1145 water supply schemes, 118 spurs and 2746 repair and operationalization of schools. Under the IT component of the program, Rs.1 billion has been released for rural based vocational training in computers. This program has given new hope to people for a prosperous future. This program and the resources allocated are unprecedented in the history of development expenditure in the country. The rate of utilization of these funds was excellent with close monitoring. In view of its popularity as well as effectiveness in reducing poverty, the Chief Executive has remained actively engaged in reviewing its performance and has made sure that flow of funds to the program was not hindered. With the functioning of district governments under the devolution program, the Khushaal Pakistan Program will gain further importance and local ownership.

(2) Food Support Program: Through another program, a food subsidy of Rs.2000 per annum was provided to poorest of poor. An allocation of Rs.2.5 billion during the year was spent on this program from the federal budget. The program was implemented again at the district level through the help of district officials. Some 1.2 million households with an income of Rs.2200 per month or less were given this subsidy by crediting their accounts with the post offices. The program was essentially designed to mitigate the impact of increase in the support price of wheat, which would have adversely affected the poorest people. In the next fiscal year allocation for this program will increase by Rs.400 million to Rs.2.9 billion. In addition to the food support program, Pakistan Baitul Maal provided support to destitute people that totaled Rs.327 million for a number of purposes including medical support, fund for bonded labor, students stipends, community education and dialysis support.

(3) Khushalli Bank: As you are well aware, poor people have no access to formal credit in the country. Moreover, the deposits are contributed by a very large number of small depositors, while the lion's share of credit is taken away by the big business. This is so despite the fact that experience with small creditors has established that they are a better risk than the larger creditors. Furthermore, as an instrument of poverty reduction, micro-credit is indispensable. Such were the considerations that led us to establish the Khushalli Bank, which commenced its business from a remote village of D.G. Khan and is now present in all the four provinces. Capital of the bank has been contributed by a number of banks, both public and private including foreign banks. By end-December, the bank would establish branches in 30 districts of the country and provide loans to 50,000 households with a total credit expansion of Rs.500 million. Aiming at fast growth, the bank will cover all districts by the end of fifth year with a client base of 600,000 and loan portfolio of Rs.7.6 billion. Encouraged by the early success of Khushalli Bank and the vast market potential, it has been decided to allow establishment of similar institutions in the private sector. For this purpose, a new law regulating the business of micro-finance institutions will soon be promulgated. Khushaali Bank is transforming economic lives of its clients. When the Chief Executive recently visited the Khushaali Bank, he met with some of its clients. Zahra Bibi of D.G.Khan told him that she was worried because her son was underemployed driving a rickshaw for someone, which never gave her adequate income. From a loan of Rs.10,000 from Khushaali Bank she was able to make a down payment for the said rickshaw which was transferred in her son's name. Now he earns enough to make installment payment of his rickshaw as well as bring good money at home, which allows her to pay her installment to Khushaali bank and still save something for tomorrow. In course of time, her son will also become owner of rickshaw. Thus a loan from the Bank has transformed her economics for the better. In fact, we are convinced of the effectiveness of micro finance in solving the problem of poverty, and therefore we have decided to allow more institutions to come into this field. A new law is being promulgated that provides for a framework for the operations of new banks and under which licenses will be given to financially and managerially sound private sector investors to establish such banks in the country.

(4) Zakat System: Zakat has emerged as a major program of social safety net. However, its potential and scope is fighting poverty is yet to be fully realized. At present, annual Zakat collection is around Rs.5 billion. About 2.5 million beneficiaries received assistance from the Zakat fund, which were disbursed to tune of Rs.3.48 during last year. The most significant disbursement was in the form of Guzara allowance at the rate of Rs.500 month, which was raised to this level by our government from Rs.300. Other forms of assistance are stipends to students, medical support, marriage support and support to Deeni Madris. It is felt that Zakat disbursements are mostly consumption oriented and there is no system to monitor exit of Mustahiqeen to a state where there is no longer a need for receiving Zakat assistance. In order to promote regular exits and to create room for others, it has been decided that Zakat will be provided for the purpose of rehabilitation, whereby a beneficiary can undertake projects that would either provide him a marketable skill or enable him to get self-employed. For this purpose, funding up to Rs.50,000 will be provided from the Fund. With the grace of Allah, the Zakat Fund made up of savings achieved each year, has risen to over Rs.24 billion. An allocation fo Rs.2 billion is initially proposed for the launching of the rehabilitation program in the third week of June. An additional 1.5 million beneficiaries will be added to the list of Zakat recipients.

(5) Pakistan Poverty Alleviation Fund: PPAF was set-up with an endowment of $100 million, basically as a wholesale lender to NGOs engaged in providing micro financing. Until 1 June 2001, it has provided total assistance of Rs.1.2 billion to 33 NGO in all parts of the country, for onward lending to poor people.

Employment

57.  No scheme of poverty reduction will have chance to succeed unless complimented by a strategy to generate employment. A sustained reduction in poverty would only be possible when poor people receive opportunities of gainful employment. Alternatively, rate of unemployment is a credible indicator of level of poverty prevailing in the society.

58. In Pakistan, total population is estimated at 140.5 million of which labor force is estimated at 41.2 million people, giving a labor force participation rate 29.4%. Reportedly 38.8 million people were employed, indicating that unemployed people were 2.8 million or the unemployment rate was 6.7%.

59. Mindful of its central position in reducing poverty, Government has developed an employment generation strategy that focuses on construction sector, urban renewal, encouragement of informal sector and giving a greater share to rupee based projects in the development budget.

60. One of the primary objectives of present budget is to encourage economic activities that generate employment opportunities. The policy initiatives taken and incentives provided to agriculture, industry and IT sectors, in particular, will act as a stimulant for economic revival and employment generation.

Development Plan

61. Over the years, development expenditure has come down significantly as percentage of GDP. The slow down in GDP growth in the 90s is partly due to this reduction in the development expenditure. Government is conscious of serious infrastructure shortages that are emerging due to slow down in development spending. It will not be possible to target a high rate of growth without a significant increase in development spending, and in those sectors which have high rates of economic and social returns.

62. For the next budget, the National Economic Council, chaired by the Chief Executive, has approved a development plan of Rs.130 billion, with a foreign exchange component of Rs.39 billion. This plan has been made in the context of a 10 year development perspective that aims at meeting critical shortages in country's physical and social overhead infrastructure, which is limiting the growth potential of the country. Its distinguishing feature is its dependence largely on indigenous resources, which will be supplemented by support from friendly countries. All the critical projects being initiated during the year will be completed in this development perspective.

63. As I mentioned in the discussion on agriculture sector, the major focus of next year's development plan will be on the water sector, where Rs.4 billion have been allocated to initiate work on some of the new water sector projects. Most notably, this will include Gomalzam and Meerani dams, and new irrigation schemes like Thal and Katchi canals and lining of numerous watercourses. In addition, the development budget also envisages a drought support program of Rs.10 billon, which will be used for undertaking projects, which would not only mitigate the suffering of those adversely affected by drought but also help them get better prepared for its recurrence in future.

64. Khushall Pakistan Program will receive an allocation of Rs.7.5 billion, which has been adjusted in accordance with the rate of utilization experienced last year.

65. A series of strategic projects has been launched to radically alter the stock of country's physical infrastructure that would, in most cases, open up new vistas of economic and social activities. Work on Coastal Highway linking Karachi with Makran will be started with an initial outlay of Rs.2 billion. The first phase of Gwadar Port will be initiated with an investment of Rs.1 billion for deepening of channel and construction of 3 berths. These projects will lead to opening of Balochistan, the most underdeveloped provinces of Pakistan, yet having more than half the landmass of the country. To unleash economic activities in the area, a free-trade zone will be developed in Gwadar, with a provision of jet runway, and eventual linkage to north through Khuzdar-Rattodero road to Motorway. This will open Balochistan to tourism also, which could be a major source of economic benefits for its people. In addition, Pakistan's links with the middle-eastern countries will find an alternative channel, which is more economical and lead to greater economic cooperation with these countries. All these projects will be completed in five years as they are very important projects, and Pakistan has been assured of significant support by several friendly countries from Middle East, China and donors from around the world.

66. Yet another focus of development plan is to reinvigorate the railway system and allow it to play its role in the economic development of the country. An allocation of Rs.6.3 billion has been made for upgrading the railway system through purchase of new locomotives, major addition to the rolling stocks and maintenance equipment and rehabilitation of track. A Rs.13 billion-program of NHA will see completion of such important projects as Pindi-Bhatian Motorway, Islamabad-Muzaffarabad Road, Islamabad-Peshawar Motorway, Dualization of many sections of National Highway including Hala-Moro, Rahimyar Khan-Bahawalpur Road and Chablat-Nowshera.

67. Significant allocation of Rs.1.5 billion has been made to put the Education Sector Reforms of the Ministry of Education in action. This will be supplemented in a large measure by the provincial resources for education sector. The programs envisaged for implementation under the education sector reforms include Introduction of Technical Education Stream in Provinces, Adult Literacy Campaign, Higher Education and Quality Assurance, Education for All Program, Revamping of Science Education at the Secondary Level. In addition, efforts are also underway to develop new initiatives in the education sector by forming public private partnerships. In this regard, a prominent project is being launched by a group of overseas Pakistanis for voluntary health and education services throughout Pakistan, which will be funded entirely by expatriates while government would only provide coordination and logistic support to their work.

68. In the health sector, Rs.2.5 billion have been kept for undertaking some major initiatives in basic health and family planning. Here also, federal plans will supplement the overall thrust in the health sector. The major programs in this sector include National Family Planning and Basic Health Care, which will receive Rs.1.5 billion. Immunization being the most important program in preventive health, will receive Rs.500 million for extended coverage of population.

69. An allocation of Rs.113 million has been kept for various programs aimed at women development. A large number of social welfare projects being run by the women division will receive funding under the above allocation.

70. A notable inclusion in the development plan is Rs.2.2 billion for providing physical infrastructure for police reforms, which are estimated to cost Rs.14 billion. These reforms will transform the basic character of our police and enable them to effectively combat the rising trend in crime and anti-social activities activities.

71. This PSDP is growth oriented. It promises to push the growth rate significantly up in the short run and provide a basis for sustaining it in the future.

Devolution Plan

72. As you are aware, a major plank of government's governance reforms is the empowerment of people both politically and economically. On the political side, a credible and powerful tier of local government at the district level is about to come into existence. It is critical that adequate financial resources are made available to ensure proper functioning of the incipient governments. A two pronged strategy is being adopted for this purpose. First, district budgets are prepared in a framework of fiscal devolution, which would operate through the mechanism of a provincial finance award. This will provide adequate resources to new governments to meet their obligations of providing basic services such as education and health to their people. Second, a lump sum provision of Rs.3 billion has been provided to meet the transition costs of setting up the basic infrastructure of such governments, wherever needed.

73. Government expects that properly functioning district governments would be effective and efficient in resolving people's problems through their own representatives and near their homes. They will not have to rush to provincial and federal capitals to seek redressal of their grievances.

Investor confidence

74. Although government is expending concerted efforts, much more needs to be done for inspiring the confidence of the private sector. During the year, although overall credit availability to private sector improved significantly, the share of fixed investment remained low. Also, there has been a marginal decline in the flow of aggregate investment in the country from 14% of GDP to 13.7% of GDP. The foreign investment was lower expected. However, in the oil & gas and IT sectors, there is substantial interest by foreign investors. New investments have begun to flow in these areas.

75. What are the factors that have impacted on investor confidence? They are many:

(1) Accountability drive;

(2) Impact of survey and registration exercise;

(3) Delay in the resolution of HUBCO dispute and approval of IMF Stand-by program.

76. These irritants are no longer in the field. There was credible improvement in the process of accountability that provided adequate safeguards against unnecessary inquiries and created room for amicable settlements. With the resolution of HUBCO dispute the IPP controversy was firmly buried. The Fund program is now solidly on track and country is enjoying full support of the entire donors community. Privatization remains the top priority of the government and as noted earlier, some big-ticket items would be brought to market shortly.

77. In addition, numerous measures have been taken by the government to further improve the enabling environment for investment in the country. Of these, the following worth special mention:

(1) Consistency of economic policy is diligently monitored;

(2) Tariff rationalization has greatly improved the competitive edge to industry;

(3) Proposed changes in tax laws and tax machinery should be a major source of comfort to business community;

(4) The process of refunds, though improved significantly, remains a source of frustration for the business. Accordingly, the budget contains additional measures to further improve the proves of refunds;

(5) Reforms in the banking sector and capital market and unusually large credit allocations have led to improved availability of finances thus facilitating the process of capital formation;

(6) Major obstacles to industrial activity, in the form of labor levies, multiple regulatory agencies, large number of federal and provincial taxes are squarely addressed by the government. Labor levies are being consolidated, regulatory agencies being reduced, wealth tax abolished, federal taxes effectively limited to only three and up to 20 out of 29 provincial taxes have been eliminated. All of this means a radically improved regulatory regime for the industry;

(7) A Committee on Deregulation is being constituted, headed by a senior private sector business leader, to identify areas and suggest measures for further deregulation and liberalization of economic regime;

(8) A more active and well-equipped Board of Investment, with appropriate legal authority, is ready to assist prospective investors.

(9) To top it all, the Chief Executive on numerous occasions has assured the business community about the sustainability of economic reforms carried out by the government.

78. Government is working to create additional space for private sector initiative. With their support, government will expend additional efforts to remove irritants, distortions and other non-economic factors impinging on their competitive edge. We consider business as partners in the economic development of the country. Government treats the success of business as its own because it leads to overall improvement in the country and jobs for the people, which is the ultimate objective of a welfare state.

Development of housing and promotion of construction industry

79.  In view of its employment generating potential and backward and forward linkages with a large number of industries, government plans to give a significant boost to the construction industry. Also, housing is an important element of basic human needs. Because of a slow down in new housing units, of serious shortages are accumulating in country's housing stock in the face of rising demand.

80. There was a shortage of 2.8 million units at the beginning of the year. An additional demand for 220,000 is estimated annually for new units. Apart from this, some 3.3 million units from the existing stocks have outlived their safe economic life. Nearly 40% the population lives in katchi abadis, for whom special housing models will have to be evolved. Clearly, this is a vast area of development requiring huge resources, which no single private or public entity can provide.

81.  But we have to start the process of filling this important need of our population. Following measures are proposed during the year to give a significant impetus to investment in the housing sector:

(1) A new housing policy is being formulated that would strengthen the role of public sector financial institutions in this sector and greatly simplify the regulatory regime presently applicable to the housing industry;

(2) State Bank and SECP will jointly evolve a new regulatory framework for housing finance companies to encourage further investment in this industry.

(3) The House Building Finance Corporation (HBFC) will soon revive its operations after amendment in its law. With impending induction of a new management in HBFC, government plans to restructure the organization and assign it a leading role in creating a vibrant and dynamic housing financing industry in the country;

(4) Major inputs consumed by the construction industry, like cement, steel and paints, will be given relief to reduce the cost of construction and thereby encourage demand for construction activities;

(5) Cost of financing in housing construction for individuals will be allowed as tax deduction.

(6) Special housing schemes for the poorest people are being designed both through regularization of Katchi abadis as well as by allocation of new lands in the urban areas.

Overseas Pakistanis

82. Overseas Pakistanis are among the proudest possessions of Pakistan. This government is committed to facilitate their role in the economy. It is generally felt that the expatriate community has great potential to help the country come out its present predicament, particularly on the balance of payments side. However, a great deal of contribution by expatriate community is presently leaked out of the system due to a largely unregulated moneychangers business and smuggling, which was receiving the lion's share of the total inflow of remittances in the country.

83. With a view to correcting the distortion in the foreign exchange market and channeling the remittances through the normal banking channels, State Bank is adopting a number of steps, which will lead to increased documentation and reporting of their activities, in the short run, while later they will be encouraged to form themselves into exchange companies.

84. The nexus between smuggling and Hundi will be weakened and eventually broken by gradual integration of kerb market into the mainstream market and tightening the smuggling..

85. The government has also developed a package of incentives for those sending their remittances through normal banking channels. These are:

(1) For expatriates remitting $2500 per annum to Pakistan will be entitled to the following benefits:

a. Separate immigration and customs counters at all international airports for handling at arrival and departures;

b. Free renewal of passport on urgent basis;

c. Duty free import of items of personal convenience of a value of $700 during a year.

(2) Banks have been directed to reorganize their arrangements for remittances to ensure outreach to labor camps, exchange company arrangements, speed in remittance and prompt delivery by establishing prior contacts with the recipients.

          For encouraging the participation of professionals, the following measures are being adopted:-

(1) Exclusive investment products will be designed and marketed by NIT for investment by Non-resident Pakistanis (NRPs).

(2) Banks will also be encouraged, since they are free to hold and manage their own foreign currency deposits, to offer new products for the NRPs.

(3) Market for private pension funds will be developed and promoted with a view to attracting investment from NRPs.

(4) A Website will be developed to host the information about charities for the benefit of NRPs.

(5) NRPs remitting a minimum of $10,000 will be entitled to the following benefits:

a. To avail the quota, to be filled exclusively on merit to be reserved in all the public sector professional colleges and universities.

b. Duty free import of items of personal convenience of a value of $1200 during a year.

c. An allocation of up to 25% for in IPOs to be subscribed in foreign currency.

d. Ballot of choice plots in public housing schemes at attractive prices to be paid in foreign currencies.

e. Discount in the auctions of CIRC where payment will be made in foreign currency.

f. Special allocation of shares in privatization.

86. Modalities for the operations of above incentives are being developed and will be shortly put in place through Pakistani Missions abroad.

87. Finally, the government has directed the Board of Investment to develop a strong focus on some of the most successful NRPs in the field of investment. For this purpose, BOI is developing a database on such Pakistanis and it will establish a personal contact with these people.

88. In addition, I take special pleasure in announcing the promulgation of an ordinance for the protection of foreign currency accounts. With this, an important promise of the government has been fulfilled. Both residents and non-residents can now maintain foreign currency accounts with complete satisfaction that these would remain free from any possibility of freezing or seizure.

89. As you can see, these are far reaching measures we are adopting. We are hoping that not only would we move toward a more stable and efficient foreign exchange market, but would be correcting the disincentives that currently impede the participation of our expatriate community in the economy of Pakistan. We believe that our expatriate community has the potential to meet the challenges the motherland is facing. Now that the government has done a significant part of its job, it is our hope and earnest desire that the expatriate community should reciprocate this gesture by significantly increasing the flow of their remittances through the normal banking channels.

Pay and Pension reforms

90. Government has been conscious of the hardship felt by its employees for lack of appropriate increases in their emoluments, which were last revised in 1994. Since then inflation has eroded their purchasing power. Mostly, the problem was ignored, or when faced, it was done in an ad-hoc fashion, that often resulted in creating serious distortions in the structure of pay and pensions.

91. As I promised to you in the last budget, government had reconstituted the pay and pension committee and asked it to study the existing pay and pension structure and suggest measures to rationalize it keeping in view financial resources. The committee has done a commendable job in carrying out its work professionally and within the context of larger civil services reforms, which are the pressing need of the hour. It therefore kept in view the imperatives of retaining efficient and competent people in the service along with maintaining some parity for the new entrants with the opportunities available outside the public sector.

92. In formulating its recommendations, the committee was guided not merely by the imperatives of massive changes in the cost of living but also the resource position of the government, which still remains weak. It was of the considered view that while large gaps have emerged in the level of emoluments and cost of living, the resource position of government would not permit full compensation.

93. In its work, the committee has paid special attention of the system of pension in the government. It has found that there was no actuarial basis of the existing pension and commutation formula. Unless the system was reformed the government would be exposed to huge liabilities that it cannot sustain. Accordingly, the committee has made recommendations for grass roots reforms in the pension system.

94. Based on committee's recommendations and overall conditions of financial stringency, the following changes are being made in pay and pension of government employees:

(1) Pay of government officials will be increased in two phases. In the first phase, effective from 1-12-2001, the pay scales of 1994 will be increased by 50%. In the second phase, the remaining differential vis-à-vis the increase in cost of living will be filled;

(2) After making adjustments for the some of the past ad-hoc increases, there will be a decent increase in the take-home pay of all government servants;

(3) The conveyance allowance will be more than doubled;

(4) Medical allowance, which is presently available at the flat rate of Rs.90 per month would also be more than doubled;

(5) Increase in house rent allowance will be made in the second phase;

(6) To bring down the pension and commutation liability of the government to a manageable level, appropriate rationalization is being effected;

(7) Net pension will be increased by 15% for those retired before introduction of 1991 pay scales, by 10% for those retired before introduction of 1994 pay scales and by 5% for those retired after 1994 pay scales;

(8) A new pension scheme called contributory fund scheme is being introduced for new entrants in government service. Option will be given to government servants to either remain with the rationalized old system or opt for the new scheme.

95. Obviously, this is a package that partially meets the needs of the government servants. But it is the one that is affordable. Together with the reforms in pension system, the package lays the foundation of a more sustainable system of compensation for government servants.

Budget estimates for 2001-02 and Revised Estimates 2000-01

96. Let me now turn to the budget estimates for the year 2001-02 together with a review of budgetary performance of the current year i.e. 2000-01.

97. For the current year 2000-2001, a fiscal deficit of Rs.162.1 billion or 4.6% of GDP was budgeted, with GDP at Rs.3510 billion. However, the ambitious revenue collection target of Rs.435.7 billion experienced certain shortfalls for a variety of reasons, including unexpected macroeconomic changes - such lower GDP growth - and delayed implementation of survey exercise. Accordingly, the overall fiscal deficit target was revised to Rs.185.6 billion or 5.3% of revised GDP of Rs.3472 billion.

98. In the budget for 2001-2002, we are targeting a budget deficit of Rs.186.9 billion or 4.9% of GDP. This represents a significant fiscal adjustment. A combination of better revenue collection and expenditure control measures has made it possible for us to shoot for this target.

99. CBR revenues will increase to Rs.457.7 billion from revised estimates of Rs.406.5 for 2000-01, representing an increase of 12.6%. Current expenditure has been restricted to 16.4% of GDP compared to 16.7% of GDP in the revised estimates for the current year. This has been made possible by flat defense expenditure and no increase in civil expenditure.

100. Provincial transfers are projected at Rs.190 billion based on tax collection of estimated tax revenue collection of Rs.457.7 billion, Rs.15 billion from GDS and about Rs.10.4 billion from royalty of oil and gas. The projected income and expenditures indicate that the provinces are likely to have an improvement of about Rs.15 billion in their cash balances after catering for the local component of their PSDP and extra expenditure on account of pay revision.

101. Based on the above estimates, we expect that our budget will not only consolidate the process of fiscal discipline but also promote the process of economic revival. Impetus to economic activities will be a crucial measure of the success of the budget.

Compensation to the cooperatives' affectees 

102. As you are aware thousands of small depositors of cooperatives were defrauded of their life long savings in the scam that reflected the greed and avarice of handful of owners and big borrowers of the cooperatives. In my last budget speech, I had announced that the government was considering to offer compensation to these affectees and for this purpose it planned to use the wealth it had been able to recover through the accountability process it launched through the National Accountability Bureau.

103. NAB has designed a scheme under which it will be making pro-rata payments to affectees starting end June 2001. As directed by the Chief Executive, NAB has prepared plans to reimburse the money to all the depositors in next one year approximately.

104. With this initiative of the NAB, an important promise of the Chief Executive relating to compensation to coop affectees will be fulfilled.

Scholarship scheme for higher studies

105. Before I move to the tax proposals, let me announce that the Ministry of Finance in collaboration with the five major commercial banks has reactivated the education fund for scholarships to deserving students desiring to pursue higher education both at home and abroad. The scheme will be administered by a high powered committee headed by a Deputy Governor of SBP and the Presidents of the commercial banks. This is a commendable effort, as it will enhance resource availability for education sector in the country. I may also mention that this is in addition to the scheme that SBP manages at its own and which is open for all Pakistanis desirous of pursuing higher studies in top universities of the world and commit for serving in Pakistan after successful completion of their studies.  

Part-II

Ladies and Gentlemen

1. I now turn to the second part of my speech that deals with tax proposals.

2. Before I give you the details of these proposals, I find it necessary to outline the approach that has guided the process of their formulation.

3. In Part-I, I had pointed out that expansion in overall revenues of the government was essential for lowering the debt burden. However, it would not be desirable to raise revenues by imposing more taxes, as the existing taxpayers are already overstretched. In fact, these taxpayers need some relief, which I do propose to announce, wherever possible. Furthermore, there are imperatives of economic revival, restoration of investor confidence, encouragement for private sector initiative, creation of jobs and incentives for tax compliance. All together form the major objectives sought to be achieved from the tax strategy.

4. A tax strategy capable to achieve the above objectives will have to be based on the following elements, as I had also noted in the last budget speech:

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

(2) Reduction tax rates and penalties;

(3) Simplification of assessment and collection procedures;

(4) Reforms in labor levies;

(5) Efficiency in dispute resolution;

(6) Broadening the tax base; and

(7) Honesty and efficiency in tax administration.

5.  We have implemented this tax strategy faithfully, as is evident from the following:

(1) To reduce multiplicity, wealth tax was abolished at the federal level. Coverage of excise duty is gradually reduced. At the provincial level, on an average, each province has brought down the number of taxes from 29 to less than 10. This is a major simplification of tax regime, which we are working to simplify even further;

(2) Scope of self assessment and audit, the main instruments of a simplified tax regime, was expanded;

(3) An alternative forum for dispute resolution was established in the form of Tax Ombudsman, which fully functional and performing a remarkable job in providing relief to taxpayers;

(4) Through Survey and Registration exercise, the tax base for both income and sales taxes has been significantly expanded;

(5) To promote honesty and efficiency in tax administration a basic framework has been agreed whose implementation will begin this year.

6.  In view of the special circumstances facing the business environment, the tax proposals have to aim at giving a significant push to investor confidence and business activities.

7. I now present the proposals within the context of each of the main taxes:

Income Tax

8. Income tax is the tax of the future. It is capable to cater both for economic efficiency as well as social equity. However, historically, the potential of this tax has remained untapped. In early 90s, attention was focused to fill this gap. Revenue yields from income tax rose sharply, but at the cost of indiscriminately overloading with withholding taxes that reduced it to an indirect tax. More importantly, the overall regime that regulated its administration was complex and repressive, rendering its compliance a difficult act.

9.  We have expended serious efforts to meet the challenges of a progressive and futuristic income tax. For this purpose, as I mentioned earlier, the Report of the on Revision of Income Tax Law has been received and a draft income tax law has been prepared. With a view to consulting all the stakeholders, we will be issuing the draft law for public review before its promulgation by end-July.

10. Let me quickly recount the major features of the new law:

(1) It will promote a uniform application of income tax law, eliminating exemptions, concessions and immunities from assessment;

(2) The tax liability will be assessment based and use of presumptive taxes will be minimized;

(3) Self assessment will be the primary mode of assessment, applicable to all types of incomes and taxpayers;

(4) Through a parametric procedure up to 20% of returns will be selected for audit whose scope will be well defined.

11. Evidently, the above changes would fundamentally transform the income tax regime in favor of simplicity, ease and efficient administration. The process of moving toward this regime has already started and the budget contains several proposals in this regard. The following changes are important:

Rationalization of personal and corporate taxes:

(1) It is proposed to reduce personal rate of taxes so as to induce greater economic activity by such taxpayers:

(a) The present exemption limit of Rs.40,000, which was fixed in 1994 and has long outlived its realistic character, is proposed to be raised to Rs.60,000

(b) The number of slabs has been reduced from 7 to 5, with the minimum at 7.5% and maximum at 35%.

(c) Taxpayers earning income up to Rs.400,000 shall get relief;

(d) Those at the higher income brackets will face some additional liability, which is justified on grounds of equity.

(e) Surcharge on corporate and personal incomes will be abolished with effect from the assessment year 2002-03.

(2) With a view to ensuring that its incentive for growth and expansion is not compromised, it has been decided to rationalize the rates of income taxes applicable to this sector. The banking companies are presently subjected to the highest income tax rate of 58%, which is highest in the region. It is proposed to reduce the income tax rate on banking companies from 58% to 50%, with effect from the assessment year 2002-03. Similarly, the effective tax rates for public and private limited companies, after merger of surcharge are being fixed at 35% and 45%;

Reduction in the number of withholding taxes:

(3) To reduce the number of withholding taxes having the character of indirect taxes, 5 types of withholding taxes, such as withholding tax on industrial and commercial gas consumers and from auction of properties belonging to the Government, local authorities and companies, bonus shares etc. is proposed to be removed. In case of brokerage and commission income of travel agents, advertising agents, insurance agents and shipping agents, presumptive tax will be converted into adjustable withholding tax. Similarly, the tax withheld from interest on bonds, certificates, debentures and securities issued by a banking company or other companies or authorities is also being made adjustable;

New self-assessment scheme (SAS):

(4) Promotion of a tax system based self-assessment is our major objective. It has therefore been decided to extend self assessment facility to public limited companies also. The scheme has been designed to encourage taxpayers to declare their true income without any fear. Only 20% of returns qualifying for SAS shall be subjected to audit. The time limit for completion of assessment under the scheme is being reduced from 2 years to 1 year. The scheme is being announced in its final shape along with the budget to enable all taxpayers to fully comprehend the same and avail the facility at large scale. Our emphasis would be on effective audit rather than subjecting a large number of taxpayers to perfunctory assessment procedure. The process of selection is being developed which will be transparent and judicious and fair.

(5) Keeping in view the convenience of the taxpayers it has been decided not to make any changes in the return form for income tax;

Incentives for capital markets:

(6) To give impetus to our capital markets and to revive the nearly stalled process of new capital issues, it is proposed to extend the exemption on capital gains for another three years. In addition, the bonus shares issued by a company would not be treated as its income;

(7) Tax on reserves has been a source of some irritation for businesses as it constrained their choices for expansion. On the other hand, small investors in the capital market felt strongly for non-payment of dividends by listed companies even when they were making good profits. To strike a balance between these competing demands on reserves, it is proposed that the listed companies distributing 40% of their after tax profits or 50% of their paid up capital, whichever is less, would not attract 10% tax on excess reserves. This would be fair and safeguard the interests of both the companies as well as the small shareholders;

(8) To encourage listing of new companies, investment in new shares will be tax deductible up to 10% of personal income with a maximum of Rs.100,000. This concession will also be available to buyers of shares offered to the general public of the companies being privatized by the Privatization Commission.

Incentives to insurance companies:

(9) Insurance companies play an important role in the development of capital markets. There is a need to strengthen this role of the insurance companies. It is proposed that income of insurance companies from dividends will be taxed at the same rate as applicable to other taxpayers.

Incentives for leasing companies:

(10) Leasing companies are providing useful financial services in the economy. Their growth in recent years has been hampered by some anomalous tax treat, which depends critically on the depreciation allowances. A long-standing demand of the industry has been the provision of first year allowance, which is available to all other companies, which own capital goods. To encourage leasing activity in the country, it has been decided that first year allowance will be available to them to be effective from assessment year 2001-02.

Incentives for the housing sector:

(11) As I mentioned earlier, government plans to encourage construction industry in the country with a view to generating employment opportunities. It has been decided to allow tax deductibility on mark-up paid on housing loans up to 25% of income with a maximum of Rs.50,000. This is a major initiative that should trigger significant resurgence in housing finance market.

Concessions for pension funds and annuities:

(12) In order to promote growth of pension funds, SECP is developing necessary regulatory framework. To compliment these efforts, it is proposed to allow a rebate on investment in an approved pension fund. In addition, as I said earlier, government is taking appropriate steps to develop a framework for the development of private pension funds, where even the self-employed persons can subscribe to a pension scheme. Government is committed to facilitate this process by providing whatever support would be required to make it a success.

(13) For the benefit of self employed persons or any other persons pension contributions to approved annuities of insurance companies up to 5% of income subject to a maximum of 50,000 will be given tax rebate. Retirement products being introduced by non-bank financial institutions under the approved framework of SECP will also qualify for this incentive.

Concessions to IT industry:

(14) I have already underlined the importance of IT industry for country's economy and its future. To encourage investment in and development of the IT industry, it is proposed to increase the present low rate of depreciation of computer equipment from 10% to 30%.

Concessions to SME sector:

(15)  A major irritant that impedes the growth of SME Sector is the application of minimum income tax of 0.5% on individuals. Through an appropriate amendment in law, the said irritant is being removed;

(16) To facilitate revival of sick units the government has established corporate and industrial rehabilitation corporation. To facilitate the success of CIRC's work it is being exempted from minimum tax;

Concessions to Overseas Pakistanis:

(17)  In recognition of the importance of their remittances to the economy of Pakistan, bonafide remittances made through the normal banking channel by Overseas Pakistanis will not be subjected to any kind of taxes. This will enable the Overseas Pakistanis to remit money freely for consumption, investment or any purpose to their families in Pakistan without harassment of tax authorities. An Ordinance is being issued to provide necessary protection in this regard.

(18) The salary income of Pakistani seafarers working on foreign vessels remitted to Pakistan through normal banking channels is being exempted from levy of income tax;

Concessions on depreciation for purchase of cars:

(19) At present the maximum limit on value for depreciation allowance on motor cars is Rs.600,000 which was fixed in 1991. Keeping in view the increase in prices of cars it has been decided to enhance the limit to Rs.750,000.

Eliminating exemptions:

(20) A number of tax exemptions have been eliminated including income from FEBCs, TFCs, income from national savings schemes on investments in excess of Rs.300,000 and income from a number of special purpose relief funds;

Central Excise

12. As part of its commitment to reduce multiplicity of taxes, government has already minimized the role of central excise in country's tax system. This process will be furthered during the current budget. Significant changes are being made in the sphere of central excise duty, which are:

(1) CED is being eliminated from 11 items, which include such items as enameled copper wire, filter rods, carbon black etc. For other items, there are legal as well as revenue considerations that make it difficult at this stage to remove the excise duty;

(2) Even within the truncated CED regime, substantial simplification will be introduced. The two major irritants of the excise system are the labyrinth record keeping and the cumbersome process of supervised clearance under the physical presence of excise officials. Appropriate amendments in the Central Excise Act are proposed to prescribe simplified record keeping, replacing the outmoded requirements. The system of supervised clearance is being replaced with self-clearance and no excise official will be posted in the units subject to excise duty. As a safeguard against abuse of this facility, units taking advantage of this self-clearance facility from now on will have to declare 10% in increase in revenues compared to previous year and will be subject to audit, along the lines of sales tax audit.

(3) In cases, where excise duty, on local production, is levied on retail price basis, excise duty on similar imported items will be levied on the maximum retail price at which they are sold in Pakistan. This will equate the incidence of duty and thus provide fair competition between local and imported goods.

(4) Duty structure on cigarettes is being rationalized in a manner that would provide for a more graduated scale for the levy of central excise duty. This would have the effect of bringing about some increase in prices of cigarettes in medium category and result in higher revenues.

Customs

13. Though not a leading tax, for a variety of reasons, Customs will remain an important element of country's tax regime. The overriding objective of tariff reforms undertaken during the last decade has been to create a competitive trade regime that reduces the undue protection to the local industry and removes the anti-export bias of imports.

14. The focus of proposals in Customs tariff is to effect a quantum jump in the process of reform initiated in early 90s. The level at which these reforms are introduced is unprecedented in the previous history of tariff reforms. Two key drivers of these reforms are the reduction in the maximum rate of duty from 35% to 30% and reduction in the number of slabs from 5 to 4. Consequently, duties on 4000 items of custom manual will be reduced, which would stimulate economic activity.

15. Another important objective of tariff reforms is to reduce the cost of imported raw materials to improve the competitive edge of our industry and provide cheap inputs to agriculture. Furthermore, duty adjustments have also been done to encourage growth of value added industries.

16. Government expect these reforms will go a long way in accelerating the growth of both agriculture and manufacturing sectors.

Reduction in maximum tariff rate:

(1) As I had announced in the last budget, the maximum rate of customs duty is being reduced from 35% to 30%. This is in line with the process of tariff rationalization and reducing the anti-export bias of our imports;

(2) To simplify the customs tariff regime, the present number of 5 duty labs is further reduced to 4. The new slabs will be 30%, 20%, 10% and 5%. This simplification will significantly improve valuation, clearance and general administration of customs tariff. In addition, it will promote a more equitable customs regime by removing exemptions. While doing so, we have ensure that existing commitments relating to zero rating of imports remain intact, together will certain important categories of goods such as computers, IT related equipment, fertilizer, books, pulses, seeds, oil and gas exploration equipment which are at present exempt will continue to be exempt from the levy of Customs duty;

Curtailing use of S.R.O.s:

 3) To promote transparency in Customs tariff regime, use of S.R.O. will be substantially curtailed. Immediately, the numbers of SROs is reduced from 120 to 60.  (Actual numbers needed). In exceptional cases where the use of S.R.O. is inevitable, procedural requirements have been simplified. For those industrial units that pay sales tax and keep documentary records of import and input/output of goods, the requirement of obtaining consumption certificates or installation certificates has been done away with;

 Concessions to steel, construction, engineering industries:

 (4) As I have already stated, government plans to give significant boost to construction industry. For this purpose, it is proposed to give relief to major inputs used in the construction industry. Since iron and steel bars and sheets are important ingredients of construction works, duty on iron and steel scrap is being reduced from --% to 10%.

(5) Furthermore, duty on construction machinery such as crane lorreys and concrete mixers is being reduced from 90% to 30% and on graders and levelers from 25% to 10%.

(6) Iron and steel sheets presently attract duty of 25%. To promote engineering industry, where they are used as basic raw material, it is proposed to reduce this rate to 10%;

Concessions to ship-breaking industry

(7) Ship-breaking industry in Pakistan was once a vibrant and most prominent activity. However, over the years, because of distortions in tariff regime the activity became dormant. With a view to giving a new lease of life to this industry, duty on scrap from ship-breaking industry is being reduced from 15% + Rs.1000 per LDT to 10% only. Large employment opportunities will be generated by the revival of this industry.

Concessions for surgical instruments and light engineering:

(8) Surgical instruments and light engineering items are emerging as a valuable source of exports. To promote this industry, it is proposed to reduce the rate of duty on stainless steel, a major input in these industries, reduced from 25% to 10%;

(9) Certain specialized plastics such as SAN, ABS, polystyrene, polycarbonate, are also essential inputs in precision engineering industry, where SMEs are most operative. It has been proposed to reduce the duty on these goods from 25% to 10%;

Concessions to textile industry:

(10) Given its centrality in country's exports potential, it is essential to give concessions to the textile industry. Accordingly, it has been proposed that duty on synthetic yarns that are not being manufactured locally, such as viscose yarn, be reduced from 15% to 10%. Also, duty on woolen yarn and nylon yarn is being reduced from 35% to 10% and 20%, respectively;

(11) Value added textiles need encouragement. Accordingly, it is proposed to reduce the duty on certain expensive chemicals such as sodium alginate from 25% to 10% and dyes, from 25% to 20%;

Concessions to soap industry:

(12) In order to improve the competitiveness of the local soap industry vis-à-vis imports, it is proposed to reduce duty on some of the key inputs of the soap industry such as tallow and palm fatty acid distillates. Duty on tallow is being reduced from 15% to 10% while on the distillates it is reduced from 35% to 20%;

Concessions to transport industry

(13) In recent years there has been a marked reduction in the demand for trucks, partly due to rising prices, which render them uneconomical. In order to encourage development of country's stock of trucks, it has been decided to reduce duty on CKD kits for manufacture of trucks from 30% to 20%. This will have a positive impact on employment as road transport is a labor intensive activity.

Concessions to tyres and tube industry:

(14) Tyres and tube industry has been facing stiff and unfair competition against cheaper imports and smuggling. In order to create level playing field, it is proposed to reduce duty on raw materials such as synthetic rubber, tyre cord fabrics and bead wire to from 10% to 5%. Furthermore, it is also proposed to reduce the duty on tyres of buses and trucks from 15% to 10%. This will discourage smuggling;

Concessions to agriculture sector:

(15) I have already underlined the significance of agriculture in country's economy. To supplement the policy initiatives aimed at accelerating growth in this sector certain relief measures are proposed. Pesticides are an essential requirement for agriculture. With a view to reducing farmers' cost of inputs, duty on active ingredients of pesticides as well as the formulated pesticides is being reduced from 10%-25% to 5%. This would help reduce input costs to farmers;

(16) Similarly, duty on inputs of fertilizer industry such as sulphur and zinc dust are also being reduced from 10-35% to 5%;

(17) A major irritant impeding healthy growth of poultry industry is the duty on soybeans meal, which is an important element of chicken feed. At present, duty at the rate of 35% is chargeable to such imports, which makes the cost of feed quite high. It is proposed to reduce the duty to 10%. This measure will have a salutary effect on the poultry industry;

Concessions to SME:

 (18) On the recommendation of SMEDA, duty rates have been reduced on a number of raw materials used by SME sector such a cutlery, soap, handles for knives, stitching and processing, horticulture industry, certain specialized plastics, etc. This will have a positive impact on the job creation capacity of the SME sector;

 Concessions to cement industry:

(19) The local cement industry is facing high upfront cost for fuels whereas this cost can be reduced by use of coal, which available in large quantities in many places in the country. With a view to facilitating the conversion process to coal, it is proposed to reduce the duty on imported plant and equipment for coal firing units from 15-25% to 5%. The lower cost of production of cement will have positive impact on construction industry, which in turn would lead to increased capacity utilization in the cement industry.

Concessions to chemicals industry:

(20) Duties on sodium format and orthoxylene, which are raw materials for formic acid and phthalic anhydride, are being reduced from 10% to 5%.

Concession to newspaper industry:

(21) To encourage wider readership of newspapers, it is necessary to offset the rising cost of newspaper printing. For this purpose, it is proposed to reduce the duty on several inputs such as photographic plates, plate processors, film processors, image setters, printing downframe from 25-35% to 10%.

 Concessions on electro-medical and laboratory equipment

(22) Duty on eletro-medical equipment like ECG, Ultra-sound, Opthelmic instruments is being reduced from 10% to 5% and on CT Scan from 15% to 10%;

(23) Duty on laboratory equipment such as gas or smoke analysis apparatus, instruments for measuring radition etc. is being reduced from 15% to 10%;

Reduction in duties on smuggling prone and other items:

(24) Duties on items like spectacles frames, sewing needles, hand tools and sodium alginate are being reduced to from --% to 10% to discourage smuggling;

(25) Duty on some of the equipment and raw material for the film industry is being reduced;

(26) Similarly, desalination plants for purification of sea water will be chargeable to duty at the rate of 5%.

Abolition of regulatory duties

(27) On several items, calcium carbide, urea fertilizer, steel bars, formic acid, urea formaldehyde moulding compound, BOPP film, medium intensity fibre board, craft paper sacks and jute bags there was a regulatory duty of 10-20% in addition to the maximum rate of duty, the regulatory duty is being abolished.

Stabilzing sugar prices

(28) In recent weeks, international prices of sugar have begun to rise sharply. In order to protect local consumers from any undue increases in price of sugar, it has been decided to further reduce the duty on refined sugar from 15% to 10%.

Compensatory measures

(29) With a view to partially offsetting the revenue losses resulting from major duty concessions aimed at reviving the industrial activity, government has decided to make certain adjustments in duties of such items where there is room for upward adjustment without causing any hardship to users. These items include cosmetics, soaps, tea from 25% to 30%.

Encouraging local industry

(30) To encourage local production of certain electric goods, it is proposed to increase duty on some of the consumer durable goods such as microwave oven, electric cattle, radio, grinders and mixers etc. from 25% to 30%. However, their parts in general will attract duty at lower rate of 5% so as to encourage local assembly.

(31) To encourage local production of domestic appliances such as VCR, DVD, VCP, LDP etc. duty on import of such items is increased from 10% to 20% various their components for local assembly will be available at 5%. Similar incentives given to TV industry last year have resulted in major increase in local production of TVs from 350,000 to 550,000. It is expected that a similar performance will be rendered by these industries as well.

(32) The duty rate on master batches i.e. pigments, dyes, additives, fillers and raisons, is proposed to be reduced from 25% to 10% to enable them to compete them against cheaper imports.

Anomalies Committee

(33) Large scale restructuring of  tariff regime as envisage in the budget can give rise to some tariff anomalies, which happens even with minimal changes in tariff. However, the process of removing anomalies takes drags for months and years. In order to facilitate those who may be affected because of such anomalies, it has been decided to constitute a high powered committee headed by Secretary General Finance and comprising Secretaries of Commerce, Revenue and Industries to review the complaints in this regard and dispose them by the end of July.

17. Overseas Pakistanis deserve better treatment in view of their role in the development of the country. It is proposed to also allow one video camera, mobile phone and a cassette player/CD player duty free in allowances. Furthermore, it is being clarified that the baggage allowances and transfer of residence allowances will be available simultaneously. Special duty free allowance of $450 is raised to $700 and $1200 will be allowed to those Pakistanis who have remitted $2500 and $10,000 respectively or more in the preceding one year through normal banking channels. For passengers coming from India, the earlier limit was $25, which is now raised to $100;

18. In order to facilitate exporters, export procedures and systems are being re-engineered with assistance of experts with world wise experience. Work has been completed on several projects to strengthen environment of tax-free exports. Hitherto, the high reliance on duty drawback regime has severely restricted our exports. Moreover, there were complaints of delay and corruption in payment of duty drawbacks. On one hand upfront cost to exporters was high while, on the other, there were instances of declaring exaggerated values in order to claim greater rebates. In order to reduce reliance on duty drawbacks, a simpler procedure known as "Duty and Tax Remission on Exports" has been implemented.

19. At the same time, exporters who want to avail duty drawback will be allowed to do so. In order to determine the duty drawbacks more accurately with assistance of sector specialists and in a transparent manner, a new organization known as Input-output Coefficient Organization has been set up. Henceforth all duty drawback rates will be determined by this organization. The system has been designed in a way that there is no harassment and rebate rates are determined in consultation with the trade. After extensive studies, new drawback rates have been determined and will be implemented in four quarterly phases. The revised notification being issued with this budget envisages reduction in quarterly installments. However, it should be noted that since duties are being reduced across the board, the need for duty drawback will decline significantly.

Sales Tax

20. Sales tax is the tax of the future. In fact, the form in which it is being implemented in Pakistan, i.e. as a value added tax, is essentially like an income tax. It is capable of catering both for economic efficiency as well as social equity.

Sales tax regime:

21. Our government has undertaken a large number to steps to introduce a truly general and value-added based GST regime. Last year, the coverage of sales tax was completed after its extension to the retail level. The Survey exercise has brought nearly 40% increase in the registered sales tax payers. While there may still be many prospective taxpayers yet to be registered, the growth already achieved is highly encouraging. In addition, all those taxpayers previously under certain ad-hoc arrangements like the fixed tax regime, were also brought under the invoice-based sales tax system. This is indeed a major break-through in moving toward a fully effective GST system.

22. While improving the system, at every stage we have been conscious of the difficulties being faced by the taxpayers and every attempt was made to address them in the spirit of mutual cooperation and trust. Now that we have achieved a high degree of purity, it is time to resolve some outstanding issues. A large number of converts from fixed tax-regime and new taxpayers are faced with several difficulties for the previous years on account of a fragmented and piecemeal expansion of the sales tax system. The fixed tax regimes created serious complications as these regimes used to lapse and later, under public pressure, reemerge with gaps in-between.

Removing difficulties of taxpayers:

23. A major exercise for resolving genuine difficulties of such taxpayers was undertaken and four schemes for amelioration of genuine difficulties of taxpayers are proposed for announcement. These schemes would cover:-

(1) Taxpayers who were barred from availing, with retrospective effect, simplified tax scheme because of their volume of turnover;

(2) Those who acted under various fixed tax schemes and continued to do so for several months after the demise of the fixed tax era in June 1999 in the hope that fixed tax scheme will revive as used to happen in previous years;

(3) Those textile weaving units and others in allied activities who adhered to government's informal fixed tax arrangements ever though formal rules and orders were not issued for various reasons;

(4) Such erstwhile non-compliers in specified sectors who have eventually stared compliance on account of Survey & Registration drive combined with the levy of GST on utilities.

24. Under the scheme, taxpayers will be able to obtain relief from the concerned collector and the pending claims for revenue whether formally adjudged or otherwise would be abated. The concerned associations are being given a role in assisting the department in resolution of these difficulties.

25. I must clarify that this major concession to the taxpayers is not an amnesty scheme. In each case it has to be established that the due tax has been paid. The scope of these schemes is limited to those taxpayers who have made an honest effort over the years to abide by the tax regime even though the quality of their compliance was not as per the prevailing rules but was in adherence to a tax regime that was no more available. The tax evaders who changed their identities and started business under new titles by obtaining fresh registration or those otherwise guilty of tax fraud are not covered under the scheme.

26. I also take this opportunity to inform the bonafide taxpayers that if there are any other segments where relief is warranted on account of undue hardship created by an evolving tax regime the government would be receptive to suggestions for facilitation. I look forward to the support of representatives of trade & industry to support these initiatives and come forward to draw government's attention toward any other areas where relief is warranted.

Reforms in refunds and audit:

27. Two other areas where taxpayers have been complaining vociferously are those relating to conduct of audit and the delays in refunds. Both these problems have been the focus of our attention in formulating the tax proposals for the budget.

28. In the area of audit, I take pleasure in announcing that sector-wise parameters of audit would be prescribed in the most precise and clear terms. I appreciate the efforts of FPCCI in this behalf as they have started work for proposing sector-wise parameters of audit and would submit their recommendations for government's consideration by June 30, 2001. During July, CBR's designated officials would interact with the representatives of the FPCCI for finalizing these parameters. These will be formally notified in August 2001. The application of parameters in various segments of trade & industry will be effective both for departmental auditors as well as external auditors. With the resolution of scope of audit, a long outstanding demand of the taxpayers will be met, which will also lead to significant improvement in the operational efficiency of the GST regime.

29. Simultaneously, departmental guidelines are reiterated for strict compliance that no taxpayer should be audited more than once in any year.

30.  Regarding prompt payment of refunds, firm instructions are being reiterated to the tax officials not to delay issue of refund checks on flimsy grounds. The CBR is being tasked to improve its system of categorization of claimants into gold category and others through regular interaction with the concerned associations. Normally, the recommendations of concerned association about the general integrity, honest account keeping and liquidity of particular members would be accepted without questions and refunds would be sanctioned against an undertaking by the recipient to pay up if any deficiency was noted in the post sanction scrutiny of documents.

31. As back-up measures for facilitation of taxpayers, where warranted by genuine reasons in exceptional circumstances, the CBR will issue post-dated refund checks, which will be discounted by the commercial banks on the basis of mutual agreement with their individual clients.

32. In order to bring about transparency in payment of refund claims on the basis of first come first served basis, category-wise details of all pending claims in the sales tax regime would be placed on the web-site of the CBR in about six weeks.

Facilitation of taxpayers:

33. The other facilitating measures in the sphere of sales tax are:

(a) The disparity in treatment in cases of financial lease and leases operated by manufacturers is being removed to provide level playing field;

(b) Necessary legal changes are being made to allow input for sales on credit provided payment is made through banking channels within 120 days;

(c) Legal changes have been made to permit ab-anitio cancellation of compulsory registration where such registration was erroneous;

(d) It is being clarified in law that the time limit of one year for claiming refund under Section-66 of Sales Tax Act, 1990 will exclude the time taken in adjudication or court proceedings;

(e) Sections-34 and 55 of the Sales Tax Act are being amended to enable the government to respond more rapidly for resolution of genuine difficulties;

(f) Certain confusions regarding levy of sales tax on certain types of milk for babies, eggs for hatching and desi-butter are being removed. It is being clarified through necessary amendment that no sales tax is leviable on these items. I may reiterate that food stuffs, like milk, pulses, meat, fruits and vegetables, books and medicines are not subject to sales tax.

Tax reforms and measures:

34. Existing legal provision for payment through check for purchases above Rs.50,000 are obligatory for seeking input credit. It is now being provided that registered sellers will be required to obtain payment through banking channels for all sales to registered persons above Rs.50,000. Otherwise, input credit would become inadmissible.

35. The importers of mobile phones have long been complaining against rampant smuggling on account of tariff structure. Since the import of such mobile phones would increase significantly on account of large-scale expansion in this sector, a paradigm shift is being made. It has been decided to waive withholding income tax on mobile phones and to postpone levy of sales tax as is the case with customs duty already. It is prposed that Rs.2000 should be collected at the time of activation by the service providers as customs duty and sales tax. The service providers will pass it on to the government under a simple procedure. This measure will provide level playing field to bonafide importers.

36. It may be recalled that through an amendment in the provisions of Sales Tax Act in February 2000, it has been provided that the government can prohibit the sale fo specified goods to unregistered or un-enrolled persons. The items notified hitherto include polypropylene granules and scraps of iron and steel. So far as plastics and yarns are concerned, thre been a strong demand form the manufacturing sectors that recourse to the measures should not be taken. It has been demanded by a broad cross-section of trade & industry that instead of such physical measure, some fiscal and economic measures should be adopted to induce compliance with the tax system.

37. In acceptance of this broad based demand from all concerned, it has been proposed to increase the rate of sales on 200 industrial raw materials to 20%. This measure will have no adverse implications on prices of finished items as the general tax rate would continue to remain 15%. As a result, the industrial taxpayer will obtain full credit for the higher sales tax pain on raw materials and the prices of the finished items would remain unchanged. This measure would affect the specified raw materials both at import stage as well as at the stage of domestic production and sales. The government expects that this measure will provide a major boost to voluntary compliance and will greatly improve documentation of economy.

38. It is added that in due course other raw materials will be added to the category attracting 20% sales tax. The choice of items will be dictated by the extent of non-compliance in the value added sector.

39. Soyabean oil and palm oil, which are the main ingredients for cooking oils/vegetable ghee, are already subject to sales tax at import stage. In order to ward off the possibility of import of possibly inappropriate substitutes, sales tax will be leviable on all imported edible oils.

40. During the previous budget, the rate of Future Tax on goods purchases by those who should be registered for sales tax but are actually no registered was reduced from 3% to 1.5% only. By doing so a revenue loss of Rs.3 billion was taken by the government. While the expansion of number of registered taxpayers has been significant as mentioned earlier, the level of compliance by the trader community has been lukewarm. It is, therefore, proposed to raise therate of Further Tax from its present level of 1.5% to 3%, which will be applicable up to June 2000 (?). It is expected that retail traders in particular would get registered or enrolled as the case may be so that they do not have to pay any Further Tax on their purchases from the organized sector.

Retail Traders:

41. It would be recalled that a major concession was allowed to retailers in the last budget where under they were permitted to pay enlistment tax @1% of their taxable turnover. As per the provisions of Finance Act 2000, the enlistment tax facility will expire on 30-6-2001. Sadly, not many retailers took advantage of this facility despite the best efforts of the government.

42. With effect from 1 July 2001, the retail traders would need to get enrolled under the 2% enrollment scheme if their annual turnover is between Rs.1 and 5 million. For those with turnover exceeding Rs.5 million, registration for GST will be mandatory.

43. Being mindful of the difficulties which this transition may create for retail traders, it has been decided to offer the following special facilities to the retailers:

(1) Retailers with annual turnover between Rs.5-10 million, though they will be required to register, their record keeping will be simplified in accordance with the records maintained by the enrollment category retailers;

(2) A notification is being issued to the effect that no retailers will be imposed any penalty under the sales tax law for any reason for transactions up to 30-6-2002. This facility will also be applicable to those retailers who were registered, enrolled or enlisted after 1 July 2000;

(3) The audit parameters to be evolved for retailers would ensure minimal and simplified scrutiny with inclusion of a representative of traders;

(4) The sales of such registered/enrolled retailers will be accepted by the income tax department, provided that the same are in accordance with the determination during the tax survey and are not less than the turnover previously accepted or determined by the income tax department. Where turnover is enhanced during the process of audit, the same will apply for income tax. It is clarified that declared turnover of such registered and enrolled retailers will not be used by income tax authorities to re-open previous assessments;

(5) Explicit instruction are being issued that with effect from the date of registration, enrollment or enlistment of any retailer, the income shall not be determined under GP rate system; and,

(6) From among those who register or enroll as retailers in the coming financial year, the number of taxpayers selected for audit by the income tax department will be up to 5%, though the government will strive to achieve the level of up to 20% audit in the case of all other taxpayers.

44. With these major concessions, the government expects that our patriotic retailers would reciprocate and comply with the legal requirements. It is added that the government will ensure at higher level that instances of hardship among the retailers because of this transition will be considered with compassion for early redress.

45. It is added that in recognition of jewelers being a distinct and peculiar category of traders, a simplified scheme is being prescribed based on levy of sales tax @15% on the prices of jewelry excluding the value of gold and sliver used therein.

46. As you can see the above tax proposals have been formulating keeping in view the objectives of economic revival, reduction in tax burden on all sectors of economy, encouragement for investments and exports and the urgency for creating new jobs in the economy, particularly in trade and industry. By drastically reducing the cost of industrial raw material, specific steps to encourage value added industry, relief to taxpayers, keeping affordability, providing a simplified customs tariff regime and lower cost to agriculture are some of the benefits that would accrue from these proposals.

47. No new taxes have been levied on common people, which would have negative on their welfare. Rather, measures have been adopted to improve tax compliance through economic incentives, encouraging greater documentation, simplification of procedures and policies and creation of a friendly tax culture.

Closing Remarks

48.  The budget 2001-02 is yet another milestone in our efforts to build a strong Pakistan. In formulating this budget, we were faced with difficult questions of resource mobilization and imperatives of economic revival. We have finally succeeded in striking a balance between these two competing ends. 

49. Such difficulties will remain there for few more years, as we pass through a period of transition. Our goal is to overcome the doubts created about the economic viability of Pakistan. I cannot do a better job in describing the potential of Pakistan than to quote the closing remarks of the Chief Executive when appeared in the Face the Nation program on 16 June 2001:

Pakistan has everything. . land, water, ..What is needed is sincerity, dedication and honesty. If we develop these personal traits, then we will have the consonance and computability between our military and economic potential. I see Pakistan making progress in this direction in the next five year.

50.     The Chief Executive was only echoing the closing remarks of the Quid made on the occasion that I had quoted at the beginning, when he said:

I have no doubt in my mind about the bright future that awaits Pakistan when its vast resources of men and material are fully mobilized. The road that we may have to travel may be somewhat uphill at present but with courage and determination we mean to achieve our objective, which is to build up and construct a strong and prosperous Pakistan.

Ladies and Gentlemen,

51.     Let us resolve that we will work jointly to realize the dream of the Quaid in making Pakistan an economically strong country.

Pakistan Paindabad