Economics Chapter 14 Public Finance in Pakistan Class 12 FA fsc notes. 2nd economic notes for kpk.
Q.1) Write a note on the sources of revenue and heads of expenditure of Federal Government.
Sources of revenue of the federal government
The federal government of Pakistan divides the sources of its income into the following parts:
a. Tax Revenue
Direct Taxes (on income & wealth)
Indirect Taxes (on commodities)
b. Non-Tax Revenue
Income from property, enterprises & administration
Misc. receipts (surcharge and royalty on oil, gas)
c. Capital Receipts
Recoveries of loans
And increase in public debt
d. External Resources
e. Borrowing from Banking Sector
In the federal budgets of past years, the average share of income from taxes has been 75 % while that of non-tax sources was 25 %. Out of tax revenue, direct taxes contribute about 40% while the share of indirect taxes’ is 60%. All major taxes are collected by the central government but a part is transferred to the provinces under the provisions of the constitution. This is called provincial share in taxes. Over the past few years, the share of direct taxes increased but again it has fallen. According to economists greater collection from direct taxes is a good sign for an economy.
Read more: Economics Chapter 13 Banking in Pakistan
TAXES (BUDGET 2011-12)
A. DIRECT TAXES
1. Income Tax:
Income tax is levied on the incomes of the individuals while corporation tax is imposed on the incomes of joint-stock (limited) companies. If a person earns income above Rs.350, 000/- per annum, he has to pay income tax. This is a progressive tax i.e. the rate is lower on smaller incomes and higher on larger incomes.
During the past few years, the importance of income tax has increased. Now it is the most important source of federal revenue. The government will receive 36 % of its tax income from this source. (743 billion)
2. Other direct Taxes:
The Govt, gets less than 2 % of its income from some small direct taxes which include Workers Participation Fund and Capital Value Tax.
B. INDIRECT TAXES
3. General Sales Tax (GST):
In Budget 2011-2012 it is the largest tax of both direct and indirect taxes. Its general rate is 16 %. Sales tax is paid by the importers on imported commodities and by wholesale dealers on sale of goods produced in Pakistan. The government will receive from this source. 41 % of its tax income. (Rs.836 billion)
These include import and export duties. Import duty is charged on almost all kinds of commodities imported. Its rate is higher for non-essential goods and lower for commodities essential for development e.g., raw materials, machinery. Some commodities, are exempted e.g., fertilizers, pulses. Export duties are charged on very few items only.
Customs duties are the third most important source of tax revenue which bring around 11% of tax collection of federal government. Custom duty is an indirect tax. The govt. will .receive Rs.206 billion from this source.
5. Federal Excise Duty:
This has the fourth largest position in revenue collection of the federal government. Excise duties are levied on goods produced in the country e.g., sugar, cement, cloth, cigarettes, coolers etc. The government will receive 9% (Rs .165 billion) of tax revenue from this source. In order to encourage local industry the Govt, has reduced reliance on this tax, so its importance in federal revenue has fallen. Excise duties are an indirect tax. The government collects the duty from producers who raise the price of the product and realize the amount of tax from buyers.
The central government provides various kinds of services to the people and takes part in economic activities. From such activities it earns income. Major sources are the following.
The central government has given loans to provincial governments, autonomous bodies etc. it gets interest on these loans. This is the most important nontax revenue. Receipts from this source will be Rs 58 billion. (8% of non-tax income)
2. Dividend, Property Income and Trading Profits:
The central government takes part in trade through its organizations such as Trading Corporation of Pakistan (TCP), Rice Export Corporation of Pakistan (RECP), Pakistan Telecom Authority etc. The government gets good amount of revenue from this source. Rs. 137 billion will be collected through this source. (20%).
3. Civil Administration, defense, Social Services:
Civil administration brings some revenue in the form of license fees, fines; selling old stock of vehicles etc. It is expected to bring more than about 50 % of non-tax income. The government expects to receive Rs.321 billion.
These include economic services and some other items. Total amount expected is 16 billion (3%).5. Royalty and development charges on Petroleum and Gas This source will bring Rs. 124 billion (19% of non-tax revenue)CAPITAL RECEIPTS (net)
Rs. 300 billion will be collected through recovery of old loans and issue of new loans.
Heads of expenditure of federal government
(According to Budget Estimate 2011-2012)
The Federal government has to make two kinds of expenditures.
· Current Expenditure 84 %
· Development expenditure 16 %
The main heads of current expenditure are the following.
1. General Public Services, Debt servicing:
The Govt, has combined this budget with debt servicing. This is 70 % of current expenditure (Rs.1660 billion) on civil administration. This includes:
2. Debt servicing:
During past two decades Pakistan has accumulated foreign and local debt. Debt servicing consumed major part of resources. About 44 % of current expenditure will be used for repayment of loans and interest.
3. Defense Services:
This had been the most important spending department of federal government. But now it is second to debt services. 21% of current expenditure is to be made on defense (Rs.495 billion).
4. Law and Order, Public Safety:
For civil administration, the government maintains many departments such as police, judiciary, education, industry and foreign affairs departments. It maintains rangers on borders and guards at sea coasts. The government will spend about 3 % (Rs.60 b) of its current expenditure.
In order to provide some commodities to the people at cheaper rates, the government gives subsidies. For example, the government imported fertilizer and wheat at higher prices but sells at lower prices. The government has allocated Rs. 50 for subsidies i.e 2 % of current expenditure.
6. Economic services:
The Govt, provides many services relating to energy, agriculture, food, labour, construction, transport communication, other industries. Rs. 50 billion will be spent for these services.
7. Social Services:
Community Services and Environment, education, health Housing, social protection Social services include manpower planning, sports, social welfare, health and education. Community services include public health, TV, town planning, museums and scientific research. The Govt, spends about 2 % of budget for such services. (Rs.50 billion). The Govt, is also spending for Poverty alleviation program.
8. Grants to Provinces:
Federal government provides grants to provinces for emergencies, floods and rehabilitation of war affected people- Baluchistan, FATA and Azad Kashmir. Amount allocated for grants is 4 % of the budget.
9. Other Expenses:
The Govt, spends about 2% on numerous small items.
Q.2) What major sources of Revenue and Head of Expenditure of Provincial Governments.
(Punjab and Other Provinces)
Sources of revenue
The governments of the Punjab and other provinces prepare their annual budgets on the pattern of federal budgets, showing estimates of income and expenditure during the year. The sources of income of a provincial gov ernment are of five kinds.
a) Share of taxes from the Federal Government.
b) Royalty on gas. Petroleum and electricity from federal government.
c) Provincial Taxes.
d) Non-Tax receipts.
e) Grants from center.
A. Share of Taxes from the Centre
According to the constitution of Pakistan the provinces get a part of the divisible pool of taxes collected by the central government. Distribution of this amount is done on the basis of population and extent of poverty in each province. (More than 80%of the income of provinces in 2010-11 will come from this source).
The provinces also get royalty for the use of their natural resources such as natural gas and hydel power. It is paid by the federal government, which collects surcharges on gas, electricity and crude oil so the province, of NWFP and Baluchistan will get large sums from this source.
C. Provincial Taxes
The provinces collect 11 types of taxes. Under NFC Award 2010 the number of taxes collected by provinces will increase.
1. Agriculture Income Tax:
This is levied on the landowners and farmers. This has replaced land revenue. It makes 4% of the provincial income in Punjab. “Usher” is also collected by provincial Govts.
2. Water Rate:
In Punjab and Sind, there is network of canals. The provincial government collects water rate for the irrigation facilities, provided to farmers.
3. Motor Vehicles Tax:
The Punjab government gets about 4% of the total income from registration of vehicles, driving licenses and fines etc.
4. Provincial Excise:
Provincial government levies duties on items such as opium, wine etc. This source contributes 2% of total receipts.
5. Stamp Duty:
The provincial government charges stamp duty on various cases filed in courts. 4% of income comes from this source.
Registration of various documents such as transfer of property is done by provincial governments. The fee charged brings about 10% of total provincial income.
7. Property Tax:
i.e. house tax on urban property.
There are some minor sources of provincial finance such as tax on use of electricity, hotels, clinics, arms licenses etc.
9. Entertainment Tax.
10. Tax on professions, trades
11. Infrastructure development Fee
D. Non-tax Receipts
The sources of non-tax receipts are the following:
1. Civil Administration:
A small amount of money is collected from civil administration in the form of fee and fines.
2. Social Services:
Although the government has to spend huge amounts for providing social services to the people, yet these services are a source of small income too e.g. fees in educational institutions, hospitals etc.
3. Economic Services:
The Provincial government collects a substantial amount of money from forests, fisheries, livestock, quarries, printing press etc.
4. Interest on Loans:
Provincial governments have advanced loans to local bodies, autonomous bodies and farmers. Interest is charged on most of these loans.
E. Grants from the Federal Government
Sometimes special grants from the federal government are received for:
1. Emergencies and calamities like floods, war, earthquake etc.
2. Strategic roads and for activities carried out under instructions of the federal government.
3. To accelerate development efforts in less developed areas.
Heads of expenditure
The provincial government or the government of the Punjab have the following items of expenditure:
1. Civil Administration Provincial government maintains police, courts
and other civil administration departments. About 20% of the total budget is spent for this purpose.
2. Payment of Interest:
The provincial government has taken various kinds of loans from Federal Government, other institutions and general public. It pays interest on these loans which forms 10% of total provincial expenditure.
3. Social Services:
This is the most important head of expenditure of provincial governments. It claims about 35% of total revenue of the budget. Social services include education, health services etc.
4. Economic Services:
The provincial government also provides a number of economic services to the people in the form of irrigation, agricultural services, civil works etc. About 30% of the annual revenue is allocated for this purpose.
There are many small items where the government has to spend e.g. provincial assembly, civil defense, parks, sports etc.
Q.3) What is the difference between Revenue Budget and Capital Budget?
The budget is a statement showing estimates of the income and expenditure position of a government in a particular financial year. The income section includes details of expected revenue from various sources. Expenditure (or payments) section shows the proposed expenses on various heads.
The budget is in fact an explanation of the activities, which the government intends to do during a certain period and the sources for collecting funds for these activities. A glance at the national budget figures of a country clearly indicates the direction of policies of the government in power for the particular year. The budget is said to be the mirror of economic health, position and potential of a country.
Surplus or Deficit Budget. If the estimated income during the year exceeds the proposed expenditure, the budget is called a Surplus Budget. In the opposite case, when income is expected to fall short of the expenditure, it is Deficit Budget. If the two parts i.e. receipts and payments are equal, the budget is called Balanced Budget.
Revenue Budget Receipts:
It contains the details of revenue from tax and non-tax sources of the federal government. Taxes include income tax, customs duties, central excise, sales tax and surcharges on natural gas and petroleum. Non-tax receipts include income from property and enterprises and civil administration.
Capital budget Receipts:
It contains the estimated income of capital nature i.e. receipt of interest on loans.
Q.4) What are the drawbacks of tax system in Pakistan? Suggest measures to remove them.
Shortcomings of tax system
1. Narrow tax base:
A small percentage of national income is collected through taxes. (10 % of GDP). The ratio is low as compared to developed countries.
2. Pakistan relies heavily on indirect taxes or taxes on trade. The burden of such taxes is higher on the poor.
The government is unable to meet its expenses from current taxes. It has to borrow or print new money. As a result Pakistan’s public debt is increasing.
4. Less effective:
Due to loopholes in our tax system, the government has not been able to reduce the gap between rich and the poor. 5. Tax evasion: The most important problem of Pakistan’s tax system is the large-scale evasion. The basic reason for this situation is inefficient and corrupt tax administration.
6. Unnecessary concessions:
In the present tax system, various kinds of concessions have been given to industry or exporters. However, there is much misuse of this concession.
7. Agriculture income:
of big landlords is not taxed sufficiently. This has harmful for economic and socio-political reasons. On the one hand, the government is deprived of a good source of income and on the other, big land owners use their wealth for political influence.
8. 20 % of our economy is black economy and underground economy. Our tax system does not reach it.
Suggestions for Improvement
- i. The share of direct taxes should be increased.
- ii. The tax system should be reorganized in such a way that the problem of wealth is solved.
- iii. Incomes of big landlords be taxed at higher rate.
- iv. System of tax collection should be made efficient. The present performance of tax collecting staff be improved. Corrupt officials should be punished.
- v. Tax evasion is a serious problem. All steps should be taken to eliminate chances for evasion. In some cases, where the rate of tax is high, it may be reduced, so that people who are honestly willing to pay the taxes and are not overburdened.
- vi. Black money accumulated by evading taxes, should be confiscated.
- vii. The taxes on luxuries should be increased.
- viii. Shifting of tax burden by rich to the poor classes be checked.
Q.5) Discuss the main features of the Federal Bpdget of Pakistan for the current year?
The budget estimate of the Federal Government of Pakistan for the fiscal year 2015-16 was presented by the Federal Finance Minister in June 2015. The budget was prepared under extreme difficult economic conditions when most of the economic indicators showed downward trend. As a statement of fiscal policy, the national budget seeks to attain certain macroeconomic objectives, such as growth, full employment, price stability and poverty reduction.
Following are the salient features of the federal budget 2015-16, unveiled by Finance Minister Senator Ishaq Dar at the Parliament House on Friday.
- Total outlay of the budget 2015-16 is Rs 4,451.3 billion.
- Size of the outlay is 3.5 per cent higher than the size of the budget estimates of 2014-15.
- Resource availability during 2015-16 has been estimated at Rs 4,168.3 billion against Rs 4,073.8 billion in the budget estimates of 2014-15.
- Net revenue receipts of 2015-16 have been estimated at Rs 2,463.4 billion, indicating an increase of 10.7 per cent over the budget estimates of 2014-15.
- Provincial share in federal taxes is estimated at Rs 1,849.4 billion during 2015-16, which is 7.5 per cent higher than the budget estimates for 2014-15. Punjab – Rs 894.653 billion, Sindh – Rs 482.801 billion, Khyber Pakhtunkhwa – Rs 300.452 billion, and Baluchistan – Rs 171.488 billion.
- Net capital receipts for 2015-16 have been estimated Rs 606.3 billion against the budget estimates of Rs 690.7 billion in 2014-15, a decline of 12.2 per cent.
- External receipts in 2015-16 are estimated at Rs 751.5 billion, which shows an increase of 12.2 per cent.
- Overall expenditures during 2015-16 have been estimated at Rs 4,451.3 billion, out of which the current expenditure is Rs 3,482.2 billion, and development expenditure is Rs.969 billion.
- Share of current and development expenditure respectively in total budgetary outlay for 2015-16 is 78.2 per cent and 21.8 per cent.
- Expenditure on general public service is estimated at Rs 2,446.6 billion, which is 70.3 per cent of the current expenditure.
- Other development expenditures outside Public Sector Development Programme (PSDP) for 2015-16 have been estimated at Rs 164.4 billion.
Zakat and usher
Zakat is one of the five pillars of Islam. It occupies an important place in Islam, second only to “Salat” (Prayer). At twenty-eight different places in the Holy Quran, Zakat has been mentioned along with “Salat”. Usher is the deduction, which is made from agricultural produce and, in feet, is a form of Zakat.
The word Zakat means that:
a) Which purifies
b) Which grows.
Wealth, in the form of goods and services, is produced by the application of man’s skill or labour and capital to the natural resources. Thus, three parties are entitled to have a share in it. These are the workmen, the persons providing capital and the owner of natural resources. The ‘natural’ resources belong to God and nobody has done anything to make them available. It is bounty of God and is common property of mankind. So a part of the produce or wealth must be set aside in the name of God. And this share belongs to the community as a whole. The community’s share is called Zakat. After this has been set aside, the rest of the wealth is purified.
The Holy Quran says:
“Take alms out of their property you would cleanse them and purify them thereby” (9:14)
The Holy Quran calls Zakat “purifying” in another way also i.e. it helps to purify the human soul of selfishness and greediness.
The Holy Quran says:
“He indeed is successful who purifies himself’. (87 :14)
Wealth is dear to everyone and everyone loves his property, but the one who spends this wealth on others, attains goodness. He purifies himself from selfishness.
As for the meaning “to grow” see the following verse:
“He is indeed successful who causes it to grow and he fails who buries it”. (Holy Quran).
Through the payment of Zakat the circulation of wealth increases and this causes the wealth of the whole community to grow. According to modern economics, circulation of wealth is essential for prosperity of a nation.
The payment of Zakat is the real obedience to God. The Holy Quran states that whoever wants to enter into the brotherhood of Islam shall have to establish regular Salat and Zakat. It should be noted that Zakat is not charity. Its payment is not optional or voluntary but compulsory and obligatory. The establishment of the system of Zakat is the basic responsibility of an Islamic state.
Zakat and Usher as instrument of social justice
Basically Zakat is a religious duty. Yet it has great economic significance.
1. Zakat is a very effective way to achieve social justice. It narrows down the vast differences of incomes and wealth between the rich and the poor. People try to conceal wealth for fear of taxes. But for the payment of Zakat or Usher, they do it as a religious duty. The more is the difference between the rich and the poor, the more will be the flow of Zakat to the poor.
2. Zakat is a means of social security. It is just natural that some people are caught in trouble due to disease, unemployment etc. Through Zakat, they can be helped to come out of the difficult situation. The system of brotherhood, which Islam preaches, cannot be established unless people are saved from fear of hunger, disease and unemployment. Islam does not tolerate that some people who are hungry or ill should die for negligence of other well-to-do persons. The poor old people who are issueless or disabled to earn their living may be helped out of Zakat fund. Zakat reduces the number of beggars in the society. Zakat promotes self-reliance.
3. Zakat solves the problem of hoarding of wealth. 2.5% annual drain of hoarded wealth discourages people to keep their wealth idle. They know that unless they invest their money somewhere, it will go on decreasing. But in a Muslim society, this problem is automatically solved.
4. Zakat expands circulation of wealth which is beneficial for economy. It ensures maximum utilization of a nation’s resources and increases prosperity of the people. The Holy Quran emphasized this fact. It says:
“In order that it (wealth) may not (merely) make a circuit between the wealthy among you”
5. Zakat encourages investment, when the poor get purchasing power through Zakat, aggregate demand for goods rises which stimulates production. Moreover, some poor persons who had skill but no funds can start some small business.
6. Zakat promotes cooperation, brotherhood and social equality among the people. It strikes at the root of class conflict. Rich and poor, both, feel that they are the members of a Universal Ummah where one has duties towards other. When a rich person approaches a person deserving Zakat, he comes to know the problems of the poor people. He feels sympathy for them. On the other hand, the poor who get Zakat feel that the rich are not hoarding wealth and are coming to their help. Thus mutual co-operation and understanding develops.
7. Zakat discourages love for wealth and thus diminishes the urge for corruption, bribery, black marketing, profiteering and adulteration. A person paying Zakat, surely tries that his sources of income should be legal and legitimate. Then includes various acts of piety such as spreading religious education etc. Governments make laws to curb these crimes but people find new ways to save them from punishment. If they are Muslims practicing Zakat they themselves will lose the urge for illegal and immoral acts. In secular rich societies people love wealth and use unfair means to get more. Belief in Zakat strikes at the root of such evils.
8. The institution of Zakat establishes the lesson that humanity is more valuable than wealth. When well to do people help the needy through Zakat, they actually declare that humans have duty to bring others out of trouble.
9. Zakat lowers crime rate: An important cause of tendency towards crimes is economic injustice. Starving and deprived people cannot have sympathy for other’s welfare. So they turn to crimes. If Zakat is available to the needy, crimes will decrease.
10. Raises bargaining power of working classes. labour has weak bargaining power because they fear that if they lose job they have nothing to fall back upon so their families will starve. But if they can expect to get at least the minimum basic needs to survive, their bargaining position against employers will improve.
Q.7) Who are Zakat payers and beneficiaries?
In Islam, Zakat is the fourth pillar. Zakat refers to purification in general and purification of wealth in particular, therefore, those Muslims who have wealth over a certain ratio, they are liable to pay Zakat on it and give it to those who are less fortunate and don’t have sufficient means to live their life in a standard way. Every person, who owns wealth to a certian level is subjected to pay zakat.
A person who is not Saheb-e-Nisab, can receive the amount of Zakat. The various categories of people to whom Zakat can be given are mentioned explicitly in the Holy Quran.
These beneficiaries of Zakat are the following, (there are eight classes)
i. The poor:
Those who possess very small amount of wealth or income. (They are not saheb-e-Nisab)
ii. The needy:
Those who have nothing to feed and clothe themselves. It is their right that society helps them.
iii. The collectors:
The staff employed for collecting and disbursement of Zakat.
iv. To support the people recently converted to Islam. Such people have to face extreme hardships created by their non-Muslim relations and community.
v. The slaves who want to get freedom, i.e. to get a slave free from some person by making payment out of Zakat.
vi. The debtors:
Who are unable to repay debts.
vii. The wayfarer:
Those who need financial aid to complete the journey.
viii. Cause of Allah:
This includes various acts of piety such as spreading religious education etc.