Budget is a financial plan, which shows government priorities to improve the socio-economic condition of the masses through resource allocation on welfare, health and education. Governments in order to strengthen the regime and political future try to prioritise national issues by focusing common man welfare.
Although budget, directly or indirectly, influences almost all the segments of the society, its impact on trade, industry and services is cavernous and determines prospective economic strategies.
The government of Pakistan will announce the budget probably in the month of May. The next budget for the fiscal year 2010-11 is a challenge for the government in order to either strengthen political future or set the economic plan for future. Because increasing tax-to-GDP ratio, curtailing inflation and reducing fiscal deficit are some strict conditions set by the IMF with its loan. So far, Pakistan has achieved these targets up to some extent as the rate of inflation has declined to 10.79 percent from 23.85 percent as compared to the same period last fiscal. Similarly, Pakistan has also reduced trade deficit to $ 8.44 billion from $10.82 billion, foreign reserves have improved to $14.32 billion. Almost, all macroeconomic indicators, showing improving trend which raise expectation of relief and incentives from the government.
As far as revenue side position of the country is concerned, Pakistan's present tax system has narrow tax base along with tax evasions too. Despite the fact that the government is continuously increasing revenue targets, which are achieved, the tax-to-GDP ratio is stagnant at 9%, which is far below the recommended level of 17% for the developing countries like us.
Pakistan's tax-to-GDP ratio (tax revenue as a percentage of GDP) is very low in comparison with not just the developed nations, but many developing countries as well. Denmark, with its strong social welfare system, has the highest tax-to-GDP ratio at 50 percent, which means over half of the value-added in the economy goes into the hands of the government. Even Sweden (49.7), Zimbabwe (49.3) the UK (36 percent), Korea 24.6 Sri Lank 16.5 collects a high proportion of their GDP as tax. The United States - a pioneer in trying out the Laffer curve hypothesis (that a reduction in tax rate increases tax revenues upto a point) - still collects close to 30 percent of its GDP as tax revenue.
Country wise Tax-to-GDP ratios comparison:
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Countries Tax to GDP Ratio
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Denmark 50.0 percent
Sweden 49.7 percent
Zimbabwe 49.3 percent
Belgium 46.8 percent
France 46.1 percent
Cuba 44.8 percent
Finland 43.6 percent
Norway 43.6 percent
Lesotho 42.9 percent
Italy 42.6 percent
UK 36.0 percent
Korea 24.6 percent
Sri Lanka 16.5 percent
Pakistan 09.0 percent
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To broaden the tax base, thereby increasing proportion of revenue as percentage of GDP, the government is planning to bring the stock market trading into tax net.
There is consensus on imposing taxes for generating revenue in the wake of the crises. Most of the economies of the world have imposed tax on stock market trading. Tax on stock market will also develop confidence in the small investors due to government intervention they will find their investment rather secure. Part of the billions of rupees, which is involved in huge business transaction and countless money, but has almost no share in the tax-net must go to national budget.
This task of imposing tax on stock market seems to be another challenge like the one agriculture tax. Despite the government efforts, tax on stock market trading has not been announced for the last two year. This time the government is seems to be fully committed to raise the tax net but political controversies impeding the government policies. The present government would hesitate to take such measures as neither the government nor politicians would take any responsibility that will damage the political career.
It depends upon political will of the present government to bring stock market trading in tax net or leave it untaxed like agriculture sector that is still out of tax net in spite of efforts by various regimes.
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