Tax bailout for economic revival   

Huzaima Bukhari & Dr. Ikramul Haq

According to various Press reports, all businesses in Pakistan, as elsewhere, badly hit by lockdown in the wake of Covid-19 epidemic, are demanding a comprehensive tax bailout claiming that loan facility announced by State Bank of Pakistan to pay salary/wages should not carry any mark-up as in the near future they would not have even break even position and this burden will further hamper their survival/growth. They are demanding another tax amnesty, drastic tax cuts/waivers, especially reduction in the rate of sales tax to half and zero taxation for employees earning below one million per year, suspension of advance income tax and all withholding provisions under the Income Tax Ordinance, 2001 as well as exemption of all federal and provincial taxes on eatables and every-day use commodities, especially those used for prevention of coronavirus (Covid-19), masks, soaps, hand sanitizers containing over 60 percent alcohol, bathroom detergent etc. 

The demand of representatives of construction industry has been that for making construction package successful, tax amnesty on all kinds of investment is necessary for three years, whereas the Prime Minister announced deadline of investment by December 31, 2020. However, in the Ordinance, exemption from section 111 of the Income Tax Ordinance, 2001 may also be available to the first purchaser of newly constructed buildings of a project if the purchase is made on or before the September 30, 2022 in the manner that Board may prescribed.   

The representatives of construction industry say, “We need out-of-box solution and the piecemeal approach will not work to end this lingering recession”. They insist that all-out amnesty is necessary to jump-start the recession-hit economic activities.

The lockdown on construction industry was lifted from April 15, 2020 along with the allied industries and service providers, but lockdown for others will continue for another two weeks (till April 30, 2020).

The Prime Minister, Imran Khan, in a Press conference on April 3, 2020, announced a “relief/stimulus package” for the construction sector—discussed in detail in Incentive package for construction industry: Amnesty, tax breaks and multiple reliefs, Business Recorder, April 10, 2020. For giving effect to tax breaks announced for construction sector, now declared an industry, Tax Laws (Amendment) Ordinance, 2020 is reportedly almost final. It should have been available at the time of announcement of relief package, but our policymakers first announce measures and then start preparing drafts of amendments in laws and other documents. This Ordinance will be discussed once made public. At the time of writing these lines, it was yet not promulgated requiring approval of the Cabinet, under the law, the Prime Minister has to send it to the President for promulgation and publication in the official gazette. It is expected to be promulgated by 17 April 2020.

The Prime Minister on April 13, 2020 took briefing from the newly-appointed Adviser on Parliamentary Affairs, instead of the Law Minister, regarding some Presidential Ordinances that were going to expire within 120 days in terms of Article 89 of the Constitution on April 18, 2020 for want of passage by Parliament or extension for another 120 days.

The Tax Laws (Amendment) Ordinance, 2019, promulgated on October 8, 2019, containing amendments in various tax laws to remove impediments in the implementation of the Concession Agreement in respect of Gwadar Port and Gwadar Free Zone will expire on June 1, 2020 after its extension by the National Assembly. It is presently pending with Standing Committee of National Assembly and is likely to be cleared during its forthcoming meeting, scheduled to be held in the next week. As regards, Tax Laws (Second Amendment) Ordinance, 2019, promulgated by the President on December 26, 2019 as per website of Federal Board of Revenue (FBR), it is already passed by the National Assembly will soon be enacted as Act after assent of the President. These updates are not available on the websites of National Assembly or FBR.  

It was mentioned in Incentive package for construction industry: Amnesty, tax breaks and multiple reliefs, Business Recorder, April 10, 2020 that the economic team of Prime Minister and FBR stalwarts as usual, demonstrated a myopic outlook and just announced some cosmetic concessions and another amnesty for whitening undeclared funds. The industry should have been given a long-term tax holiday as even a medium sized project, what to speak of a mega one, can be completed in two years. Thus, in the long run, incentives/concessions announced, are not going to promote construction sector as a vibrant industry. Secondly, some elements having proceeds of crime may abuse the amnesty. The Financial Action Task Force (FATF) can raise serious reservations about it in the next meeting. The Asia Pacific Group of FATF conveyed its decision to the Financial Monitoring Unit (FMU) for postponement of the Joint Working Group meeting for all countries, including Pakistan, scheduled for May 2020, to take place in August/September 2020 due to the outbreak of COVID-19 outbreak. 

It is strange that those in real estate/construction business are emphasising time and again for “general tax amnesty for all kinds of sectors for the next three year period” on the plea that all those having untaxed, undeclared funds should be given “opportunity to spend money because usual steps would not help cope with such an extraordinary situation”. In other words, they are admitting that they are in possession of undeclared fluid funds even after two amnesties introduced by the government of Pakistan Muslim League (Nawaz)—PMLN—in 2018 and by the incumbent Government in 2019! When the poor are facing extreme financial hardships, instead of donating funds in Prime Minister Relief Fund for which no questions are to be asked, they want to whiten their untaxed/undeclared funds! This can happen only in Pakistan!!

Nobody is going to be surprised if those who minted billions during price-hike of sugar, wheat flour and other essential commodities, abuse the new amnesty in the name of promoting construction industry! The unscrupulous public office holders, government officials and other mighty sections of society always use front-men, proxies and benamidars (name-lenders). This can be a case with real estate agents, developers and contractors, whether individuals, Association of Persons or companies. How can FBR, after amnesty, check this nexus? On paper, holder of any public office as defined in the Voluntary Declaration of Domestic Asset Act 2018 or his benamidar (name-lender) as defined in the Benami Transactions (Prohibition) Act, 2017 (V of 2017) or his spouse or dependents or any proceeds derived from the commission of a criminal offence, including crime of money laundering and terror financing are excluded, from amnesty, except those related to offence of tax evasion. However, it is well-established that FBR, National Accountability Bureau (NAB) or any other agency lack capacity/competence to unearth sophisticated benami and money laundering multi-layered operations by organised criminal outfits, many of these allegedly enjoy political patronage.    

Those real estate agents and developers having political clout and influence are taking advantage of the situation on the plea: “The common buyer of plots are reluctant to invest because of the fear of FBR as they receive notices even if they purchase 5 or 10 marla plot in any housing society”. Investors in real estate and construction being afraid of FBR are now investing in other businesses such as buying dollars, hoarding sugar or wheat because they did not want to come on the radar screen of tax machinery”.

Tax officials, according to a report, revealed that demand for another amnesty was being made not only by construction industry but by many top businessmen arguing that “extraordinary situation requires extraordinary response”. They argue that business activities have almost come to a halt making it impossible for the tax machinery to collect desired taxes. Any stimulus package, not containing amnesty, they say, “will not help the economic activities to kick-start even after partial lifting of lockdown on construction industry and some other activities”. According to the report, “One top business giant even proposed to the government to stop collecting taxes for next six months”. The report further says that “there is no end to the wish list of the business tycoons as they are always busy vying before the government to increase their incentives and subsidies”. However, it says, “one FBR official wondered that how could the government satisfy International Monetary Fund (IMF) and FATF for a general tax amnesty scheme because they were currently discussing PM’s incentive package with the two international institutions against clear understanding that the IMF and World Bank are opposed to any such schemes in principle”.

In these extraordinary and incomprehensible circumstances, what should be the meaning of tax bailout for all businesses to retain their employees when there is recession and revival is a big challenge? Is general amnesty for all inevitable? Will it serve any useful purpose for mitigating economic toll of Covid-19 epidemic? In the past, the country suffered losses of billions of rupees due to various tax amnesties that are quantified and documented in ‘Retrieving untaxed/ill-gotten assets, Business Recorder, February 21 & 26, 2020.

By now it is well-established that even after giving about a dozen amnesties since 1958, we have failed to counter under-invoicing and mis-declarations, ensure correct reporting of sales and payment of sales tax due, ensuring correct declarations of incomes and/or reduce/eliminate tax evasion/avoidance through under-reporting and/or non-reporting and claiming inflated expenses. The coalition Government of Pakistan Tehreek-i-Insaf (PTI) must be reminded that one of the worst consequences of black money/tax evasion is their pernicious effect on the general moral fabric of society shattering the faith of the common man in the dignity of honest labour and virtuous living.

Pakistan aptly fits in the concept of a “soft state”—famously articulated by the Nobel Laureate, Swedish sociologist Gunnar Myrdal in his 1968 three-volume work, Asian Drama: An Inquiry into the Poverty of Nations. It is a broad based assessment of the degree to which the state, and its machinery, is equipped to deal with its responsibilities of governance. The more soft a state is, the greater the likelihood that there is an unholy nexus between the law maker, the law keeper, and the law breaker. Pakistan is a classic case of this unholy nexus where since 1958 numerous tax amnesties failed to achieve the desired results rather encouraged rent-seeking and tax evasion.

The solution is, thus, not extending another amnesty scheme to construction industry or any other class of persons, but a comprehensive tax bailout that can help in revival and sustainability of all types of businesses, including professions. The PTI Government should give tax reliefs/stimuli to all businesses, especially small and medium business enterprises (SMEs), to prevent lay-offs. The Pakistan Institute of Economic Development (PIDE) in a report, titled, Sectoral Analysis of the Vulnerable Employed COVID-19 and Pakistan’s Labor Market, estimates that in stage II, there would be lay-offs of 70% (4.5 million) of the total employment in wholesale and retail sector. The report recommends relief to businesses which engage the most vulnerable workers (especially daily wage workers) and emphasise that General Sales Tax (GST) on their products should be waived.    

The PTI Government has a golden chance to restructure the complicated and inefficient tax system and give meaningful and result-oriented tax bailout, incentivising all businessmen to pay low-rate taxes with simplified model suggested in Towards Flat, Low-rate, Broad and Predictable Taxes, [PRIME Institute, April 2016] with assuring the masses that taxes collected will be spent on priority basis for the poor suffering immensely due to loss of income after lockout in the wake of Covid-19 epidemic. All the governments—federal and provincial—must protect the most vulnerable employees in SMEs by waiving tax on salary up to Rs. 800,000 per annum. Parliament must impose excess profit tax on those engaged in hoarding, monopolies and cartels (sugar and wheat surfaced recently). The State must ensure that under the principle of reciprocity in taxation, it will provide free education, health, affordable basic amenities and universal pension for all citizens.

The challenges arising from Covid-19 outbreak also offer opportunities for us to reform our governance and remove weaknesses in all institutions as highlighted in When challenges offer opportunities, Business Recorder, March 27 & April 2, 2020. The real need is that the federal and provincial governments should act on war footing and work diligently/prudently, and follow Article 156(2) of the Construction: “National Economic Council shall review the overall condition of the country and shall, for advising the Federal Government and the Provincial Governments, formulate plans in respect of financial, commercial, social and economic policies; and in formulating such plans it shall, amongst other factors, ensure balanced development and regional equity and shall also be guided by the Principles of Policy set out in Chapter 2 of Part-II”.

In these critical circumstances, all the governments—federal and provincial—should join hands, engage best minds [give task of finding solutions to PIDE) in terms of Article 156(2)] of the Construction, and we can prove wrong projections by foreign lenders/donors that once a nation, like China, shunning elitist structures and crony capitalism, unites as one entity, with dedicated leadership ready to take professional input and determination/capacity to execute the same, can overcome any crisis, including economic repercussions of Covid-19 epidemic.   

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The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)