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Covid-19: economic impact measures

Huzaima Bukhari & Dr. Ikramul Haq

The Prime Minister of Pakistan, Imran Khan, in a Press conference on April 3, 2020, thinly attended by journalists (after the bitter experience of March 24, 2020 of critical questioning on many issues rather than on Rs. 1.2 billion relief-package unveiled that day), announced relief/stimulus package for the construction sector besides giving it status of an industry. A number of measures were put forward by the Prime Minister claiming it would boost economic revival after its opening on April 15, 2020. The other main consideration, according to him, was of mitigating financial hardships faced by the daily wagers/vulnerable due to lockdown and State’s kitty was incapable of giving them a minimum wage of Rs. 17,000 per month fixed under provincial laws.

The March-24-Package was not only delayed but offered no meaningful economic/tax incentives to the affectees of the outbreak, lockdown and consequential contraction in economy, lay-offs, stock-exchange crash and cancellation of export orders—just to mention a few. The same thing happened with package for construction industry. There were no measures for ensuring security of employment, what to speak of making it obligatory for the developers/builders/constructors to ensure work-place safety, social protection and a comprehensive health insurance as quid pro quo for multiple concessions. Out of the many actions announced on April 3, 2020, tax related finally became effective through Tax Law (Amendment Ordinance, 2020), promulgated by the President on April 19, 2020.

Tax amnesty offered in Tax Law (Amendment Ordinance, 2020) has not been extended to selling open plots and owner must start construction on the same by December 31, 2020 and for that amount earmarked to be deposited in a separate bank account and requires compulsory registration made with Federal Board of Revenue (FBR). No amnesty for the buyers. Due to the liquidity crunch, at the moment demand in the market is low, and if buyers have no amnesty, unless they become developers, how will this scheme be successful? The crafty tax bureaucrats through inserting many ifs and buts in the law have made the whole idea of Prime Minister unworkable. As regards affordable houses for the poor under Naya Pakistan Housing Scheme, it is not economically viable, especially in post coronavirus environment, as the targeted beneficiaries lack required equity to avail even reduced rate house loan finance—though yet not assured by commercial banks.    

It may be recalled that due to wrong tax policies of the coalition Government of Pakistan Tehreek-i-Insaf (PTI) in the Finance Act 2019, construction sector witnessed a sharp contraction of 7.6% in FY19 from 8.2% growth during FY18”.

If the PTI Government is really serious in avoiding a deep recession, overcome economic toll during and after the lockdown and safeguard the interests of unskilled or skilled workers and white-collar/blue-collar employees, it needs to follow what other countries have done or still doing. Their legislators have passed comprehensive laws, covering all areas—economic reliefs to cash disbursements etc. For example, the United States Congress on Mach 27 passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act of US$ 2 trillion under which millions of Americans, many of whom are judgment debtors, are to receive “economic impact payments” from the Department of the Treasury. In a write up an expert noted that such “payments range from $1,200 for qualifying individuals or head of household filers, to $2,400 for married filing jointly, plus $500 per child”. It is worthwhile to mention that the CARES Act provides fast and direct economic assistance for American workers and families, small businesses, and preserves jobs for American industries, whereas no such legislation is made by us.

Our National Assembly met last on March 13, 2020 and Senate on March 4, 2020. Elsewhere in the world the governments and legislators are working hand in hand to pass laws to provide on emergent basis relief packages for their citizens and businesses. The Speaker of National Assembly on April 14, 2020 constituted a ‘Committee on Virtual Session’ during COVID-l9 pandemic. The first meeting of this Committee was held on April 18, 2020 to consider amending for recommending amendments, if any, in the Rules of Procedure and Conduct of Business in the National Assembly, 2007 for holding virtual session of the National Assembly. However, on April 21, the Muslim League (Nawaz) opposed any such move. The Chairman Senate and speakers of all assemblies have not even taken any such initiative. Our legislators have failed to even discuss the gravity of the situation arising out of Covid-19 outbreak/lockdown, and after debates/consultation suggest any meaningful steps/measures/laws to the federal and provincial governments.

It is worthwhile to note that parliament of a small country like Estonia, on April 15, 2020 adopted the Bill introducing amendments to a number of laws aimed at mitigating the COVID-19 pandemic effects on the economy. Mauritius extended the self-employed assistance scheme (SEAS) and the wage assistance scheme (WAS) to eligible self-employed individuals and tradespersons. All of them are receiving financial support from government ensuring no lay-off in the private sector unlike in our case where the State Bank of Pakistan (SBP) has asked the employers to take loans at 3% [originally it was 4%] if tax filers and 5% if not appearing on Active Taxpayers List of FBR. On the contrary, the Mauritius Government has assumed responsibility to provide to all private employees an amount of around US$ 677 per employee per month under the WAS. China while fighting outbreak medically also gave immediate tax breaks to restore manufacturing operations, service industries and those facing disruptions to transport workers, exacerbated by quarantines/travel restrictions in many areas of the country. The companies in China that supply and store meat, vegetables, and eggs and daily necessities are given reductions in VAT, real estate taxes, and urban land use taxes. No similar incentives announced by our government.

Unfortunately, our Prime Minister and his Cabinet and advisers took weeks and even in March-24-Package deferred “special relief package for construction sector” aimed at “kick-starting different industries and to provide jobs in these difficult times after opening on April 15, 2020—later a faulty tax amending law. This shows incompetence of government apparatus (first announce package and then draft law whereas it should have been the other way around), sadly reflecting indecisiveness and lack of clarity.

Much before the corona outbreak, onerous tax policies together with high interest rates have destroyed the real estate/construction sectors and also negatively affecting host of industries causing irreparable damage to economy. The unwise monetary, fiscal and trade policies led to stagflation. The lockdown after Covid-19 outbreak further worsened the situation. In this crisis, we require smart lockdown and income tax holiday for affected sectors, lowering of interest rate by SBP to 2 % and drastic cuts in prices of electricity, POL products and sales tax rates—both by federal and provincial governments on goods and services.   

Our policymakers should have followed Ministry of Finance of China that announced in early February 2020 exemption from import duties, VAT and consumption tax for any imported materials for epidemic prevention as well as eatables etc. The companies in China that supply and store meat, vegetables, and eggs and daily necessities have been given reductions in VAT, real estate taxes, and urban land use taxes. No similar incentives announced by our government. We acted as late as on March 24, 2020 just to waive duties on certain eatable items and statutory regulator orders (SROs) issued for these were badly drafted and importers are still facing difficulties as Customs authorities create hurdles demanding speed money.

The wizards sitting in Ministry of Finance and FBR even while preparing tax incentives for construction industry miserably failed to realise that long-term tax holiday for the real estate/housing/construction sectors was required to kick start dozens of industries linked to these sectors, which alone could help avoid massive unemployment and recession.

The issue of labour after the 18th Constitutional Amendment devolved to provinces and not one has promulgated any law or Ordinance when the provincial assemblies are not in sessions. Tax Law (Amendment Ordinance, 2020 also contains nothing for Islamabad Capital Territory (ICT) to make it legally obligatory for the construction industry to comply with social security, old-age benefits, contributions to workers welfare fund and in case of companies, 5% profit sharing under the Companies Profit (Workers’ Participation) Act of 1968 for all the employees, workers, permanent or on contract. No such announcement has come from any province, what to talk of immediate Ordinances by Governors to protect the interest of the working class.

Faced with lay-offs, industrial slow-downs, dwindling agriculture, sluggish economy, high inflation, exorbitant interest rates, fiscal deficit and unbearable debt servicing, Pakistan was already in economic mess prior to the outbreak of coronavirus. If lockdown continues for a prolonged time, consequences can be disastrous—notwithstanding getting more money from IMF and other foreign lenders/donors as well as concessions of deferment of loans by G20.

It is necessary for the coalition governments of PTI in the centre and in three provinces and PPP in Sindh to learn from China and others and take the same measures they have adopted to overcome the outbreak and simultaneously move towards smart lockdown, incentivising all those individuals or companies, affected during the crisis. There is a need to be firm and take right decisions timely and come out of conflicting and/or imprudent decisions to deal with crisis of a magnitude that has jolted even the most powerful and economically resourceful countries of the world.

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The writers, lawyers and authors, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)

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