Economic-tax relief package
Huzaima Bukhari & Dr. Ikramul Haq
Pakistan is facing the brunt of Coronavirus outbreak as the country is in a partial lock down. This has had a negative impact on businesses. Initial estimates show that the economy will witness sluggish growth in services, manufacturing and agriculture sectors, increase in unemployment, decrease in government revenue, decline in exports and disruption in supply chains. Lockdown across the country is expected to make the situation dire for the estimated 5.2 million enterprises in the country. SMEs may experience supply chain distortions due to irregular supply of raw materials and intermediate goods, revenue loss and shortage of liquidity to continue business operations—Survey Report: Impact of Covis-19 on SMEs, Policy &Panning Division of SMEDA, April 2020
In out last column [A simple tax bailout, Business Recorder, April 24, 2020], it was mentioned that “hopefully, the economic and tax managers of the coalition governments of Pakistan Tehreek-i-Insaf (PTI) in centre and provinces and Pakistan People Party in Sindh must be considering demands of businesses and soon come up with tax-relief package…..If relief packages are not announced within next seven days, we will write specially about it summarizing the various tax relief and stimulus measures announced across the globe by governments to protect businesses and workers”. Till today, only piecemeal relief measures are announced and comprehensive relief packages are still not prepared/announced by federal and provincial governments, whereas with every passing day, the frustration of business community and employees is increasing.
During these difficult days, the coalition government of Pakistan Tehreek-i-Insaf (PTI) has raised the issue of paucity of funds vis-à-vis Constitution (Eighteenth Amendment) Act, 2010 [commonly called 18th Amendment]. About that we have already written in detail [Federalisation versus centralisation: 2020: Year to road to prosperity, Business Recorder, December 27, 2019] and offered solutions. Many ministers of PTI and all-knowing TV anchors while deliberating on this issue even failed to mention that distribution of revenues under 7th National Finance Commission (NFC) Award was signed on December 30, 2009 effective from fiscal year 2010-11, before the 18th Amendment. It is true that the share of provinces under NFC Award cannot be reduced by virtue of Article 160(3A) inserted by 18th Amendment. However, outside the ambit of Article 160 of the Constitution, the federal government can impose taxes as they did in 2013 by enacting Income Support levy Act, 2013 that was repealed the very next year. They can impose and tax/levy/cess etc to meet their needs [Wither new NFC award? Business Recorder, July 1, 2016]. The issue is not of NFC Award but poor collection of taxes by the federal government that hurts the provinces as well [2019: review of PTI govt’s fiscal measures—II, Business Recorder, January 2, 2020]. More on this subject in coming weeks as this column, as promised, intends to highlight what is needed to be done to help businesses and employees during partial lockdown in terms of reliefs.
The Economic Coordination Committee (ECC) on April 27, 2020 approved a support package for small and medium enterprises (SMEs). It sanctioned Rs. 81 billion financial support package “to pay electricity bills of SMEs and pick principal loan repayments of big firms aimed at helping them absorb economic shock caused by deadly pandemic”. Minister of Industries and Production, Hammad Azhar tweeted: “Rs. 50.7 billion is indirect cash flow support to 3.5 million SMEs through pre-paid electricity bills”. The Cabinet on April 28, 2020 approved Rs. 75billlion relief package. The Prime Minister directed Dr. Sania Nishtar, Special Assistant on Social Welfare, and Hammad Azhar to devise a comprehensive mechanism. The cabinet also ratified decisions taken the Economic Coordination Committee in its meetings held on April 22 and 27. The ECC approved Rs. 30 billion for the Risk Sharing Facility for State Bank of Pakistan’s (SBP) Refinance Scheme to support employment and prevent lay-off of workers; financing to be extended to businesses with maximum sales turnover of Rs. 2 billion while the government would bear 40% first loss on distributed portfolio (principal portion only) for eligible borrowers, in case of repayments, after being classified as “loss” as per classification criteria under the respective SBP Prudential Regulations. The second phase of bailout to SMEs, according to Hammad Azhar, will include a collateral-free financing scheme and Small and Medium Enterprises Development Authority (SMEDA) to target/prioritise relief for SMEs most hit by COVID-19″.
The most worrisome aspect is that Federal Board of Revenue (FBR) has yet not cleared all the payable refunds, which cannot be termed as relief but vested right of taxpayers. The federal government is accusing the provincial governments for taking 57.5% of revenues under 7th NFC Award, but FBR is unlawfully holding back since 2014 refunds of billions of rupees due to taxpayers belonging to all four provinces. According to a Press report, “The income tax refund claims have surged to a record Rs. 348 billion or 9% of last year’s tax collections as taxpayers have been waiting for the past many years to receive their due refunds, reveal statistics of the Federal Board of Revenue (FBR)”.
All businesses—badly hit by lockdown in the wake of Covid-19 epidemic and earlier due to sluggish economic activities, high utility bills and markup rate—are demanding a comprehensive bailout. They are critical of loan facility announced by State Bank of Pakistan to pay salaries/wages and demanding that it should be interest-free and/or grant to employees in lieu of lay-offs—as after opening of businesses, it will require many months to recoup losses and achieve break-even position. In this scenario, they ask, where would they pay markup from? They are also demanding tax amnesty, drastic tax cuts/waivers, especially reduction in the rate of sales tax to 5%, and zero taxation for employees earning up to Rs. 50,000 per month, waiver of advance income tax and over 100 withholding provisions contained in the Income Tax Ordinance, 2001, Sales Tax Act, 1990 and all provincial laws relating to sales tax on services. What a shame that 5% advance income tax is payable if fee exceeds Rs. 200,000, whereas under Article 25A of the Constitution it is the duty of State to provide free and compulsory education to children from age 5 to 16.
It is highly regrettable that oppressive taxes have not been withdrawn by the federal and provincial governments even during the days of extreme hardship for the weaker segments of society. For example, About 95 million unique mobile users [as per website of Pakistan Telecommunication Authority (PTA) total cellular subscribers as on December 31, 2019 were 165 million, but many have multiple and/or dormant SIMs], after vacation of stay by Supreme Court on April 24, 2019 in Human Rights Case (HRC No. 18877/2018), are paying 12.5% advance income tax. The detail of indirect taxes paid by them is 19.5% sales tax on services to all the four provinces, for users in Islamabad Capital Territory 17% federal excise duty, plus 10% service/maintenance charges. Millions of these mobile users, some of whom are even declared eligible for Ehsaas Emergency Cash Programme, are brazenly subjected to extortion by the Federal Government in the name of advance income tax and by provinces charging sales tax as high 19.5%.
This is the height of highhandedness and violation of Constitution of Islamic Republic of Pakistan [‘The Constitution’]—those having enormous incomes and assets are offered frequent and generous amnesties/immunities and the vast majority of population, even those living below poverty line, is forced to pay oppressive taxes. Adding insult to injury, they do not get in return even basic amenities of life (clean drinking water etc), what to speak of free education/health care, decent living, and affordable public transport.
According to ‘Impact of Covid-19 on SMEs’, an online survey by SMEDA, conducted through April 3, 2020 until April 14, 2020, “Annual Sales Turnover of respondents indicates that majority (81.1%) of the respondents were from small sized businesses with up to 30 million annual sales turnover. 32.8% of respondents indicated to have less than PKR 1 million annual sales turnover”. They, while immensely suffering due to lockdown, are still compelled to pay advance income tax on mobile and commercial electricity use under sections 235 and section 236 of the Income Tax Ordinance, 2001 and those in service sector, by exorbitant sales tax on services. These taxes should be waived for all those having income below taxable limit. The Survey by SMEDA further reveals:
“To cope with the current challenges, “68.92% of enterprises demand financial schemes including loans on low interest rates, grants and relaxation of loan payments, followed by taxation/customs & tariff (10.46%). Around, 16.52% enterprises require support to meet operational expenses including; wage/salaries support (8.81%) and rental cost & utility support (7.71%). Furthermore, export oriented units call for government support for export facilitation (1.65%). 1.53% of enterprises want infrastructure support and 1.18% require amendments in regulations/simplification of procedures”.
All over the world, not only the rich states but countries even poorer than Pakistan have announced special tax relief packages to all businesses, especially SMEs. Our governments—federal and provincials—should also do so as early as possible. For their references, this link [https://www.ibfd.org/IBFD-Tax-Portal/Tax-News-Service] would be helpful to study the tax reliefs given by various governments, especially in our region (South Asia). If they are running short of ideas, they may examine recommendations of bailout under various areas from finance to tax given by SMEDA in ‘Impact of Covid-19 on SMEs’.
It is hoped that the coalition governments of PTI in the centre and three provinces and PPP in Sindh will learn from research by local/foreign experts and all universities, its own institutions e.g. Pakistan Institute of Development Study (PIDE), successful examples of countries that overcame the outbreak. It should move towards smart lockdown as per best practices and simultaneously incentivising all those individuals or companies affected by the crisis.
There is an urgent need to take right decisions collectively and 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. It is worthwhile that it is the command of Constitution to adopt a unified approach under 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“.
Sadly, instead of following Article 156(2) of the Construction, the 9th NFC Award, according to a Press report of April 28, 2020, “died its natural death at the weekend after the Centre and four provinces could not reach consensus on a new award for distribution of fiscal resources during the five-year constitutional term. It added: “The Ministry of Finance has now sent a fresh summary for approval of the president of Pakistan for the constitution of 10th NFC, according to officials. The terms of reference of the new commission might be changed”.
The Prime Minister without wasting any further time should call the meeting of National Economic Council as well as that of National Development Council (NDC), established by him on June18, 2019 [its mandate includes approving long-term planning in relation to national and regional connectivity], to tackle a challenge that requires federalised approach and not centralised or provincialised [Federalisation versus centralisation: 2020: Year to road to prosperity, Business Recorder, December 27, 2019].
The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)