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Learning from China & others
Dr. Ikramul Haq
Nobody in Pakistan has highlighted till today what China has offered as tax package to help domestic businesses hurt by the deadly corona outbreak in addition to overcoming it in a short time. The relief package [March-24-Package] announced by our Prime Minister of Rs. 1.2 trillion was not only delayed but offered no meaningful tax incentives to the affectees of the outbreak, lock-down and consequential contraction in economy, lay-offs, stock-exchange crash and cancellation of export orders—just to mention a few.
As there is need to follow how quickly/valiantly China overcame the monstrous pandemic, it is also necessary to study the tax relief package(s) given by it. The transportation sector, the main beneficiary, got value-added tax (VAT) break and loss carry-over extensions. We have seen nothing of this sort in the March-24-Package. All the provinces/municipalities of China provided independent benefits to agriculture and retail companies. Our federal/provincial Governments have done nothing to reduce/waive high rate of sales tax on goods and services. In the March-24-Package, only tax relief was release of Rs.100 billion refunds that in any case was the right of taxpayers, held unjustifiably by Federal Board of Revenue (FBR).
While the head of State Bank of Pakistan [SBP], economic team of Prime Minister and others have been painting Doomsday scenario, Pan Gongsheng, Deputy Governor of the People’s Bank of China said: “Our economy will continue to show strong resilience. The Chinese government has ample policy space to stabilize economic growth.” This is the way to deal with any crisis: give concrete concessions and raise morale rather than show pessimism/defeatist mindset.
China 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. Unfortunately, our Prime Minister and his team took weeks and even in March-24-Package deferred “special relief package for construction sector” aimed at “kick-starting different industries and provide jobs at these difficult times”. This shows indecisiveness and lack of clarity. The onerous tax policies much before the corona outbreak have already destroyed the real estate/construction sectors. They should be given at least 10-year tax holiday if government is serious to avoid recession after stagflation caused due to faulty monetary, fiscal and trade policies.
Ministry of Finance of China announced in early February exemption from import duties, VAT and consumption tax for any imported materials for epidemic prevention. We did it as late as on March 24, 2020 and statutory regulator orders (SROs) issued for these are badly drafted and importers will face difficulties as Customs authorities create hurdles and demand speed money.
China waived corporate income taxes and “VAT for companies purchasing materials that were to help continue production during the outbreak. The economic/tax wizards in Pakistan have not announced any such concessions in March-24-Package. China also exempted transport industry, express delivery, and businesses associated with daily necessities from VAT, all epidemic-hit companies in the catering, tourism, accommodation, and transportation sectors. These can also carry over losses for an additional 3 years, to a total of 8 years. This is the way you incentivise the businesses and not through meaningless measures announced in March-24-Package.
All donations by businesses and individuals of material and medical supplies to help with the epidemic are made eligible for tax deductions by China and personal income tax is waived on salaries and bonuses for medical workers involved in epidemic prevention. We have yet not given them proper safety equipment what to speak of income tax exemption on salaries! This is shocking and lamentable as they are in the forefront of fight against the epidemic.
The State Administration of Taxation in China exempted airlines from civil aviation fees, which is expected to last until the end of April. We have not given any such relief to our national carrier already running in huge losses. This shows indifference as well as incompetence to deal with problems timely and efficiently.
In China, all provinces/municipalities presented their own policies to help small and medium sized enterprises (SMEs). Our provinces have not given any relief in multiple taxes they impose on them, especially sales tax on services. Guangdong province in South China, the country’s most populous province and most important manufacturing region, released 10-major-tax-relief measures on February 2, 2020. Our economic/tax managers in provinces till today have done nothing to soften the impact of corona outbreak on SMEs.
The Federal Government, after drastic reduction in world oil prices gave peanut relief to consumers. The SBP acted unwisely by not bringing down the discount rate to single digit—these two steps alone could provide effective relief to all, businesses and masses at large, by bringing down the worst cost-push inflation, crushing all. The monetary/fiscal policies in difficult times give relief as China and others have offered. Our wizards were/are sticking to conventional theories meant for normal times and not for emergent situations.
The approach of China is of drastic tax reductions on medical supplies and other materials needed to control the outbreak/relaxation in reporting provisions. Additionally, preferential tax rates for high-tech companies, tax deductions on research and development expenses and priority for tax refunds on any equipment related to vaccine and reagent production. 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. Where are these incentives in Pakistan?
Stalwarts sitting in the Ministry of Finance, FBR and relevant provincial authorities need to study Guangdong Model of Tax Relief Package that includes special tax incentives for catering, hotels, and other companies that cannot resume production as usual, and support further tax reductions for SMEs.
Beijing municipality announced several relaxations including: tax cuts and deferred payments for dormant companies, taxis and ride-hailing companies to continue operations and subsidies for research and development for SMEs through a special fund. Suzhou, a manufacturing and tech-hub city in Jiangsu province near Shanghai, released a set of 10 policies to support all companies in financial difficulty. Relief measures on real estate/urban land tax, and defer tax payments for all SMEs. Shanghai and all other areas of China prepared/implemented combinations of polices similar to those described above.
Pakistan, prior to corona outbreak, faced with lay-offs, industrial slow-downs, dwindling agriculture, sluggish economy, high inflation, exorbitant interest rates, fiscal deficit and unbearable debt servicing, is now heading towards recession. If lock-down continues for a prolonged time, consequences will be disastrous, no matter even if we get some concessions/aid from World Bank or IMF as promised to all the developing countries. It is necessary for us to learn from China and others and take the same measures they adopted to overcome the outbreak and simultaneously move towards 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 writer, Advocate Supreme Court, is Adjunct Faculty Members at Lahore University of Management Sciences (LUMS)