Is Pakistan Doing Taxes the Right Way During Pandemic?

By Amna Urooj and Saud A. Khan

Pakistan has always teetered precariously on the tightrope between utopianism and dystopian-ism, but now in the face of the economic danger to its economy thus presented by the recursive Corona Virus, it might altogether find its feet forcibly pulled and dragged into the dystopian abyss. If poverty, corruption, and deprivation were not crippling enough as it is, Pakistan also has to deal with the billions of debt it has amassed over the years while at the same time as jostling to provide adequate healthcare. Institutions, businesses, and industries stand affected by the outbreak on a global scale, and the country faces an uphill battle for revenue generation, funding, and provisioning. As conditions have transformed, the need for revised counteractive policies and strategies has become apparent, especially around the country’s taxation policies which for a long time now, have drawn much ire and failed consistently to meet revenue goals.

The Corona Budget

Speaking to the concerns of the public and to appease the wavering confidence of its investors, the government in June announced the budget for fiscal year 2020-21. The budget, dubbed as “the Corona Budget” for the occasion, touted tax relaxations and rebates to support the sinking businesses and to ease life for the populace. The bill headlined a Rs. 56 billion tax relief for the industries stilled by the virus, reverberating friendliness towards cinemas, hotels, and banquet halls where it slashed the tax rates to 5pc for personnel recruitment services and entertainment duty. Also, to get a lift with the budget plan 2020-21 was the construction industry, accounting for the bread and butter of 30-35% of the nation’s workforce, second only to the agriculture sector.

Attempting to stimulate employment for the workers laid off during the pandemic, and to encourage investment, the government has made amendments to the tax ordinance granting several non-compulsory time-bound tax relief measures to developers and constructors undertaking to complete their projects by September 2022. The amendment also offers avoidance of audit regarding the source of investment upon the fulfillment of certain conditions. To ease tax paid upon property, the current regime proposed alterations to the Punjab Urban Immovable Property Tax Act.

With these modifications, the taxpayer can now avail a discount of 5pc on tax payment through e-payment channels, and a rebate equal to 10pc of annual tax if the said tax is paid aggregately by September 30, 2020. Furthermore, the government now provides leverage to pay property tax on yearly or half yearly basis with no late payment charges for the duration of the pandemic. The Punjab Motor Vehicles Taxation Act now follows suit with similar changes to its policy code. Excise and Customs Duty Taxes have been rationalized to promote cross border trade. Import taxes for pulses and vegetable oil have been marginalized to prevent price hikes. The government has also green lit tax exemptions on 61 medical items. It also aims to cut medicine prices for broader accessibility and penetration.

Government’s Approach towards Public Sector

Rallying greater anticipation, however, was government’s approach towards the public sector. Does it succumb to the burden of IMF debt and respond by levying heftier, more cumbersome taxes on its already impoverished population, or does it implore relief and instead direct the funds towards overcoming the Corona crisis? It seems to have settled on the middle way. On the one hand, the new bill comes devoid of a new tax to add to the tax book, but on the other the government did raise the tax revenue collection bar by Rs. 200 billion, suggesting a surplus of at least Rs.120 billion in income tax and Rs. 80 billion in sales tax. Even though the cabinet took to the stage to dispel public fears about tax overburdening, an air of trepidation and skepticism still looms over the horizon.

From where it concerns healthcare, the government has opted to increase funding for hospital services by 130.55% in an endeavor to combat the incremental surge of COVID-19 patients. Though a much-needed maneuver to effectively counter the pandemic, critics argue as to the disproportionately high allocation of funds towards the debt financing and defense budget. In the last two years, Pakistan utilized more than 2.5% of its GDP on defense, coming up slightly higher than the world average in contrast with the GDP consumption of 1% for healthcare significantly lower than the world average of 9% for the same window. Now with debt and defense comprising 60% of the government’s expenditure for the coming year in face of a relentless outbreak, the establishment has done just enough to cloud the air with suspicion.

Revenue Generation and Relief for the Public

In another bit of news, while the government struggles to maintain equilibrium between revenue generation and providing relief, the Federal Board of Revenue (FBR) looks to hit a home run after several years of run out. Despite, the negative growth and economic recession, the tax collection target for fiscal year 2020-21 is set at Rs.5555 billion. The target for fiscal year 2019-20 originally set for Rs.5555 billion was revised twice to Rs.3908 billion which the FBR missed by Rs.374 billion. For the year 2018-19, the FBR collected Rs.3828 billion against the twice revised target of Rs.4150 billion with a deficit of Rs.322 billion. Given the FBR’s track record of coming a day late and a dollar short, coupled with the havoc from the outbreak, the collection target for this year sounds implausible and far-fetched. Further giving credence to this discernment, is the fact that the budget plan laid down no groundwork to push for economic stability or growth. Revealing dubiety was none other than the financial advisor to the prime minister who went on to quote, “The budget is an aspiration for reaching any certain stage based on a certain assumption. It is not like a holy book that cannot be changed. It is not budget of 19th century but an evolving document that can be adjusted around the clock in line with ground realities.” Other governmental bodies seem to give off the same impressions.

All things considered, one can surmise that the bills introduced by the government have only sought mere patchwork here and there to repair the sundering fabric of economy. It does little in the way of coming up with innovative strategies to reverse the socio-economic downfall. Economists and tax experts have blamed the country’s dissymmetrical and convoluted tax system for many of the economic distortions, citing the need for a low rate, broad-based equitable tax system. They urge the government to reduce the sheer amount of taxes levied upon the middle-income households and businesses to ensure their revival and survival.

Final Thoughts

The country must also shift towards a transparent corporatized economy. Undocumented sectors must be brought into the tax-net rather than overtaxing a few multinational corporations. The establishment should also crack down on tax cheats, frauds and evaders as opposed to yoking law-abiding and tax-paying citizens. What we need is an even-handed tax ecosystem that works for all and sundry.

It hardly is surprising that the fiscal budget fails to address all these concerns. Pakistan has historically struggled with its policies. Previous regimes and budgets have displayed such a trend. This time however, the stakes are much higher. Pakistan stands on the brink of a total financial breakdown, and half measures could have far-reaching consequences. To save the economy and to protect its reserves, the government must go the whole nine yards to initiate economic, political, and structural reforms across the board.

Editor’s Note: An earlier version of this blog appeared in The Nation newspaper on December 10, 2020 here.

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