EDITORIAL: The tax laws (amendment) ordinance 2020 granting tax amnesty to construction industry received the assent of the President of Pakistan in April 2020 with the following impeccable rationale to deal with the onslaught of Covid-19: “in the existing circumstances, the poor and most vulnerable segments of the population, including the daily wagers in Pakistan are at most risk of suffering and facing [hardships] to their livelihoods; and in order to protect and revive the economy of Pakistan, it is essential and critical to give incentives for revival of the construction industry with certain conditions.” Some of these conditions were, sadly though not, unexpectedly, liable to abuse.
The Ordinance was extended till 30 June 2021; however, while it was made part of the Finance Act 2021 in the budget 2021-22 yet the end date of applicability of the ordinance was not changed. In his post-budget press conference Finance Minister Shaukat Tarin stated that discussions are under way with the International Monetary Fund (opposed to amnesty schemes on the ground that they penalize the genuine taxpayers) for an extension in the date of applicability, adding that the facility of non-disclosure of sources of income can be availed till June 2021 while availing the fixed tax regime for the construction sector will apply till end December 2021.
On 16 June 2021, Tarin publicly acknowledged that talks on the sixth mandatory review with the IMF were inconclusive, deferred till September 2021, adding that the government has embarked on formulating an alternate time-bound structural reform programme, particularly with respect to the poorly performing power and tax sectors, with growth being the overarching objective. The government has yet to share, leave alone demonstrate, an alternate power sector plan to the one agreed in February 2021 which envisaged a raise in the base tariff to achieve full cost recovery, so as not to compromise growth. The recent visit of a World Bank team, the lead agency in the sector, indicated that the alternate plan has not yet been shared which has naturally fuelled its concerns over reforms.
The Federal Board of Revenue (FBR) collected 4732 billion rupees July-June 2020-21, surpassing the downward revised target of 4691 billion rupees, which economists attribute to the 3.94 percent growth rate - almost double the projection - which, in turn, is being mainly credited to the success of the incentives extended to builders/developers. Questions are being raised as to why the rise in revenue was only of 41 billion rupees when the growth rate was double the projection – a query based on the projected 5 percent growth rate in the current year estimated to generate an additional 236 billion rupees or nearly 20 billion rupees additional each month. And, the question as to why the July 2021 collection was 410 billion rupees against the target of 342 billion rupees, given that the amnesty scheme expired on 30 June 2021? This increase may safely be attributed to increase in international prices of imports, depreciation in the value of the rupee, increase in tariff rates at the import stage and higher quantities of imports.
The State Bank of Pakistan has termed the scheme a success by citing a 75 percent increase in loans to the housing and construction sector last year compared to the year before, sourcing it to its policy of mandating banks to allocate at least 5 percent of private sector credit to this sector. While credit to the private sector in Pakistan is the lowest in the region, barring Afghanistan, due to state sector borrowing crowding it out, yet it is relevant to note that the government is also heavily engaged in low-cost housing for the poor, at subsidized rates, and there is therefore a need to distinguish between the rise in credit for private or public sector schemes.
Unfortunately, the government is between the devil and the deep blue sea – if it does not extend the scheme till the end of this year there are statements by builders/developers that the sector growth would be severely curtailed with a consequent impact on the GDP growth rate; while any attempt to extend it for another six months is unlikely to meet with approval from the lending agencies whose subsequent disengagement would make external inflows significantly more expensive.
Copyright Business Recorder, 2021
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