Aftermath of Covid-19 pandemic: PBC for urgent, well-coordinated fiscal & monetary policies

The Pakistan Business Council (PBC) has called for urgent and well-coordinated fiscal and monetary policies to save jobs, preserve industrial capacity, and capability to produce goods and services for both, domestic consumption and exports, in the backdrop of Covid-19 pandemic.

Also, it urged the State Bank of Pakistan (SBP) to further reduce the Policy Rate to 7 percent in two stages, in view of the urgent and existential risk to livelihoods and business continuity.

The business Advocacy body said that the government's Ehsaas Programme will go some way to help alleviate the plight of the poor, many of whom were already jobless.

In today's circumstances, under-addressing the challenge or delaying the measures, is a bigger risk than over-addressing them. A series of small, incremental and fragmented measures, will have diminishing returns and be wasteful and ineffective.

The economic impact of the Coronavirus crisis, both globally and in Pakistan is unprecedented in its depth and width. It is also unpredictable in duration. The only certainty is that the economic crisis will outlast the medical upheaval.

An "all-it-takes" approach being followed by many countries to save employment and ensure business continuity is recommended in Pakistan. These are unusual times requiring exceptional measures.

The PBC urged the federal government to release the remaining Income Tax, Sales Tax Refunds and Export Rebates. The balance will provide much needed liquidity, now when it is required.

Minimum Turnover Tax under Section 113 should be suspended: Businesses should be allowed to file tax returns based on their actual incomes for the current as well as the next Financial Year. A number of businesses are / will face existential threats as demand and profit reduces along with the possibility of dumping of imported products as global suppliers face recession.

Advance Tax deduction under Section 153 be put in abeyance: Advance Income Tax deducted as various stages of business operations, including imports, local purchases of goods and services and upon sales to final customers be deferred till June 2021. Businesses should of course be required to pay any tax if due with their normal tax returns.

Advance Quarterly Income Tax under Section 147 not be collected: Since this is an Advance Income Tax and assumes a certain level of income in the coming quarter and which also has to be funded prior to income from any business activity, it is requested that this not be collected for the 4th Quarter 2020.

Input adjustment of Sales Tax u/s Section 8 B: Currently most manufacturing concerns are allowed input adjustment of sales tax to the extent of 90% of their input. For certain industries this limit has been enhanced to 95%. However, commercial importers are allowed to adjust 100% of their input sales tax in case they have paid minimum value addition tax at import stage. It is requested that this limit be enhanced to 100% for all manufacturing concerns.

As most businesses are currently in survival mode and facing daily emerging challenges, it is requested that Sales Tax returns for March, April & May be filed by June 15th, 2020. This will allow businesses to better manage their liquidity.

Electricity and Gas utilities fall under the federal control. It would assist business if collection of utility bills for February to April 2020 was deferred to July 2020.

Urging provincial governments, PBC said the Infrastructure Development Cess be withdrawn or at least deferred for the next 12 months: No cash payment or bank guarantee to be required to be given. The Punjab Government has already done this till June 30, 2020.

Property tax on businesses be reduced by 50% for the FY2020. Provide energy to industry at globally competitive costs. Incentivize growth of edible oil-seeds, cotton, pulses. Secure parity access with Bangladesh for exports to Japan, Canada and Australia. Launch a revival package for the hospitality/tourism industry. "Walk the Talk" on Special Economic Zones. Activate the Tax Policy Board and separate it and Audit from FBR. Secure Electronic exchange of trade data, especially with China to stem under invoicing. Win the agreement of provincial authorities to clamp down on known centers of smuggling. Agree qualitative and quantitative limits on transit trade with Afghanistan.

Pakistan is fortunate to receive significant fiscal and external account space from the G20/IMF and other multilaterals to fund the immediate liquidity requirements. Additionally, the IMF's Extended Funding Facility has been put on hold. It is essential that Pakistan renegotiates realistic tax targets in line with the FBR's institutional capability to collect and the government's political will to pursue documentation of the economy. In the absence of the latter, the formal sector will continue to be taxed disproportionately.

The State Bank has already undertaken a number of initiatives to inject liquidity, however it could do further. In view of the urgent and existential risk to livelihoods and business continuity, reduce the Policy Rate to 7% in two stages.

Besides the need to revive a crisis-ridden economy, this is also justifiable in view of a non-cost-push inflation rate of 5.2% with the future outlook trending lower. Incentivizing savings, hence a positive real rate, is now not as important a priority, as reducing borrowing cost to sustain the economy. Nor is protecting "hot deposits," which have mostly left the country.

The impact on the exchange rate will be buffered by debt relief from the G20/Paris Club ($10-12bn), Rapid Financing Instrument from the IMF ($1.4bn), assistance from the World Bank and the Asian Development Bank, lower oil imports, depressed import demand, both offset by lower exports and remittances.

Thus, the foreign exchange reserves already up $4bn over same period last year are likely to remain healthy.

Remove the discrimination against large employers whose interest subsidy is limited in the proposed Payroll Refinance Scheme. Large employers comply with all laws, generate the highest exports, pay a large part of the taxes and have high fixed costs. They need parity relief with other employers.

Bring down the Payroll borrowing cost to 2% pa for all formal tax-paying employers.

Banks are risk-averse to lending to SMEs. A subsidized vendor financing scheme which channels funds to SME supply chain partners of large companies can help spread the risk of exposure. No one knows SMEs better than those that transact with them on a daily basis. They are better risk managers than banks.

Under the current conditions, investors are unlikely to start new projects. Hence the need to divert the TERF loan refinance scheme to Balancing, Modernization and Replacement of plant in existing ventures. With general borrowing rate trending downwards, there is a need to revise down the fixed rate for TERF. Remove the 100% LC Margin requirement for import of industrial inputs. This is illogical to retain now.