Pakistan’s Tax policy Response to Covid-19 pandemic

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Pakistan’s Tax policy Response to Covid-19 pandemic

Bilal Hassan

Pakistan is a middle income country with GDP per capita of USD 1,497 during 2018-19. Revenue mobilization is almost 50% of its potential with tax revenue-GDP ratio of 13.9% and non-tax revenue-GDP ratio of 2.4% during 2018/19. With limited resources like other developing countries, Pakistan will be facing serious challenges in the wake of the Covid-19 pandemic. Although it is too early to sum up exact impact of the pandemic, the most-cited impact is summarized below.

  • significant contraction of GDP. The World Bank (WB) has estimated that the South Asian Regional growth could fall between 1.8% and 2.8% in 2020, and that Pakistan is in a danger of experiencing a negative economic growth rate;
  • national output is projected decline in the range of 2.2% to 1.3% during 2019-20 by the WB, which implies significant reduction in per capita income;
  • considerable reduction in job opportunities due to countrywide lockdown. Further, job losses in the oil-producing Arab and Gulf countries, which employ large Pakistani expatriate workers, will further add to rising problem of unemployment;
  • significant decline in remittances. Pakistan’s remittances will likely reduce due to shrinking job opportunities for the Pakistani expatriate workers around the world, particularly in the Gulf region as 2.6 million Pakistanis in Saudi Arabia have generated remittances between USD4.8 billion and USD5.9 billion over the last five years and 1.5 million Pakistani workers in the United Arab Emirates (UAE) generated remittances between USD3.1 billion and USD4.3 billion during the same period;
  • considerable decrease in exports, which will result in a steep drop in foreign exchange earnings and increasing unemployment;
  • mounting debt burden of PKR41 trillion, which is 49% of Pakistan’s GDP, will further add to challenges in coping with the Covid-19 pandemic as Pakistan will have to pay about USD40 billion as interest on its external debt during 2019 and 2023.
  • escalating shortfall in tax revenue target and increasing expenditure will push fiscal deficit between 7% and 10% of GDP as projected by the WB. Pakistan’s tax revenue collection is estimated to be PKR 1.65 trillion less than the original target of PKR5.555 trillion set for 2019-20.cash-distribution-under-govt-s-ehsaas-program-begins-1586425628-4165

In order to mitigate the effects of the Covid-19 pandemic on taxpayers, the tax authorities extended the deadlines for filing tax returns of sales tax and federal excise duty. Furthermore, deadline for payment of sales tax and federal excise duty has also been extended to ease the financial burden and cope with the lack of cash flow of businesses and individuals as a result of Covid-19 pandemic. Detail is summarized below:

 

  • the deadline for filing sales tax and federal excise duty tax returns for the month of January 2020, which is due by 18 February 2020, extended up to 15 April 2020;
  • the deadline for filing of the sales tax and federal excise duty tax returns for the month of February 2020, which is due by 18 March 2020, extended up to 15 April 2020;
  • the deadline for payment of sales tax and federal excise duty for the month of February 2020, which was due by 15 March 2020, extended up to 12 April 2020.

 

Furthermore, pursuant to Circular No.9(11)ST-LPE/Misc/2016 issued on 18 April 2020, the Federal Board of Revenue (FBR) extended the deadline for tax return filing and payment of sales tax and federal excise duty for the tax period March 2020. Detail is as under:

  • the sales tax and federal excise return, which was due by 18 April 2020, was deferred to 30 April 2020; and
  • the sales tax and federal excise payment, which was due by 15 April 2020, was deferred to 27 April 2020.

As a part of multi-billion economic relief package, the government announced issuance of tax refunds amounting to PKR100 billion in order to ease the financial burden and lack of cash flow of businesses and individuals as a result of Covid-19 pandemic and to enable the businesses and industries to pay salaries to their employees in the prevailing emergency Covid-19 pandemic situation. For expeditious issuance of tax refunds, the following measures were adopted:

  • established centralized system for online payments of income tax and sales tax refunds as well as customs duty drawback;
  • the tax authorities were instructed to complete sales tax refund process before 20 April 2020 as well as to work out income tax refund amount after due adjustments; and
  • strict monitoring of issuance of tax refunds for maintaining transparency and fairness;

Pursuant to amendments in the Second Schedule to the Income Tax Ordinance, 2001 (ITO 2001), through SRO 300(I)/2020 of 10 April 2020 issued by the Federal Board of Revenue (FBR), any amount paid as donation to, or any income derived by the Prime Minister Covid-19 Pandemic Relief Fund 2020 (Covid-19 Fund), will be exempt from income tax. Furthermore, the following provisions of ITO 2001 will not be applicable to the Covid-19 Fund:

  • Section 113: payment of minimum tax;
  • Section 151: deduction of advance tax on profit on debt;
  • Section 231A: deduction of advance tax on cash withdrawal;
  • Section 231AA: deduction of advance tax on transactions in bank; and
  • Section 236P: collection of advance tax on banking transactions otherwise than through cash.

The Federal Board of Revenue (FBR) issued the following SROs to reduce taxes and duties on import and supply of various food items during the period commencing from 7 April 2020 until 30 June 2020 for alleviating the adverse impact of Covid-19 pandemic on different sections of the society.

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SAMSUNG CSC

SRO 287 (I)/2020 that inserts new clauses (24CA) in Part II and (12C) in Part IV into the Second Schedule to the Income Tax Ordinance 2001 (ITO 2001).

  • Clause (24CA) introduces reduced withholding tax rate under section 153(1)(a) of the ITO 2001 of 1.5% from 4.5% of the gross amount of payment in respect of supply of tea, spices, salt, dry milk, sugar, pulses, wheat flour and ghee, supplied to the Utility Stores Corporation (USC) by any person other than a company. However, Clause (24CA) will not applicable if tea, spices, salt and dry milk are sold under a brand name; and rate of tax under section 153(1)(a) of the ITO 2001 is less than 1.5% of the gross amount of payment under any other provisions of the ITO 2001; and
  • Clause (12C) exempts persons importing pulses from payment of advance tax at the rate of 2% under section 148 of the ITO 2001.

SRO 288(I)/2020 that amends SRO 670(I)/2019 of 28 June 2019 to exempt additional customs duty on import of edible oil and oil seeds.

On 20 March 2020, the FBR issued the following Statutory Regulatory Orders (SROs) to exempt from duties and taxes the medical and testing equipments concerning Covid-19 outbreak for a period of three months commencing from the date of publication of these SROs:

  • SRO 235(I)/2020 to provide exemption from the whole of the customs duty, regulatory duty and additional customs duty chargeable under the Customs Act 1969;
  • SRO 236(I)/2020 to provide exemption from deduction of the withholding tax on the imports under section 148 of the Income Tax Ordinance 2001; and
  • SRO 237(I)/2020 to provide exemption from the whole of the sales tax on the imports and subsequent supply under the Sales Tax Act 1990.

On 17 April 2020, the President promulgated the Tax Laws (Amendment) Ordinance 2020 (Ordinance 2020) concerning incentive package for construction sector announced by the Prime Minister on 3 April 2020.

The Ordinance will be applicable to new projects commencing before 31 December 2020 and existing incomplete projects in the construction sector. However, new and existing projects will require to be registered by filing a prescribed form on the IRIS web portal of the FBR.

Under the Ordinance:

  • tax will be charged on the basis of square feet and square yard;
  • withholding tax will not be charged on construction material except for steel and cement;
  • withholding tax will not be charged on services except those rendered by companies;
  • tax credit of profit/gains from a project up to 10 times of tax payment will be available;
  • 90% tax liability will be reduced for low cost housing projects of Naya Pakistan Housing and Development Authority;
  • tax will not be charged on dividends paid to the shareholders by the companies;
  • capital value tax (CVT) is exempted within the jurisdiction of federal capital;
  • a reduced advance tax of 5% instead of 10% will apply on sale of properties;
  • construction services within the jurisdiction of federal capital will subject to 0% sales tax; and
  • one-time exemption from capital gains tax will be available on sale of personal accommodation not exceeding 500 square yards in case of houses and 4,000 square feet in case of flats; and
  • capital investment made in a new project in the form of money or land will not be probed under the provisions of section 111 of the ITO 2001 subject to prescribed conditions.

The future will tell us whether these measures prove effective against socio-economic challenges posed by the Covid-19 pandemic.

 

 

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