TAXATION

ASSIGNMENT
COVID-19 IMPACT ON GDP AND TAX 2019-2020

SUBMITTED TO: Ms. SEHRISH aamar

SUBMITTED BY: MAHEEN AMIN
CLASS: BBA 4
SEMESTER: 8
ROLL NO:61651024

LAHORE COLLEGE FOR WOMEN UNIVERSITY, LAHORE

 COVID-19 effect on GDP and tax of 2019-2020

A small viral outbreak in Wuhan city of China has now engulfed the whole planet. All those who

had any false hope and misconceived

notions of containing this are now in

shock. The world has come to a

standstill.

Pakistan was introduced to the virus

through travellers coming in from

countries like Iran initially, and then

there have been reports of migrant

workers and personnel coming to

Pakistan from the Middle East and Europe. Pakistan as of now has over 8 thousand cases and

under one hundred deaths which are increasing daily.

On the other hand, lockdowns tend to suffocate the economy in a number of ways. The economic

fall-out is able to cripple the economy and it threatens the livelihood of the poorest segments of

the society. It’s a split decision and a delicate balance of controlling the virus while not

destroying the economy in the process. It would be pertinent to thrash the facets of the negative

impact on the economy from the COVID 19.

The lingering pandemic COVID-19 is expected to have far reaching negative impact for

Pakistan’s economy as the number of people living below the poverty line might get doubled

going up to 125 million from existing figure of 50 to 60 million. The lingering pandemic

COVID-19 is expected to have far reaching negative impact for Pakistan’s economy as the

number of people living below the poverty line might get doubled going up to 125 million from

existing figure of 50 to 60 million.

EFFECT ON GDP

A downturn in Pakistan’s GDP growth was anticipated even before the epidemic reached the

country. The State Bank had already revised downwards the GDP growth rate to 3% from an

earlier estimate of 3.5% for the 2020 fiscal year. The Asian Development Bank also lowered its

projected growth rate to 2.6% from an estimated 2.9% while the World Bank has revised it

downward to 1.1%. Official assessments estimate an initial loss of PKR 2.5 trillion (around $15

billion)

It has further forecasted an economic loss of up to $5 billion, while official authorities expect

anywhere between 12.3 to 18.5 million layoffs.

The fiscal deficit is expected to narrow to 8.0% of GDP in FY2020 as the government continues

to prioritize consolidation. In the first half of FY2020, the deficit fell as revenue collection

rebounded from the equivalent of 6.1% of GDP a year earlier to 7.3%. On the expenditure side,

spending increased from 8.7% of GDP in the first half of FY2019 to 9.6% on higher interest

payments and public development programs to protect public investments and support business

activity, particularly activity connected with construction.

The current account deficit is expected to continue narrowing to the equivalent of 2.8% of GDP

in FY2020 with a reduction in the trade deficit resulting from currency depreciation, the

imposition of regulatory duties to contain import demand, and continued recovery in workers’

remittances following declines in FY2016–FY2018. In the first half of FY2020, the current

account deficit narrowed sharply from 5.8% of GDP a year earlier to 1.5%. Modest growth in the

key exports textiles, rice, and leather was supported by loans under a central bank export finance

scheme and long-term financing facility for exporters. Now this was complemented by a notable

reduction in imports restrained by higher import duties. Weaker demand under COVID-19 could

adversely affect exports, but on balance exports should strengthen due to policy stability,

improvement in ease of doing business, and lagged effects of currency depreciation. Thanks
primarily to the lower oil price the current account deficit is projected to narrow further to equal

2.4% of GDP in FY2021.

To finance the fiscal deficit, the government restructured its short-term borrowing from the

central bank into long-term securities in a bid to increase the average maturity of domestic debt

and reduce its interest rate. Improving the primary budget balance as planned will reduce public

debt ratios, moving the economy closer to debt sustainability as GDP growth recovers somewhat

in FY2021 and further in subsequent years.

EFFECT ON TAX 2019-2020

Economic activities are crippled. The virus has killed off the stock market gains. The Federal

Commerce Secretary commerce said that exports orders had got cancelled and due to this export

loss can be in the range of $2 billion to $4 billion. The FBR is already facing a massive revenue

shortfall. The estimated collection of revenue till June 2020 is just Rs 4.4 trillion as compared to

the FBR’s annual target of 5.555 trillion. The Asian Development Bank reported that Pakistan

economy may face losses of $5 billion or may even more than that.

A fall in import duties caused by import contraction was compensated by the reinstatement of

levies on petroleum products and telecommunication services, the elimination of exemptions for

export-oriented industries, and higher profit transfers from the central bank and the Pakistan

Telecommunication Authority. On the expenditure side, spending increased from 8.7% of GDP

in the first half of FY2019 to 9.6% on higher interest payments and public development

programs to protect public investments and support business activity, particularly activity

connected with construction. Health care and other social expenditure is expected to be

significantly higher as the government addresses COVID-19.

IMPORT EXPORT

A fall in import duties caused by import contraction was compensated by the reinstatement of

levies on petroleum products and telecommunication services, the elimination of exemptions for
export-oriented industries, and higher profit transfers from the central bank and the Pakistan

Telecommunication Authority.

OIL

After raising the policy rate to 13.25% at the beginning of FY2020, the central bank reduced it in

2 steps to 11.00% in March 2020 following the decline in global oil prices and sluggish demand

under COVID-19. Growth in private sector credit has slowed considerably. Inflation is forecast

to decelerate to 8.3% in FY2020. The decline in the oil price may adversely affect government

revenues due to reduced petroleum tax receipts.

Food

The government plans to temporarily abolish all taxes on food items and has announced a

significant reduction in oil prices. Payment of utility bills has been deferred for three months for

households with bills falling below a certain threshold. A sum of PKR 50 billion ($298.94

million) has been earmarked for government-run utility stores to ensure the constant availability

of food and other necessities. PKR 280 billion ($1.68 billion) has been allocated to ensure wheat

farmers do not face cash flows and to smooth wheat procurement.

BUSINESS

Setting the right foundation to kick-start the economy is imperative for the government. The

economic stimulus package contains a whole range of fiscal measures (tax breaks, financial

support via utilities, fuel and transport subsidies, concessions and tax refunds) to protect

exporters and businesspersons. The government has also announced a separate package worth

PKR 100 billion ($600.42 million) just for SMEs, which form close to 90% of all enterprises in

Pakistan and generate 40% of non-agriculture employment.

The State Bank of Pakistan (SBP) has announced a Temporary Economic Refinance Facility to

fuel new investment. This will offer subsidised loans to the manufacturing sector and a
Refinance Facility to allow banks to get loans at zero mark-up, which they can offer to hospitals

at 3% for five years. The SBP has also reduced the interest rate to 11%, still much higher than

other countries that have cut down, but 150 basis points lower than before.