Article by Dr. Vaqar Ahmed, Joint Executive Director, Sustainable Policy Development Institute (SDPI), Pakistan.
Small businesses in Pakistan have been adversely affected by the Covid-19 pandemic. The low demand at home, disruptions in supply chains, constraints in international trading, and expected prolonged lockdowns are now leading to severe cash flow problems, the inability to pay back debts and cancellation of orders from clients.
This rising uncertainty is gradually leading them to lay off employees which will have welfare implications. In some sectors where recovery is difficult to predict, small businesses have started planning for the worst: complete shutdown. This crisis could also imply a much bleaker outcome for the startup ecosystem in Pakistan.
The government has announced a SME relief package. The central bank has also come forward to relieve some of the funding and finance related concerns of private enterprises. Yet, many micro and small businesses do not understand how to apply or if they are eligible, to receive such assistance. There are others who argue that this one off relief may not be enough given that businesses are going to face depressed demand for a longer term. Pakistan’s past record of small businesses trying to access such fiscal packages is also not encouraging, partly because many such firms do not access formal banking channels for their needs or banks impose steep collateral requirements. Also, large segments of micro enterprises have the entire or some components of their businesses in the informal sector.
Federal and provincial governments have two issues to address now: how to ensure that small businesses are able to access and utilize existing government-provided assistance, and secondly, what more can be done to support private enterprise in these times.
"A progressive fiscal policy and commitment to redistributive taxation is in line with the spirit of Riasat-e-Madinah to which Prime Minister Imran Khan often refers to. A sincere effort is required to reduce the burden of compliance costs faced by small firms- often filing returns several times during a year and to multiple tax bodies across the country".
Dr. Vaqar Ahmed
On the former, it would be best to start by addressing information and outreach gaps. As the problems for businesses are evolving in real-time, hence there remains a need for structured and more frequent public-private dialogue which should be inclusive enough to also give representation to women, youth-led firms and social enterprises. Such a dialogue will also give a sense to the government about how these businesses will get affected in the forthcoming rounds of Covid-19.
On the latter, I believe the forthcoming budget for the fiscal year 2020-21 should be seen as an opportunity not only to provide support to collapsing businesses but also to put in place economic incentives that encourage enterprises to consider resilient business models. A large part of this has to do with reimagining a better taxation regime.
A progressive fiscal policy and commitment to redistributive taxation is in line with the spirit of Riasat-e-Madinah to which Prime Minister Imran Khan often refers to. A sincere effort is required to reduce the burden of compliance costs faced by small firms - often filing returns several times during a year and to multiple tax bodies across the country. It is an opportunity now to automate, rationalize or eliminate several filing and payment layers in taxation to ultimately help reduce the cost of doing business.
After a lot of persuasion from local think tanks and the International Monetary Fund (IMF), federal and provincial governments agreed to establish a National Tax Council (NTC) to harmonize the general sales tax (GST).
Currently, all provinces have a different structure of GST on services. There are also issues regarding the definition of certain activities which the federal government may assume to be under its jurisdiction. Perhaps smaller firms have been the hardest hit due to the fragmented tax structure across the federation and it is time now to expedite NTC’s establishment and work in this direction. Even when the system is finally harmonized, the GST should not be collected by multiple windows at federal and provincial levels. A unified tax return and collection should be made possible through online mechanisms.
It will also be timely to think about which sectors should be motivated to scale up production and services in the face of this health-related emergency. Hospitals and private clinics operating at micro, small, and medium scale are primary candidates for cut in GST on services and even rationalization in direct tax rates. Firms producing personal protective equipment should also see a relief in taxes. The trade taxes faced by such producers or even hospitals importing from abroad need to be revisited. The agro-based and food processing enterprises will need similar help as their input supplies face price and supply volatilities.
Covid-19 also increased demand on several other sectors providing essential services. Our policy circles have rarely seen these sectors as important for the social and mental wellbeing of society until the pandemic struck. It will now be timely to recognize the services of firms (including schools) providing online services. The economic policy managers must think out of the box how best to leverage e-commerce in the battle against Covid-19.
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