Font Size



Menu Style

Submit to FacebookSubmit to Google PlusSubmit to TwitterSubmit to LinkedIn
 (Edited Image Courtesy: Indian NCDC's Covid-19 Comic for Kids)
Corona virus has infected global economy end to end, triggering generation of fiscal, monetary & public welfare packages. 
No wonder then that Covid-19 is sending fiscal consolidation/discipline on sick leave in several countries. European Commission, for instance, has resolved to suspend its fiscal adjustment in European Union to cope with pandemic. This would allow member countries to breach the deficit limit of 3 percent of GDP. 
The USA’s $ 2 trillion stimulus law - Coronavirus Aid, Relief, and Economic Security (CARES) Act – is expected to increase the federal deficit by the same amount. According to Brookings’ paper titled ‘Careful or careless? Perspectives on the CARES Act’, “Deficits will have to take a back seat to preventing a Depression and supporting public health”.
In Finland, “automatic stabilizers are expected to increase the fiscal deficit significantly, including through an expansion of the coverage of existing unemployment benefits”, according to International Monetary Fund (IMF)
Brazil is another case in point. It has invoked the escape clause of the constitutional expenditure ceiling to grapple with pandemic. 
Covid-19 has derailed revenue mobilisation including tax collection. All tax administrations are thus easing tax compliance/filing norms. Many countries have unveiled fiscal stimulus packages. Several more goodies for specific sectors are in the works at finance ministries across the continents.
Before elaborating on taxes, consider more aspects of Coronavirus’ impact on the economies. It is also altering budget arithmetic, enhancing expenditures in certain areas and cuts in others. In India, state or provincial governments have started cutting staff salaries to finance Covid-19 management. 
Oil producers and other commodity-producing countries are faced with twin challenges – COVID-19 and the precipitous drop in the prices of commodities & revenue
Algeria, for instance, is hit by two shocks—the spread of COVID-19 and the sharp decline in oil prices. As noted by IMF, in response to the oil price shock, Algerian authorities have announced their intention to lower current spending by 30 percent (7.2% of GDP or USD 12 bn), while keeping wages intact and protecting health and education spending.
Companies are deferring projects whose viability is uncertain in changed economic situation. They are also tightening belts. Global Fertilizer giant, Yara of Norway, for instance, has made this amply clear in its latest annual report.
It says: “In light of the demanding situation globally related to the Covid-19 virus, Yara's Executive Management will for the second year running abstain from any salary increase in 2020. Furthermore, short-term incentive payout for Executive Management accrued for 2019 which would normally be paid out in April 2020 will be frozen. A conclusion on whether to cancel or pay the bonuses will be made once the macro-economic situation has normalized”.
The deferment of capital expenditure means weak prospects for indirect taxes. And reduction or freezing in personal incomes signals lower direct tax collections. Tax administrations would thus faced with daunting situations for a couple of years. 
Coronavirus has thus left governments with no option but to breach public debt ceilings. There is no escape from liberal deficit financing of budget. This means rise in risk of unsustainable debt pile-up by some countries.  
Developing countries and companies are currently queuing up before multilateral institutions for sanction of money from their respective special Covid-19 management windows. The World Bank group has opened a $14-billion fast-track finance window. IMF has created $ 50 billion concessional financing for member countries to cope with economic challenges thrown up by Covid-19. 
It has altered capital flows in battered stock markets. It is hell-bent on slowing down foreign direct investment (FDI) across the world. United Nations Conference on Trade and Development (UNCTAD) has projected 30 to 40% decline in global FDI during 2020 and 2021.
Coronavirus has left hanging a huge cloud of uncertainty before businesses. 
The companies are now mentioning Covid-19 as a big risk factor in their documents including the ones filed for raising funds from the capital markets. 
According to Australia's telecom giant Telstra corporation, “the current novel coronavirus (COVID-19) outbreak is having a profound impact on business, has caused stock markets worldwide to lose significant value and impacted global economic activity, and it is possible that it will cause a prolonged global economic crisis or recession”.
In its debt offering circular dated 20th March 2020 issued to global investors, Telstra observes: “As at the date of this Offering Circular, the impact of COVID-19 is a rapidly evolving situation. There will likely be more impacts for Telstra from a financial perspective through this unprecedented period and there is a possibility Telstra’s financial performance could be materially adversely impacted”.   
Tracking progress of viral infection and the resulting response of the economy's stakeholders has become a 24x7 work for policy-makers analysts. “Projections of the economic impact of Covid-19 are becoming more serious by the day” says UNCTAD's latest Investment Trends Monitor captioned ‘Impact of the Covid-19 Pandemic on Global FDI and GVCs – Updated Analysis’.
Institutions are thus unveiling websites/weblinks to track policy responses of countries to manage Covid-19 pandemic. On 25th March, Oxford University launched what it called as “the first ever tool to track and compare policy responses of governments tackling the coronavirus outbreak around the world”. 
According to official release, The Oxford COVID-19 Government Response Tracker (OxCGRT) counts data from 73 countries so far, including China, South Korea, Italy, UK and USA. The research team will update it regularly throughout the crisis.  
Says the release, “This new tracker is designed to systematically record government responses worldwide and aggregate the scores into a common ‘Stringency Index’ which we hope will help researchers, policymakers and citizens understand whether increasingly strict measures affect the rate of infection, and identify what causes governments to implement stricter or less strict measures”.
On same day, IMF unveiled a ‘Tracker of Policies Governments are Taking in Response to COVID-19’. This tracker summarizes the key economic initiatives the governments are taking to limit the human and economic impact of the pandemic as of end-March 2020. The tracker at present includes 186 economies. IMF would add more countries to this platform. 
Similarly, OECD launched on 21st March, ‘a new online policy hub’ to help countries in combating pandemic in each sector including taxation. 
Country-specific initiatives aside, country groups are planning collective action. On 23rd March, G20 Finance Ministers and Central Bank Governors, for instance, decided to develop a joint G20 Action Plan in response to COVID-19, which will outline the individual and collective actions that G20 has taken and will be taking to respond to the COVID-19 pandemic.
Three days later, a virtual G20 Summit resolved its members would create economic stimulus. These initiatives would aggregate to over $ 5 trillion. 
As put by OECD Secretary-General Angel Gurría at the Summit, “our latest estimates show the lockdown will directly affect sectors amounting to up to one third of GDP in the major economies. We calculate that, for each month of containment, there will be a loss of 2 percentage points in annual GDP growth. The tourism sector alone faces a decrease in output anywhere between 50% to 70% in this period. Many economies will fall into recession”.
In a note dated 27th March, OECD says: “The implications for annual GDP growth will depend on many factors, including the magnitude and duration of national shutdowns, the extent of reduced demand for goods and services in other parts of the economy, and the speed at which significant fiscal and monetary policy support takes effect”.
The scale of the estimated decline in the level of output is such that it is equivalent to a decline in annual GDP growth of up to 2 percentage points for each month that strict containment measures continue. If the shutdown continued for three months, with no offsetting factors, annual GDP growth could be between 4-6 percentage points lower than it otherwise might have been, according to OECD Note. 
OECD’s online policy hub contains domain-specific packages of initiatives. It says that the packages are not recommendations but initiatives that countries can consider in reining in the onslaught of Covid-19. 
It is here pertinent to cite one such package/note titled ‘Emergency tax policy responses to the Covid-19 pandemic - Limiting damage to productive potential and protecting the vulnerable
The initiatives listed in this Note include: 1) Defer payments of VAT, customs or excise duties for imported items, 2) Simplify procedures for claiming relief from VAT on bad debts, 3) Providing tax concessions for workers in health and other emergency-related sectors, 4) Increasing the generosity of loss carry-forward provisions, 5) Waiving or deferring employer and self-employed social security contributions and 6) Temporarily provide more generous welfare payments and income support, including through benefits provided through the tax system, to individuals and workers.
In another Note captioned ‘Covid-19: Tourism Policy Responses’, OECD has listed two scenarios: 1) international tourism arrivals start recovering in July 2020 and 2) arrivals start to recover in September 2020
The Note says: “Countries for which the impact of the pandemic on tourism is most drastically felt have focused on providing financial relief to tourism SMEs, such as postponed VAT payment. Liquidity injections have been introduced to ensure business survival in the immediate term (e.g. Austria, Croatia, Greece). In Iceland the bed-night tax is being suspended until 31 December 2021”.
Tukey has decided to waive off the accommodation tax in hotels and tourism facilities until November. The underlying message is clear: tax administrations have to sacrifice revenue to rescue tax payers from brink of disaster & nurse them to health and then resume restoration of taxes in phases. 
Like institutions, consultancy giants are unveiling different Covid-19 impact monitoring systems for different sectors. 
PwC’s ‘COVID-19 Navigator’ assess the potential impact on businesses and their readiness to respond. The digital tool contains 3 sections of questions that helps companies understand where they stand as they respond to COVID-19 in the areas of: crisis management and response; workforce; operations and supply chain; finance and liquidity; tax and trade; and strategy and brand.
Similarly, KPMG tracks global tax developments related to COVID-19. It is for the first time that country-specific, sector-specific response to challenges posed by pandemic are getting tracked. Such monitoring helps governments to compare their initiatives with that of others. Live tracking helps authorities fine-tune their responses and take leaf from others’ packages. 
As governments continue to respond to COVID-19, it is imperative to study what measures are effective and which are not”, says a recent Working Paper from Oxford University.
It adds: “OxCGRT seeks to contribute to this knowledge gap by providing a comparable measure of the stringency of government responses over time. We find significant variation in both the measures that governments adopt and when they adopt them. Going forward, governments will benefit from adopting an evidence-based approach to the measures they deploy”.
To conclude, the efforts by different stakeholders to monitor unfolding pandemic & the governments’ economic response towards would open a new chapter in developing coordinated action against global shocks. 
Published by taxindiaonline.com on 1st April 2020
You are here: Home Macro Economy Covid-19 Reshapes Fiscal Domain Across the World