Fiscal incentives made negative

According to a news report, the ministry of industries and production has conveyed its concern to the Chairman, Central Board of Revenue, about the adverse impact of two recent budgetary amendments, on the operations of the existing industrial units in the Export Processing Zones.
These amendments will cause a setback to further inflow of foreign investments in these zones. One of these amendments has placed limitations on the export of goods manufactured by EPZ units to the tariff areas of the country. The SRO 461(I) dated June 12, 2004 has restricted exports from the EPZ units to tariff areas to only 20 percent of their total production. It has been pointed out by the ministry of industries that permission to EPZ units for exporting their goods to the tariff areas of Pakistan has served as one of the major incentives for investors of the EPZ.
The sharp reduction in the proportion of EPZ exports to tariff areas in Pakistan has consequently deprived these units from the scope of marketing their goods in Pakistan.
It is true that the manufacturing units located in the Export Processing Zones are supposed to seek foreign markets for their export sales and thereby earn foreign exchange for the country. However, in the absence of a desired level of demand from foreign markets for these goods manufactured in Pakistan's EPZs, there is no reason why these units should not be allowed the scope of exporting their goods to Pakistan.
The exports from the EPZs are equally treated by the customs authorities as imports from abroad and are subject to recovery of customs duty and sales tax at rates similar to those applicable on imports from a foreign country. In this context the EPZs exports contribute to governments revenue in the form of duties and taxes.
Moreover, the goods from the EPZs can only be successfully marketed in Pakistan's tariff areas if they prove to be competitive in prices and compare with the quality of similar goods available in the local market from other countries.
Thus the units operating in the EPZs, which are required to pay in foreign exchange from their own sources in respect of all types of cost, should be equally entitled to sell their goods in Pakistani market along with imports of similar goods from other countries and those manufactured in Pakistan.
Yet another constraint confronting the investors in the EPZs, as pinpointed by the ministry of industries, is the withdrawal of the exemption of excise duty on the export of construction material viz. cement and iron bars to Export Processing Zones. As a result the investors in the EPZs have been burdened overnight with additional cost in the construction of their factories.
The CBR move in this connection would appear to be a contradiction of the principle of facilitating exports which earn foreign exchange. The sale of construction materials from Pakistan to units in the EPZs is interpreted as exports and payments against these sales are received by Pakistani suppliers in convertible foreign exchange.
Since exports are not supposed to carry the brunt of taxes and duties, there is no reason why exports from Pakistan to EPZs should be subjected to any type of levy like the excise duty.
Thus the ministry of industries, which is making the best efforts to make improvements in incentives and facilities in the EPZs and thereby making them more dynamic in attracting foreign investment, is rightly perturbed over the adverse impact of the aforesaid move from the CBR.
It is intriguing to find that while the overall policy thrust of the government is to invite foreign investors in EPZs in particular and in Pakistan in general, the unimaginative taxation policies of the CBR quite often run counter to the above objective. This seems to be one of the reasons underlying the extra-cautious attitude of intending foreign investors to participate in Pakistan's investment scenario.
That the government is keen to extend the concept of Export Processing Zones to different areas of the country, is illustrated by permissions to establish new EPZs, including Saindak in Balochistan. The objective evidently is to create new potential of export-oriented industries in different parts of the country.
The objective is pursued with suitable offers of fiscal and other incentives to both foreign and local investors encouraging them to establish export industries in these zones. Now, if the incentives are turned negative through the moves as could be noted from the above amendments, the investment climate can hardly be expected to show the desired change for the better.