Pakistan badly needs investments in productive sectors– both from within and outside. And the urgency could not be greater given the unsustainable balance of payments situation today. One way to do so is by establishing Special Economic Zones (SEZs) where special treatment is given to investors based on certain criteria.
However, Pakistani SEZs have failed to attract FDI compared to India & Bangladesh. 60 percent of SEZ land in Pakistan is still unoccupied after 11 years of SEZ Act 2012. Investors are not willing to trust 10-year tax holiday as FBR applies 1.25 percent minimum turnover tax on SEZ enterprises. The government must take notice of this.
Over the last 10 years, the turnover tax is equivalent to 29 percent tax on net income. Investors call it “Deceptive Marketing” by Board of Investment (BOI). This is hindering the foreign capital and investment in the manufacturing sector, especially via CPEC Phase II, which is the key to solving our balance of payment woes and won’t happen without clear & decisive policy incentives. There are no two ways about it.
The buzz is that Shandong Province of China is thinking to relocate its industries to Pakistan, as most industries are labour-intensive such as Cement, Fish farming, Agriculture, solar panels, Citric acid, etc. Sources in touch with Chinese investors say that over 100 projects have potential and interest to relocate to Pakistan.
SEZ incentives are a key to attract such relocations which will bring jobs to the country and a large portion of the output would be exported back to China. That is to help transfer the technology and skillset to Pakistan and help to create much needed value chains. However, that is not likely to happen without the said incentives to be implemented. And turnover tax is one big impediment.
The issue was highlighted with the government last year when a foreign investors delegation met the PM to raise the issue of unfair applicability of minimum turnover tax on SEZ enterprises and explained to him how its constraining their investment in Pakistan. The PM formed a committee comprising of BOI and FBR representatives, and that came up with a recommendation to continue with exemption of minimum turnover tax in SEZs which is inline with the SEZs Act.
However, there is nothing on it in the recently announced budget. FBR perhaps fears potential loss of revenues; but that might not be the case, as it would be more than compensated for by the 18 percent sales tax paid by these new SEZ enterprises when they are set up in SEZ.
The main idea behind SEZs is to encourage domestic and international investors for promotion of industrial infrastructure. And the fiscal benefits are provided in this regard. One such fiscal incentive was ‘exemption from all taxes on income’ given to zone enterprises under Section 37 of the SEZ Act.
This exemption from tax on income was one of the critical bases of the investments made in the SEZs across the country since 2016. However, the FBR is not willing to extend exemption from minimum tax on turnover. This is despite the plain language in both the SEZ Act and Income tax Ordinance, 2001.
The intention of FBR to deny exemption from minimum turnover tax would frustrate the provisions of the SEZ Act. It will not only create dissatisfaction among already invested zone enterprises but would also deter new foreign & domestic investors from establishing factories in SEZs.
This contrasts with the practices in other developing countries, especially China, Vietnam, India and Bangladesh that have used the SEZs as a valuable tool to attract foreign capital to develop their industrial infrastructure.
To date, Pakistan SEZs have performed poorly compared with its regional peers. Credibility and sanctity of the commitments made by the Pakistan’s Parliament and its Government are critical to compete in attracting investments in our SEZs and attracting the much-needed foreign capital in manufacturing sector.
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