Gwadar free zone: grant of tax exemption approved

The Economic Co-ordination Committee of the Cabinet (ECC) has approved the grant of Tax Exemption under Gwadar Port Concession Agreement for Operation and Development of Gwadar Port for a period of 23 years to those establishing business in free zone.
Giving details, sources said Ministry of Ports and Shipping moved a summary for the ECC for allowing current concession holder of Gwadar Port i.e. China Overseas Ports Holding Company Limited (COPHCL) tax exemption under the Concession Agreement (CA). The summary was discussed in an ECC meeting held on March 16, 2016 and it was decided that a committee headed by Special Assistant to the Prime Minister(SAPM) on Law will review the proposals submitted by the Ministry of Ports and Shipping to ensure that the proposed exemptions are in accordance with the CA.
In the light of a decision of the ECC, the committee held two meetings, i.e., on April 12 and May 05, 2016 under the chairmanship of SAPM in the Ministry of Law and Justice.
As per consensus reached in the meetings, the following tax exemptions are proposed to be extended to the current concession holder according to the CA.
Income Tax- (i) name of the previous concession holder may be replaced by COPPHCL and its Operating Companies in clause 126(A) of part I of the Second Schedule of Income Tax Ordinance 2001 by amending the existing SRO No 755(1) 2007 of July 27, 2007. This will be in accordance with the article 1.3.5(iv)(a) of the CA;(ii) complete tax holiday may be provided to the businesses to be established in the Free Zone, for a period of 23 years as per article 5.1.5 of the CA and ECC decision of April 9, 2015. The SRO will become effective from the date of issuance; (iii) complete tax holiday may be granted to contractors and sub-contractors of the concession holder and its companies for 20 years as per article 7.1.1 of the CA; (iv) exemption from paying minimum tax under section 113 of Income Tax Ordinance 2001, may be granted to the concession holder and its operating companies under article 7.1.1 of the CA; (v) complete exemption may be granted from tax on dividend income and withholding tax as per article 7.1.1 of the CA to the concession holder i.e. COPPHCL (private ) Limited, Gwadar International Terminals Limited, Gwadar Marine Services Limited and Gwadar Free Zone Company Limited;(vi) in the light of article 1.3.5 tax exemption may be given on profit on debt derived by certain local and foreign lenders under the financing agreements to the concession holder under the Income Tax Ordinance, 2001 for 20 years.
FBR, sources said, maintains that such exemptions be provided to the non-resident lenders with non permanent establishment whereas Ministry of Ports and Shipping argues that it may be provided to certain local and foreign lenders as per CA.
Sales Tax and Federal Excise Duty (i) exemption on sales tax was earlier provided by FBR under article 1.3.5(iv)c of CA to the previous concession holder through SRO No 115(1) 2008 issued on February 6, 2008. The SRO may be revised by FBR to add the names of the current concession holder, its operating companies, contractors and subcontractors. Exemption from Federal Excise Duty will be added along with sales tax;(ii) 23-year exemption from sales tax and federal excise duty may be granted to business to the established in the Free Zone as per the decision of the ECC of April 9, 2015. Sales/ supplier outside the Free Zone and into the territory of Pakistan shall, however, be subjected to sales tax and federal excise duty.
Customs Duty: (i) exemption will be allowed to the concession holder, its operating companies and their contractors/sub-contractors from the whole of custom duty for a period of 40 years on import of equipment and materials (plant, machinery, equipment appliances and accessories) for construction and operation of Gwadar Port and its Free Zone. The existing SRO No 327(1) 2007 will be revised;(ii) in the light of article 7.1.2 of the CA, exemption will be allowed to the concession holder from the whole of customs duty for a period of 40 days on import of ship bunker oils for supplying fuels and lubricants and lubricants to ship used in the port and its terminals; (iii) a 23-year exemption from customs duties to all port related business to be established in the Free Zone may be granted in the light of the article 5.1.5 and 5.2.2 of the CA and as per the decision of the ECC of April 9,2015; and (iii) duty-free import of vehicles by concession holder and its operating companies may be allowed, in light of the article 1.3.5(iv) (f) & 7.1.1.1). FBR and Ministry Ports and Shipping will develop a mechanism in consultation with the provincial governments, if required, to regulate the concession provisions and check possible misuse; and (iv) condition of " non manufactured locally" may be omitted from SRO No 327(1) 2007.
The sources said, in case of a dispute about exemption from levy of customs duty on any item, provincial release will be allowed by the customs authorities against corporate guarantee submitted by the importer and in case of any dispute whether any item falls within the category of equipment and materials, the exemption of customs duty will be allowed by FBR on the recommendations of Ministry of Ports and Shipping and Ministry of Law and Justice.
Regarding the import of vehicles for the free zone by the concession holder, a fool proof mechanism will be involved in consultation with the stakeholders. A regulatory framework shall be jointly developed by FBR and Ministry of Ports and Shipping in consultation with the provincial government(s) if required, for imports into and exports from the Gwadar Port Free Zone from/into the customs/ tariff areas of Pakistan.