SEZs: incentive package may include tax relief, foreign ownership

The incentive package for the Special Economic Zones (SEZs) may include corporate income tax/turnover tax exemption, 100 percent foreign ownership, no minimum investment requirement, and no taxes on non-residents.

Sources told Business Recorder that the Federal Board of Revenue (FBR), the Board of Investment (BoI) and the Ministry of Planning Development and Reform are in the process of finalizing the tax incentive package for the SEZs. In case of most of the proposals, the response of the FBR is awaited whereas the BoI has endorsed various proposals and tax relief measures to facilitate SEZs.

Once the proposals are finalized, the amendments are expected to the Special Economic Zones Act, they added.

A recent follow-up meeting to discuss the proposed incentive package for special economic zone at Ministry of Planning, Development and Reform under the chairmanship of Deputy Chairman Planning Commission discussed and proposed measures.

Following are the main points of discussion/decisions/responses of the FBR/BoI and Ministry of Planning: Discussion: It was discussed that 100% foreign ownership to be allowed in SEZ and no minimum investment requirement are part of policy but not present in the SEZ Act.

Decision: It was decided that this point should be made part of the existing SEZ Act, at least for those sectors which have been notified by the government. Provision of justification of sectors could not be included for 100 percent foreign ownership. The action will be taken by BOI in consultation with the FBR.

Discussion: In the point of normal corporate income tax on local sales only except for sectors/industries identified under import substitution, the BOI told that they have identify five priority with consultation of Chinese but they these sectors are designed for China and internal working on these sector have been completed by BOI but need consultation and feedback from FBR and Ministry of industries and Production, So, it was recommended that for designing priority sector for SEZs feedback of other stakeholder, eg, Ministry of industries and production and Customs, etc, is also very important for the decision of identifying these sectors. The BoI will also be in better position if feedback of Ministry of Industry is provided.

Decision: There was no representation from Ministry of Industries & Production in subject meeting. The DCPC made a note of the same and directed secretary MOIP to look into the matter.

Discussion: No taxes on non-resident other income sources of enterprise including property, Investments including profit on debt, dividends and capital gains as long as other income constitutes if it constitutes 5 to 10 percent of annual gross revenue. Taxes on resident other income of companies as per Income Tax Ordinance (ITO).

Decision: Both FBR and BOI will get back on this point after completing their internal discussion. It was decided that focal person should be nominated by FBR, Ministry of Finance, and Ministry of industries & Production. The BOI has nominated PD CPEC, BOI as a focal person.

Discussion: It was proposed that this clause (100 percent exemption on import duties on plant and machinery for 10 years from customs duty. CoD + 10 years to attract 50 percent import duties, 100 percent dunes thereafter) may apply to only capital expenditure but excluding Balancing, Modernization Replacement (BMR) for machinery.

Another issue related to this point was discussed that before the revision of the SEZ Act the word "equipment" was also part of the older version of this Act, but in revised Act 2015 "equipment" was excluded and now only plant and machinery is included. However, it was suggested that equipment may he included; BOI also agreed to this point.

Decision: It is decided that language of this clause needs improvements for better understanding. One-time exemption does not look attractive from investor's perspective. The BOI will get back on this point after their internal discussion.

Discussion: It was suggested in the discussion that concession agreement for Gwadar may have approval of Board of Approval (BoA). The BoI agreed to this suggestion but they say that Ministry of Ports and Shipping has some reservations. It may be requested to Ministry of Ports and Shipping to share their reservations to resolve this issue.

Decision: It was decided to approach Ministry of Maritime to understand their reservations.

Discussion: Corporate tax exemption for 23 years from certain time. It was proposed that the same should be provided for SEZs as the FBR has already agreed to a concession agreement for Gwadar Port & Free Zone. As such, question was raised as to why the same incentive cannot be extended to SEZ.

Decision: The FBR will send its response on this proposition after consultation with their direct taxation department. The action will be taken by FBR.

Discussion: In the discussion on the below mentioned points FBR told that they get back on all these point after consultation with tax department as no representative or tax is present in the meeting.

The proposed tax relief included no turnover tax for export companies; 25 percent Corporate tax exemption beyond 23 years for 12 years (total 35 years if exports more than 75 percent of gross revenue); no income tax for expatriates till 2040 and 100 percent tax exemption on local sourced raw material used for export/import substitution sectors.

Decision: It has been decided that the FBR will share its response after internal consultation with Taxation Wing as there was no representative from Taxation Wing. The FBR has been directed to get back to BoI on these points.

In discussion, the BoI has agreed to 'no turnover tax' for export-oriented companies but it will share its response after getting feedback from the FBR. The action will be taken by the FBR.

Discussion: Regarding incentive to provide bonded warehouses and Customs facilities, ready to use offices, light industrial units, warehouses, the BOI told all these facilities are included in the rules but the bonded warehouse facilities are missing.

Decision: It was suggested to incorporate all these incentive details including bonded warehouse facility in the SEZ Act, so as to reduce complexity and for better comparative advantage. The action will be taken by the BoI.

Discussion: It was discussed that incentive review committee be formed to review incentive package periodically at least once every two years and make recommendations.

Decision: The BoI agreed to this point.

Discussion: incentive package to be enacted separately as part of one document preferably in BOI SEZ Act.

Decision: The BoI agreed to this point.

Discussion: One stop service window to include company registration, facilitation for procurement of licenses, FBR registration, bank accounts, employee visas, compliant office and the BoI access.

Decision: The BOI agreed to this point.

Discussion: It was suggested that incentives need to be federal level initiative with provinces on board, any other provincial taxes levied on inputs/transport to be refunded as well like sales taxes.