Legal issues in tax laws of SMEs highlighted

Some legal issues in the tax laws, governing tax concessions including minimum tax exemption to industries setup or to be setup at the Special Economic Zones (SEZs), have created a disincentive for the investors.
Tax experts told Business Recorder on Friday that the income tax exemption given under the Income Tax Ordinance 2001 (ITO 2001) to the industrial undertaking set up within much publicized SEZs have become defective due to an oversight, while drafting the same.
Various SEZs have been developed across Pakistan in pursuance of the Special Economic Zones Act 2012 preamble of which stated that "whereas it is necessary and expedient to promulgate a law for the creation, development and efficient operation of special economic zones through provision of a legal and regulatory frame work to encourage domestic and international investors for promotion and establishment of industrial infrastructure and for other matters connected or ancillary thereto."
Section 2 of the SEZ Act provided that this Act to override other laws and stated that provisions of this Act shall have force notwithstanding anything to the contrary contained in any other law for the time being in force.
Whereas, Section 37(b) of the Act as amended, provide the benefit of exemption from all taxes on income for all the enterprise for the period of 10 years from start of commercial production.
Whereas, Section 54(a) of the ITO 2001 states that no provision in any other law providing for any exemption from any tax imposed under the Income Tax Ordinance shall have legal effect unless also provided for in this Ordinance.
Shahid Jami, a renowned tax lawyer explained that as such both the laws contained overriding provisions, which were not well drafted and that is why through the Finance Act 2013, Clause 126E was substituted in Part I of Second Schedule of the ITO 2001 and income derived by the zone enterprise was exempted from income tax for the period of 10 years.
However, this exemption is limited only to tax on income, whereas under the Income Tax Ordinance 2001, there are various provisions levying final or minimum tax like final tax under Section 154 on exports at the rate of one percent and minimum tax under Section 113 at 1.5 percent on total local turnover in case of loss or exemption from normal tax.
Jami explained that due to oversight exemption from minimum tax under Section 113 was not provided to the industrial enterprises established in the SEZs though under Clause 11A of Part IV such exemption has been given to many others, such as taxpayers qualifying for exemption under Clause 126K of Part I in respect of income from operating halal meat production, and taxpayers qualifying for exemption under Clause 126J of Part I in respect of operating warehousing or cold storage facilities for storage of agriculture produce.
Recently, the present government through Finance Supplementary (Second Amendment) Act, 2019, said exemption from minimum tax has been given to green field industrial undertaking qualifying exemption under clause 126O but again earlier oversight in bigger incentive of the SEZs got ignored.
Jami added that exemption from final tax under Section 154 on exports has been given under Clause 93 of Part IV to taxpayers operating halal meat production.
As per Jami, invariably the tax burden of minimum tax at the rate of 1.5 percent on total turnover is more than normal corporate tax liability on income hence the exemption given to SEZs has become farce and is no more an incentive when the industries have realized the error in law and inability and reluctance of tax authorities to rectify the same through any ordinance etc though Second Amendment Ordinance promulgated in December 2019 is pending before the National Assembly, wherein requisite amendments in Part IV can also be inserted to extend exemption to final and minimum tax as well, so that establishment of industrial undertakings in various SEZs gets momentum for revival of economy.