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December 13, 2019

Procedural delays to establish SEZs deterring investors

Business

December 13, 2019

LAHORE: No special economic zone (SEZ) has been established as yet in Pakistan under the China-Pakistan Economic Corridor (CPEC) because procedures for establishing SEZs and operating industries on promised concessions are cumbersome and deter investors from committing their resources.

The Board of Investment (BOI) is involved at all stages of development through specially formed SEZ Authority that short lists developers. It then selects consultants; the final design has to be improved by SEZA.

The SEZA issues tender documents and receives sealed bids for development of a SEZ. Even after selection of bidders and contractors the allotment of plots need the approval of BOI. The retarding factors for developers to setup and manage SEZs include lack of utility services. Power might be available in some cases, but getting gas connection is an issue.

Why would an investor be interested if he is not assured of the availability of all utilities? Many state agencies like BOI and the local government have roles in management of SEZs. Their efficiency and capacity to deliver remains doubtful.

The developer that manages the SEZ has to route every request of the investor through the BOI. But the BOI lacks capacity to process and clear every issue of industries established in the SEZs.

Why can the issues not be sent directly to each executing agency to save bureaucratic delays? Multiple property transfer mechanisms exist in Pakistan like transfer of property in owner’s name or register of the property in local government.

The DHAs established around the country have different transfer rules as do the industrial estate management companies. In most of the countries where SEZs exist, there is one mode that is to transfer the property in buyer’s name. The judicial system in case of disputes is very weak.

Then there are other drawbacks. For instance the hiring of expatriate workforce is allowed for one year. The investors would be comfortable if a three year work permit was issued in the SEZ under one window.

It is worth mentioning that many skills are not available in Pakistan, and investors must recruite foreigners. Repatriation of profit and capital gains needs to be simplified and permissions promptly granted.

Utilities like power, gas, water and telecommunications must be available at doorstep of the SEZ where developers could make these services available promptly.

The government has announced 10 years income tax exemption in these zones; however, the rules are such that this exemption is not fully available to the investors because we collect bulk of our taxes through withholding regime and withholding taxes are not exempted.

There is section 113 of the Income Tax Ordinance that makes it mandatory for every entity operating in Pakistan to pay a minimum income tax. Even the exports that are zero rated are not exempt from this minimum turnover tax.

Under Section 148 of the ordinance, withholding tax has to be paid on import of raw materials. The industries in SEZs are not exempted on this count.

Section 153 of the ordinance mandates withholding tax on supply of goods, and industries in SEZ getting supplies for various sources would be liable to pay this tax. Section 253 of the ordinance binds power distribution companies to deduct advance income tax on power consumption.

The government would have to elaborate its exemption certificate to include all withholding income taxes in the exemption.

Government has allowed one time duty free import of plant and equipment to industries being established in SEZs. But this concession has no advantage as over 70 percent plants and machineries are imported from China already at zero duty –courtesy Pak-China FTA.

Sales tax on plant and machinery has not been exempted and it is very high in Pakistan. It adds to the cost. Similarly withholding tax on the equipment is not exempted. Moreover, the spare parts are not included in the zero-tariff regime.

The additional customs duty is applicable on plant and equipment imported in SEZs. Balancing and modernising has to be carried out every three to five years, but BMR has not been allowed at zero tariffs.

The government would have to revisit its SEZ strategy and offer meaningful concessions to the investors in other to attract them. The planners should bear in mind that 70 percent of the income tax in Pakistan is collected indirectly and exemption granted on income tax should include withholding income tax as well.