Chinese companies working on CPEC: Balochistan refuses to grant blanket tax exemption

The government of Balochistan has refused to grant blanket tax exemption to Chinese companies working in Pakistan under China-Pakistan Economic Corridor (CPEC), negating the concept of standardized tax policy for Chinese investors. Sources told Business Recorder here on Thursday that the refusal has been made by Balochistan government during the follow-up meeting held at the Ministry of Planning to review the progress of CPEC projects under the chairmanship of the secretary ministry of planning and development.
The meeting also decided that no attachment were of any Chinese company's bank accounts, engaged in CPEC projects, would be carried out by the Federal Board of Revenue (FBR) unless approval has been taken at senior level in the board (FBR).
According to sources, it was informed by a representative of Balochistan government that blanket tax exemption is not possible for Chinese companies working on CPEC projects; adding that tax exemption/relaxation in this regard could be brought about on case to case basis.
In his response, Chairman Gwadar Port Authority (GPA) remarked that they had referred a case related to Gwadar Port operations to the government of Balochistan which has been unresolved for the last two years despite the fact that finance secretary Balochistan had committed to giving exemptions for development of Gwadar whenever required when the Gwadar Port concession agreement was being signed.
Additional secretary, Ministry for Planning, Development and Reform (MPD&R), apprised the meeting that all provincial governments, including Balochistan's, had agreed in previous meeting to develop a standardized tax policy for levying provincial general sales tax (GST) on CPEC Projects for the categories that fall under the Schedule (2) of the Provincial Sales Tax Regulations keeping the tax rate of Punjab government as a benchmark. He added that all provinces need to agree to a 'basic minimum' if not zero tax-rating with Chinese companies in respect to CPEC projects.
It was noted with concern that response from the Balochistan government was not forthcoming and secretary Ministry of Planning and Development directed that a letter be written to chief secretary Balochistan highlighting these observations. In his remarks, secretary Ministry of Planning and Development highlighted that tax issues with respect to CPEC projects need to be resolved proactively by all stakeholders. He added that the tax issue was also raised in meeting of Cabinet Committee on CPEC.
In view of minister's decision, the secretary Ministry of Planning and Development instructed FBR that no attachment of any Chinese company's accounts engaged with CPEC projects be made without the approval at a senior level in the board. In this regard, the FBR will issue administrative instructions/SOPs with respect to attachment of Chinese companies' accounts engaged with CPEC projects at the earliest. The representative of FBR said that exemption from sales tax and FED (federal excise duty) has been given to Chinese companies working on CPEC and non-CPEC projects under the 3rd Schedule.
It was informed by representative of AJK government that initial sales tax regime for construction services was 16 percent which was adjustable; meaning thereby that sales tax claimed in input would be adjusted in output tax. However, the Chinese company "China Three Gorges" engaged in Karot Hydro Power Project had asked for a preferential treatment for taxation under CPEC arrangement; more so because the refund adjustment process is quite complicated and slow.
The government of AJK in consultation with the government of Punjab deliberated upon the issue and in the Finance Bill 2017, current sales tax regime is 5% in both AJK and Punjab. This 5% sales tax is non-adjustable in the sense that the company can add this cost to the tariff petition to NEPRA and this will go to the consumer. The company asked for a further reduced rate, arguing that 70% of electricity will be used in Punjab and the consumers will have to bear the additional cost. The AJK government has constituted a committee headed by finance minister to further deliberate on tax reduction.
The authorities noted with satisfaction that the AJK government is examining concession/ reduction in sales tax regime for CPEC projects. The representative of Punjab government said that the current sales tax regime for CPEC projects in Punjab is 5% which is non-adjustable. However, a summary has been moved to chief minister Punjab with recommendations for a further tax reduction.
The representative of Sindh said that current sales tax regime in Sindh is 13% (with adjustment) and 8% (without adjustment) and they have not been approached by any company for tax concession. The additional secretary MPD&R remarked that the Sindh government needs to act proactively for due legislation and should not wait to be approached by potential investors, including those from China, for reduction/concession in sales tax.
The chair (secretary Ministry of Planning and Development) noted that the Sindh government has not revised policy on tax regime for CPEC projects so far and directed that a DO letter be written to chief secretary Sindh highlighting these observations. It was informed by representative of Khyber Pakhtunkhwa that two tax regimes are currently in practice; (i) 15% with adjustment (ii) 5% without-adjustable, however, they are considering bringing the same at par with other provinces. A policy for the same is under consideration by the provincial government.
The authorities observed that tax adjustment and refund process is a cumbersome process and impedes effective implementation of CPEC projects, adding that such refund adjustment mechanisms are a source of worry to foreign investors. The chair directed that a DO letter be written to chief secretary Khyber Pakhtunkhwa requesting for a revised tax regime to support CPEC projects within 15 days.
The representative of Gilgit-Baltistan said that sales tax on services is not extended to Gilgit-Baltistan. He added that GB adopts the tax policies framed by FBR and hence the income tax and annual tax rates are the same as of the Federation. It has been decided that the government of Punjab would also convene a meeting inviting representatives of all provincial governments to discuss and formulate a standardized tax policy.
The secretary Ministry of Planning and Development stressed on the need of pricing a level playing field to all investors, adding that provincial governments should ensure a countrywide uniform tax regime so that domestic investors and businessmen are not at a loss. He further said that tax mechanisms and operations should be made simpler and faster for facilitating foreign investors and companies.