Procurement by govt entities

Public procurement in Pakistan plays a critical role in the execution of large and important infrastructure projects. Government entities, while bound by regulatory frameworks, must ensure that the procurement process especially in relation to tax matters, is transparent, equitable, and commercially viable for all bidders.

Unfortunately, tax-related ambiguities and a reactive approach to bidder queries continue to generate disputes that not only burden the parties involved but also lead to time and cost overruns which could otherwise be avoided.

Tax clarity: a non-negotiable element of modern procurement

Tax is not a peripheral issue in procurement – it is central. Whether it is sales tax, income tax withholding, custom duties on imported equipment, or applicability of exemptions under statutory notifications, bidders must be in a position to price their bids accurately and allocate risks fairly. Often, bid documents either:

• provide insufficient information about applicable taxes;

• shift tax risk entirely to the contractor in vague terms;

• or fail to acknowledge ongoing legal or policy disputes on tax interpretation.

In such cases, the bidders are left guessing, and the resulting commercial offer reflects uncertainty. We have seen projects where the bidders are asking x and the employer is responding y. Neither the bidder nor the employer has the necessary clarity. The bidder thought he had protected himself and the employer thought it had ‘clarified’ its position.

Once a contract is awarded, disagreements on tax treatment, recoverability, or change in law become fertile ground for conflict. These matters, unfortunately, tend to crystallize after notice to proceed is issued by the employer to the contractor or after significant execution milestones, leading to disruption and, in some cases, project paralysis.

A proactive duty: guidance before award

Government procuring entities must change their posture from “respond-if-asked” to “clarify-proactively.” This means:

1. Issuing comprehensive tax guidelines as part of the bid documents, including references to applicable exemptions, any prior FBR rulings, and the specific treatment expected of bidders.

2. Allowing pre-bid tax queries to be submitted and responded to in writing, so that a level playing field is created.

3. Engaging tax advisors or legal consultants early in the process to vet the procurement documents from a tax risk allocation perspective.

4. Considering model tax clauses that can be adapted across public-sector projects for consistency.

By investing effort prior to contract award, the government can save far more in post-award dispute resolution and project delays.

Disputes, delays, and the real cost to public

Most seasoned contractors will confirm that time and cost overruns rarely result from poor planning alone. A large number of these stem from legal and contractual disputes – tax being a recurrent flashpoint. These disputes:

• freeze payments,

• delay import or mobilization,

• erode trust between the contractor and the employer,

• and ultimately affect project delivery to the public.

Government projects are funded either by public money or development financing. Both demand accountability. Disputes that drag on for months, if not years, result in wasted interest payments, missed timelines, and reputational damage.

Need for practical solutions, not just legal positions

Whenever there is a dispute between two or more parties, there is always a possibility or threat of termination, especially by the party which believes in the strength of its case. To state the obvious, disputes with contractors resulting in termination of the awarded contracts are not beneficial for the public sector entities as employers because, more often than not, re-award of a contract results in cost and time overruns.

Dispute avoidance and early resolution mechanisms must form an integral part of every government contract. Rather than sticking to rigid legalistic positions, government entities should:

• Encourage ongoing dialogue with the contractor’s commercial and legal teams post-award.

• Involve neutral mediators or experts for early tax dispute resolution.

• Allow interim relief mechanisms to keep the project moving while a tax or other dispute is being resolved.

• Adopt expert adjudications in complex infrastructure projects, with the ability to issue binding recommendations unless overturned by arbitration.

Ultimately, the objective must not be to ‘win’ a dispute, but to deliver the project.

Pakistan’s development goals demand efficient public procurement. Tax-related uncertainties and avoidable disputes are low-hanging fruit in the reform agenda. Clarity at the outset, coupled with practical and cooperative dispute resolution frameworks, can significantly reduce delays and cost overruns.

It is time for government entities to view contractors as partners and not opponents, and to shape procurement as a collaborative process geared towards outcomes, not obstacles.

Copyright Business Recorder, 2025