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Business & Finance

The Tax Laws (Amendment) Ordinance, 2021 — II

Chartered Accountants CONCESSIONS FOR SPECIAL TECHNOLOGY ZONES In December 2020, Special Technology Zone ...
Updated 17 Feb 2021

Chartered Accountants

CONCESSIONS FOR SPECIAL TECHNOLOGY ZONES

In December 2020, Special Technology Zone Ordinance, 2020 (STZO) was promulgated to provide for development of science and technological ecosystem and to accelerate technology development in Pakistan.

Under STZO, a Special Technology Zone Authority (Authority) is established. The Authority has been authorized to appoint zone developer through development agreement and issue licenses to zone enterprises for the notified zones. The term ‘Zone’ has been defined as under, specifying the economic activities allowed for the zone enterprises:

“Zone” shall include any defined geographical area notified by the Authority with any such name including, but not limited to special technology zone, information technology parks, high-tech industrial area, software technology park, hardware technology park, technology export zone, free technology zones, science and technology park, information technology zones, science and technology zone, R&D Zone, opportunity zone, innovation zone, technology development zone, knowledge parks, smart city, knowledge city, technology incubation zone or any sector zone which may require technological intervention such as biotech, chemical technologies, agri-tech, fin tech, robotics, nanotech etc. and other zones with any combination or combinations of the aforesaid fields.

STZO envisage duty and tax incentives for the zone developer and zone enterprises. In addition, the Authority has been empowered to allow additional benefits to zone developers and zone enterprises if found justified on the basis of an economic impact assessment. It is further provided in STZO that the concessions allowed under STZO are independent of the concessions (if any) allowed to the zone developers/zone enterprises under any other applicable legislation and that the provisions of STZO shall not be taken as limiting the authority of any Government to grant any additional benefits. STZO has also provided necessary provisions for the protection of investment. In particular it is also provided that these incentives shall not be withdrawn prematurely and retrospectively and that any change therein could only be advantageous to the investor and not otherwise.

=================================================================================================================
STZO provides for the following incentives:
=================================================================================================================
        INCENTIVES FOR ZONE AUTHORITY                                            INCENTIVES FOR
        AND ZONE DEVELOPERS                                                      ZONE ENTERPRISES
=================================================================================================================
(i)     Exemption from all taxes on income accruable in relation       (i)       Exemption from all income
        to the development and operations of the zones for a                     taxes (withholding tax,
        period of ten years, starting from the date of signing of                presumptive tax) for a period
        the development agreement (for zone developer only)                      of ten years from the date of
                                                                                 issuance of license by the
                                                                                 Authority.
(ii)    Exemption from all customs duties and taxes for a period       (ii)      Exemption from all customs
        of ten years from the date of signing of the development                 duties and taxes for a period
        agreement on capital goods including but not limited to                  of ten years from the date
        materials, plant, machinery, hardware, equipment and                     of issuance of license by the
        software imported into Pakistan for consumption within                   Authority on capital goods
        zones by the Authority and zone developers; and                          including but not limited to
                                                                                 materials, plant,

                                                                                 machinery, hardware,
                                                                                 equipment and software
                                                                                 imported into
                                                                                 Pakistan for consumption
                                                                                 within zones by the Authority
                                                                                 and zone enterprises.
(iii)   Exemption from general sales tax (GST) on goods and            (iii)     Exemption from GST on goods
        services on import of plant, machinery, equipment and                    and services on import of plant,
        raw materials for consumption of these items within                      machinery, equipment and
        zones by the Authority, zone developers as well as zone                  raw-materials for consumption
        enterprises.                                                             of these items within zones by
                                                                                 the Authority as well as zone
                                                                                 enterprises.
                                                                       (iv)      Exemption from
                                                                                 property tax for ten years from
                                                                                 the date of issuance of license
                                                                                 by the Authority.
                                                                       (v)       Tax exemption on dividend
                                                                                 income and long-term capital
                                                                                 gains from investments in a
                                                                                 venture capital (VC)
                                                                                 undertaking for a period of ten
                                                                                 years from the date of issuance
                                                                                 of license by the Authority.
=================================================================================================================

There is a view that fiscal exemptions/concessions introduced through enactment of a special law like STZO overrides the relevant fiscal laws since the same is equally backed by constitutional dispensation, with a specific objective. Nevertheless, procedural amendments in the corresponding fiscal laws are critical so that the Tax Authorities regulating fiscal laws are aligned to practically allow and give effect to such incentives.

Through the Amendment Ordinance, 2021, customs duty incentives envisaged by STZO for Zone Authority, Developers, and Enterprises referred in (ii) above have been provided in Customs Act, 1969 in the following manner.

“ (i) Capital goods including but not limited to materials, plant, machinery, hardware, equipment and software for a period often years as prescribed in the Special Technology Zone Authority Ordinance, 2020 (Ordinance No. XIII of 2020), if not manufactured locally, imported from the date of signing of the development agreement for consumption within zones by the Special Technology Zones Authority and zone developers, subject to such conditions, limitations and restrictions as the Federal Board of Revenue may impose from time to time; and

(ii) Capital goods including but not limited to materials, plant, machinery, hardware, equipment and software for a period of ten years as prescribed in the Special Technology Zone Authority Ordinance, 2020 (Ordinance No. XIII of 2020), if not manufactured locally, imported from the date of issuance of license by the Special Technology Zones Authority for consumption within zones by the said Authority and zone enterprises, subject to such conditions, limitations and restrictions as the Federal Board of Revenue may impose from time to time.”

There appears to be little inconsistency between the customs duty incentives allowed under STZO and that introduced in the Customs Act, 1969 as the former has not prescribed any condition/limitation to qualify for the concession.

For the remaining incentives provided under STZO, it is expected that corresponding procedural amendments would be made under the respective fiscal laws in due course.

CONCESSIONS ALLOWED FOR ELECTRIC 4 WHEELERS VEHICLES

In pursuance of Electric Vehicle Policy approval by the Federal Cabinet, the concessional rates (previously allowed to two-wheelers and three-wheelers electric vehicles) have now been extended for 4 wheelers vehicles CBU, CKD and certain specific parts till 30 th June, 2026.

CUSTOMS DUTY

(a) Following are the categories of 4 wheelers electric vehicles imported in CBUs for which concessional rates have been allowed.

========================================================================================================
Description of Vehicle            PCT Code         Customs       Conditions
                                                   Duty
========================================================================================================
Electric Vehicles 4-wheelers      8703.8090        25%           The concession shall be admissible till
                                                                 30th June 2026.
Electric Vehicles 4-Wheelers      8703.8090        12.5%         The concession shall be admissible till
                                                                 30th June 2026 on import of electric
                                                                 vehicles 4 wheelers (CBU) per
                                                                 company of the same variant to be
                                                                 assembled or manufactured to the
                                                                 extent of 100 units per company, duly
                                                                 approved/certified by Engineering
                                                                 Development Board (EDB). EBD
                                                                 shall monitor compliance with EV
                                                                 Policy 2020 and intimate FBR
                                                                 immediately in case of violation by
                                                                 any manufacturer to stop further
                                                                 clearance at concessional rates.
========================================================================================================

(b) Following are the categories of 4 wheelers electric vehicles imported in CKDs and specific parts for which concessional rates have been allowed:

===============================================================================================================
Description of          Description of           Rate of Customs             Conditions
Vehicle & PCT           Imported goods           Duty
===============================================================================================================
Electric Vehicles 4     (i) EV Specific          1% (notwithstanding         The concession shall be admissible
wheelers (PCT           components for           the rate of customs         to manufacturers of electric
Code 8703.8090)         assembly/                duty on these items as      vehicles 4-wheelers till 30th June
                        manufacturer in          specified in the First      2026, subject to certification and
                        any kit-form             Schedule to the             quota determination by the EDB.
                        (CKD)                    Customs Act, 1969).
                        (ii) Components for      10%                         The concession shall be admissible
                        assembly/                                            till 30th June 2026 subject to the
                        manufacture in                                       conditions mentioned in para 2 of
                        any kit-form                                         the SRO.656 (I)/2006 dated
                        Non-Localized                                        June 22, 2006.
                        parts.
                        (iii) Components for     25%                         The concession shall bead missible
                        assembly/                                            till 30th June 2026 subject to the
                        manufacture in                                       conditions mentioned in para 2 of
                        any kit-form                                         the SRO.656 (I)/2006 dated
                        Localized parts.                                     June 22, 2006.
===============================================================================================================

(c) In addition to the above, concession on import of CBU chargers with CKD kits for electric vehicles have been extended to 4 wheelers which was previously available for 2 and 3 wheelers.

SALES TAX

(a) Local manufacturers/assemblers importing and supplying the electric vehicle of prescribed categories have been allowed exemptions and reduce rates of sales tax which have been tabulated below:

================================================================================================================
Entry reference          Description                                     Exemption/                 Exemption
                                                                         Concessional               Stage
                                                                         rate of Sales Tax
================================================================================================================
S.no. 157 of Table I     Import of CKD kits for the following            Exempt                     Import
of 6th Schedule          electric vehicles (4 wheelers) by local
                         manufacturers till the 30th day of
                         June 2026:
                         (a) Small cars and SUVs with 50
                         kwh battery or below; and
                         (b) Light Commercial Vehicles
                         (LCVs) with 150 kwh battery
                         or below
S.no. 71 of 8th          Following locally manufactured or               1%                         Local Supply
Schedule                 assembled electric vehicles
                         (4 wheelers) till the 30th day of
                         June 2026:
                         (a) Small cars and SUVs with 50
                         kwh battery or below; and
                         (b) Light Commercial Vehicles
                         (LCVs) with 150 kwh battery
                         or below
================================================================================================================

(b) Import of CKD, SUVs and LCVs have also been incentivized by excluding from the ambit of Minimum Value Addition (MVAT) at the time of import. For that purpose, following classes of vehicles have been added in the exclusion section of 12th Schedule to the Sales Tax Act, 1990:

  • Electric vehicles (4 wheelers) CKD kits for small cars or SUVs, with 50 kwh battery or below and Light Commercial Vehicles (LCVs) with 150 kwh battery or below till the 30th day of June 2026.

  • Electric vehicles (4 wheelers) small cars or SUVs, with 50 kwh battery or below and Light Commercial Vehicles (LCVs) with 150 kwh battery or below in CBU condition till 30th day of June 2026.

  • Electric vehicles (2-3 wheelers and heavy commercial vehicles) in CBU condition till the 30th say of June 2025.

FEDERAL EXCISE DUTY (FED)

FED is levied on locally manufactured/assembled and imported motor cars, SUVs at the rate of 2.5% ad Val. However, there were certain exemptions for rikshaws designed for transportation of persons. Through the Amendment Ordinance, exemption has also been allowed to 4 wheelers electric vehicles (falling under tariff headings 87.03) upto June 30, 2026.

INCOME TAX

The reduced rate of 1% would now be applicable on import of CKD kits of electric vehicles for small cars or SUVs with 50 kwh battery or below and LCVs with 150 kwh battery or below.

OTHER AMENDMENTS

SUPER TAX EXTENDED ON BANKING COMPANIES

The levy of super tax was introduced through Finance Act 2015.

For banking company, the levy was applicable at the rate of 4 percent till tax year 2021. This has now been extended to tax year 2022 and onwards.

For other than banking companies, the levy of super tax was reduced to zero percent for tax year 2020 and onwards. There is no change in super tax for other than banking companies.

INCOME TAX LIABILITY OF COTTON GINNERS

A concessionary regime was provided for cotton ginners under a Circular of 1994. The same has now been given effect into the provisions of the Income Tax Ordinance, 2001 whereby tax liability of cotton ginners on their income shall not be more than 1% of their turnover from cotton lint, cotton seed, cotton seed oil and cotton seed cakes. The tax so payable shall be final tax in respect of their cotton ginning and oil milling activities only.

EXTENSION OF EXEMPTION FOR TRANSMISSION LINE PROJECTS

Profits and gains derived from a transmission line project setup in Pakistan on or after July 1, 2015 are exempt from income tax for a period of 10 years, subject to certain conditions prescribed under clause (126M) of Part I of Second Schedule to the Ordinance. One such condition provided is that such project should be setup by June 30, 2018. The said date has now been extended until June 30, 2022.

ADVANCE TAX ON OWN MONEY-LOCALLY MANUFACTURED VEHICLES

Every motor vehicle registering authority of Excise and Taxation Department has now been required to collect advance tax at following rates from the buyers of locally manufactured motor vehicles who subsequently sell it within 90 days of delivery of such vehicle (whether prior to or after registration):

===============================================
S.          Engine                          Tax
No.         Capacity                (in Rupees)
===============================================
1           Upto 1000cc                  50,000
2           1000cc to 2000cc            100,000
3           2000cc and above            200,000
===============================================

The advance tax collected would be adjustable in the hands of buyer. The said amendment has been introduced for the period upto June 30, 2021.

The advance tax collection under this new provision is in addition to advance tax collected by the manufacturer (at the time of sale) or by motor vehicle registering authority (if tax is not collected by the manufacturer).

If a person is buying and then selling the motor vehicle within 90 days of delivery after registration, then advance tax will be collected from such person under the new provision as well as under the existing provision. However, precise mechanism for collection of new tax after registration needs to be clarified by the Board.

NON-APPLICABILITY OF WITHHOLDING TAX ON PAYMENT TO NTC

Under Pakistan Telecommunication (Re-organization) Act 1996, National Telecommunication Corporation (NTC) is granted a license by the Pakistan Telecommunication Authority to provide telecommunication services within Pakistan on a non-exclusive basis, only to the armed forces, defense projects, Federal Government, Provincial Governments or such other Governmental agencies or Governmental institutions as the Federal Government may determine.

It is provided that the withholding tax under section 153 will not be applicable on payments received by NTC against provision of such telecommunication services. Accordingly, such receipts would no longer be subject to minimum taxation under section 153.

EXCHANGE/SHARING OF INFORMATION

Through Finance Act, 2015, section 56A was introduced in Sales Tax Act, 1990 through which Federal Government was empowered to enter into bilateral or multilateral agreements with provincial Government or governments of foreign countries for exchange of information including electronic exchange of information relating to sales tax law or any other law of the country. These provisions are similar to the relevant provision for exchange of information provided under the Income Tax Ordinance, 2001.

Through the Amendment Ordinance, FBR has now been empowered for sharing of data or information including real time data videos, images received under the provisions of the Sales Tax Act, 1990 with the Ministries or Divisions of Federal and Provincial governments subject to such limitations and conditions as may be specified by FBR.

TEMPORARY IMPORTS

Customs duty has been reduced to 0% on temporary import of professional and technical apparatus or equipment or instruments imported by foreign nationals, experts and athlete etc. participating in an international event (including but not limited to sports events) or under any international arrangement for use solely during such event or arrangement provided:

(a) it is endorsed on the passports of importer.

(b) The goods allowed for temporary admission shall be identified at the time of import and subsequent re-export

The condition of furnishing undertaking or bond by such foreign nationals has been made inapplicable.

Goods temporarily imported into Pakistan by international athletes or sportsmen which would be subsequently taken back by them within 120 days have been allowed exemption from sales tax as well as income tax at import stage.

(Concluded)

Copyright Business Recorder, 2021