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ISLAMABAD: The Board of Investment (BoI) has sought exemption from minimum turnover tax in SEZs as Chinese and other investors have shown reservations saying that when SEZs are exempted from all taxes then why is this tax still applicable, sources close to BoI chairman told Business Recorder.

The Special Economic Zones (SEZ) Act, 2012 was made for establishment, development and efficient operation of SEZs providing a legal and regulatory framework to encourage domestic and international investors for promotion and establishment of industrial infrastructure and for other related matters.

To incentivize such investment, the said Act provides certain fiscal and allied benefits to the SEZ investors, i.e. Zone Enterprises and Zone Developers. One such fiscal incentive, is “Exemption from all taxes on income", given to both Zone Developer and Zone Enterprises under sections 36 & 37 of the said Act.

In the 6th meeting of the Board of Approvals held on October 7, 2020 under the chair of prime minister, it was highlighted that despite explicit exemption provided under sections 36 and 37 of the Special Economic Zones Act of 2012 and section 126E of the Income Tax Ordinance 2001, in reality, all SEZ enterprises are being subjected to pay up to 1.5% turnover tax under section 113 of the said Ordinance.

In the meeting, attention was invited to section 113(3)(a) of the Income Tax Ordinance 2001, under which Turnover Taxes are being charged. The zone enterprises and developers are required to incur heavy depreciation costs in the first few years of their coming into operation. Imposition of turnover taxes diminishes any sale proceeds that they may be making in these nascent years. These taxes along with depreciation costs diminish the profitability of the enterprises and set them up for failure right at the onset of their operations.

According to sources, with regards to CPEC SEZs, several Chinese investors have shown reservations, since local as well as foreign investors do not understand imposition of turnover taxes when the benefits stated in the SEZ Law provide exemption from all taxes on income.

After deliberating upon the issue at length in the aforementioned meeting under the Chair of the Prime Minister, in the presence of Advisor to Prime Minister on Finance and Revenue and Chairman FBR, it was unanimously decided that the issue requires interpretation of the law, therefore, it may be referred to Ministry of Law. Accordingly, the case was referred to the Ministry' of Law for opinion on October 21, 2020.

Resultantly, in the light of provisions of SEZ Act 2012 and Income Tax Ordinance 2001, Ministry of Law clarified that the “exemption from all taxes on income available to the zone developers and zone enterprise includes exemption from minimum turnover tax.

Consequently, the clarification thus received was communicated to the FBR for needful action.

However, despite clarification from the Ministry of Law and Justice, the minimum turnover tax is still being charged from the SEZ enterprises, as highlighted by various investors.

Regardless of the clarification provided by the Ministry of Law, the FBR has proposed that if the federal government intends to extend exemption from minimum turnover tax to the entities in the SEZs, it may be granted by making appropriate amendments in clause 11A of the Income Tax Ordinance 2001 through the forthcoming Finance Bill.

However, BoI is of the considered view that the ‘exemption from income tax’ is already inclusive of ‘exemption from minimum turnover tax’, whereas grant of exemption from minimum turnover tax in the manner as proposed by FBR, will make it a new incentive to the SEZs, which might have unwarranted repercussions.

Whereas, a similar proposal suggested by FBR for exemption from minimum turnover tax, was earlier taken up with the FBR to give effect in the Finance Bill 2020. However, the proposal was not agreed by the FBR.

BoI, being the SEZ Secretariat, argues that investment, whether foreign or local, must be encouraged by provision of fiscal incentives in letter and spirit. Therefore, it has proposed that if the SEZ Act 2012, provides for an exemption from all taxes on income including minimum turnover tax, then it should be provided to the investors, by issuance of a simple clarification by FBR to all its field formations, rather than treating it as a new incentive.

In view of the foregoing, BoI has proposed that the Economic Coordination Committee of the Cabinet may direct the FBR to implement the exemption from minimum turnover tax being a tax on income, exemption from which is available to both SEZ developers and its enterprises.

Copyright Business Recorder, 2021


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