ISLAMABAD: The government is likely to announce incentives for buying houses, sourcing companies or liaison offices that play a vital role in establishing effective customer-supplier relationships with the objective of enhancing their footprints in Pakistan, well-informed sources told Business Recorder.
Textile Wing of Commerce Ministry has proposed the following facilitations for buying houses with a total revenue implication of US $2.5 million: (i) buying house re-appropriated amount may not be levied corporate income tax on NCP model; (ii) Buying House employees may not be liable for any personal income tax (revenue implication would be approximately $3.725 million per annum); and (iii) to mitigate the above cost, it is proposed that local buying houses of Pakistani origin may be allowed to bring their commission to Pakistan at 5% income lax (it is expected that this would generate income tax of $2.5 million per annum).
Commerce Ministry has also recommended income tax on export realisation to be reduced from 1 per cent to 0.5 per cent for direct and indirect exporters.
It has also been proposed that Income Tax Credit may be restored at 10% u/s 65 of the Income Tax Ordinance which was available during Current Fiscal Year, in addition to zero rating of textile machinery, i.e., currently charged at 17%.
Income tax on export realization is also expected to be reduced from 1 per cent to 0.5 per cent for direct and indirect exporters.
According to sources, there are around 100 buying houses in Pakistan of both local and foreign origin which account for approximately US$4 billion (32%) of Pakistan's textile and apparel exports.
India and Bangladesh have more than 500 and 1,000 buying houses/liaison offices respectively and their significance may be gauged by analyzing exports of these two countries.
Currently, major buying houses are stationed in competitor countries that initially place orders in the respective country and spill over orders are then allocated to other countries. In view of upcoming Textiles and Apparel Policy that aims to enhance exports to US$20 billion and most recent investment of US$3 billion in textiles and apparel machinery, Commerce Ministry believes that it is imperative to encourage the establishment of buying houses in Pakistan to enhance export orders. However, as Pakistan value-added exports are only $10 billion, therefore, these buying houses have not found Pakistan an attractive place to open their offices.
Advisor to Prime Minister on Commerce and Investment and Secretary Commerce held a meeting with the international buying houses in Pakistan represented by Umar bin Asad (Country Director Li & Fung - the company is one of the largest sourcing and supply chain management company) wherein it was informed that deemed income remitted to Pakistan by their principal office abroad for operational cost is calculated at 5% and catered under the Net Cost Plus (NCP) model taxation.
Buying houses argue that around US50 million is re-appropriated for operational cost per annum and deemed income tax at 5% works of out to be US$2.5 million which is charged at 29% corporate tax and tax submitted is US $ 0.725 million. Moreover, 40% of the cost is paid as a salary to employees’ subjected up-to 35% income tax and approximate average of 15% and it works out to be US$3 million per annum.
Commerce Ministry maintains that there are international buying houses in Pakistan either having principals abroad or owned by Pakistani origin which are contributing to getting export orders for Pakistan. Customarily, they keep their commission abroad due to high income tax which is why the Ministry is proposing that the buying houses may be allowed to remit their commission to Pakistan and may only be charged income tax at 5%. This has no financial implication and in return would facilitate in bringing their income to Pakistan. Their expected income remitted to Pakistan is projected at $50 million which at 5% income tax would generate tax of approximately $2.5 million per annum.
Copyright Business Recorder, 2021