Lahore Orange Line set to get exemption in taxes, duties

The government is all set to grant Rs 20 billion exemption in duties and taxes, including withholding tax, on the import of equipment for Lahore Orange Line mass transit project under China-Pakistan Economic Corridor (CPEC). Sources told Business Recorder here on Thursday that the Ministry of Planning, Development and Reform has submitted a summary in this regard to the Economic Co-ordination Committee of the Cabinet.
According to details, Quetta Mass Transit Project sponsored by Balochistan has been agreed upon with the Chinese side for implementation through CPEC under Chinese financing. Furthermore, Karachi Circular Railway (KCR) project sponsored by the government of Sindh has also been approved by the Prime Minister for implementation through CPEC under Chinese financing. Modalities of both projects will be discussed with the Chinese side in the forthcoming Joint Co-operation Committee (JCC) meeting scheduled to be held in Beijing, China, from 28th to 29th December, 2016. However, cost of these projects including the loan repayment will be borne by the respective provincial governments. Grant of exemptions from withholding income tax beyond 6% of E&M contract price and taxes and duties on import of equipment to be furnished / installed for Quetta Mass Transit Project and Karachi Circular Railway (KCR) may also be considered in principle.
Sources said the governments of Pakistan and China entered into a Framework Agreement on 22nd May, 2014 for construction, equipment, procurement and financing of Lahore Orange Line Metro Train Project. As per framework agreement, the Orange Line shall be designed, constructed and supervised by Chinese enterprises. Identification of Chinese companies for execution of the project from amongst the recommended companies through a competitive bidding procedure was agreed.
The project to be executed on EPC (Engineering Procurement and Construction) mode envisages construction of 27.1 kilometres long dedicated a signal-free corridor for train mass transit system in Lahore alongwith 26 stations, one depot and procurement of rolling stock with allied facilities. The project was approved by the ECNEC on 13th May, 2015 at the cost of Rs 165.226 billion including a Foreign Exchange Component (FEC) of Rs 103.0986 billion without involvement of funding from the federal PSDP. The loan amount would be repaid by the government of Punjab.
Punjab transport department is getting the project implemented through the Punjab Mass Transit Authority and Lahore Development Authority respectively. Bids from two Chinese companies, namely CR-NORINCO JV and SINORAIL - JV, were received on 18th July, 2014. The government of the Punjab signed the commercial contract agreement on 20th April, 2015 with the lowest evaluated bidder ie CR-NORINCO-JV for implementation of the project. ''''The commercial contract includes provision and installation of electrical and mechanical (E&M) equipment with testing and commissioning besides civil work being sublet to the Pakistani side.
The contractor included withholding income tax at the rate of 6% applicable at the time of bidding in the bid price as per the Commercial Contract. According to the Commercial Contract, the income withholding tax for E&M works, which is 6% of contract price for E&M works, has been considered. The employer shall be responsible for the payment of balance due to increase in income withholding tax rate in accordance with the regulations of Pakistan. Unless otherwise stated, the contractor would be exempted from all obligations or responsibilities for the payment of all the other Pakistani taxes arising of the contract such as sales tax and contract tax.
Furthermore, the Chinese contractor, under the Commercial Contract, will be importing all E&M equipment under its own name for subsequent ownership of the Pakistani side. The Commercial Contract further reads that unless otherwise stated in this contract, the employer would pay all customs, import duties and taxes in consequences of the importation of equipment to be furnished in the Orange Line Project. If the contractor is required to pay such customs, import duties and taxes, the employer would reimburse the amount, thereof, with 30 days upon submission of proper documentation, invoice and proof of payment.
The ECC was told if the total incidence of tax on CR-NORINCO JV increases beyond 6%, the additional tax liability, if any, will have to be paid for by the Pakistani side in accordance with the provisions of contract agreement. As a result, the government of Punjab has estimated that roughly Rs 20 billion are to be paid in the form of taxes and duties on import of equipment for Lahore Orange Line Metro Train Project which will have to be borne by the provincial government as charge on Provincial Consolidated Fund, if exemptions are not granted.
The government of Punjab has requested for a grant of exemption from the ECC in respect of Lahore Orange Line Metro Train Project on the lines allowed to NHA for CPEC infrastructure projects on grounds that this project is acknowledged within CPEC framework by the Chinese side as ongoing building of CPEC in the framework agreement.
The ECC was requested; (i) CR-NORINCO JV may be exempted from withholding income tax beyond 6% of E&M contract price; (ii) the Chinese contractor may be exempted from all tax amounts including but not limited to income taxes, withholding taxes, sales taxes, custom duties and taxes on import of equipment to be furnished in Orange Line Project.