Enterprises within Special Economic Zones (SEZs) and Techno-Logistics Parks (STZs) suggested to limit tax exemption benefits by the National Authority panel.

Going Forward: Assessing Pakistan's Latest Move on SEZ and STZ Tax Exemptions

In a recent development, Pakistan's National Assembly Standing Committee on Finance and Revenue has suggested that the government should cap the tax exemptions for enterprises located in Special Economic Zones (SEZs) and Special Technology Zones (STZs) by 2035 or within a 10-year period. This recommendation comes as part of the International Monetary Fund (IMF)'s conditions.

Naveed Qamar, who chaired the committee meeting, also approved the budgetary proposals for taxing pension income exceeding Rs10 million for individuals under the age of 70.

Finance and Revenue Minister Muhammad Aurangzeb stated that the tax exemptions, currently enjoyed by SEZs, were not economically sustainable and unproductive based on the expected results.

Boosting Tech Exports by $350 Million

FBR chairman revealed that a sunset clause for SEZs and STZs is included in the finance bill. Despite the IMF's initial insistence on limiting the tax exemption for these zones to 2027, after intense negotiations, the deadline has been extended to 2035.

Some committee members raised concerns about the tax cap, fearing it would deter investors and that it would not attract any new investments. However, they ultimately gave their approval as it's an IMF benchmark that must be met.

A Step Towards IMF Compliance

Another proposal from the IMF was to remove the distinction between Table-I and II, with all Non-Profit Organizations (NPOs) now subject to standard compliance requirements to qualify for 100 percent tax credit. This enhancement in oversight, reduces misuse of blanket exemptions, and aligns the tax benefit with clearly defined regulatory conditions, as observed by the FBR.

Regarding the rate deduction for payments through digital means and cash on delivery, the FBR informed the committee that this measure is expected to generate around Rs59 billion. Although a single levy will be proposed for a more uniform application and will be discussed further, with updates to be provided to the committee.

Broadening the Tax Base

The committee also accepted the proposal for taxing pension income exceeding Rs10 million for individuals under the age of 70, with a five percent tax rate imposed on pension income above this threshold to widen the tax base.

FBR Chairman also presented the FBR transformation plan, focusing on fighting significant economic transactions by both filers and non-filers, financial disclosures for high-value transactions, conditions for access to financial transactions, use of technology to enhance compliance, data sharing for risk-based enforcement, and expansion of audit capacity with confidentiality safeguards.

All in all, Pakistan's decision to cap tax exemptions in SEZs and STZs by 2035 demonstrates a commitment to meeting IMF requirements while addressing economic growth strategies. The potential impact on business operations within SEZs and STZs and employment opportunities is worth considering, as is the exploration of alternative incentives to maintain competitiveness. Balancing fiscal responsibility and economic growth is a delicate act, and Pakistan's moves suggest this understanding.

Enrichment Data

The decision to cap tax exemptions in SEZs and STZs by 2035 has various implications and anticipated consequences:

Implications:1. Revenue Generation: This move will increase government revenue, contributing significantly to fiscal policies aimed at boosting tax collections and reducing reliance on exemptions to meet revenue targets.

Investment and Economic Growth: Although the tax cap could lower the appeal of SEZs and STZs for new investors, the extended deadline until 2035 offers a transition period for existing and new investments to develop, ensuring a balance between economic growth and fiscal needs.
International Pressures: The extension aligns with pressures from international organizations, such as the IMF, promoting more equitable tax systems.

Potential Effects:1. Economic Impact on SEZs and STZs: Phasing out tax exemptions could lead to increased operating expenses for businesses within these zones, potentially affecting their global competitiveness. However, the phased approach allows businesses to adjust their strategies accordingly.

Job Creation and Employment: Reduced investments or slower expansions could impact job creation and employment opportunities within these zones.
Alternative Incentives: The government might need to look into alternative incentives, like infrastructure improvements or streamlined regulatory environments, to maintain the competitiveness of SEZs and STZs.
Fiscal Discipline: The cap on exemptions promotes fiscal discipline by ensuring that tax breaks are not indefinite, leading to more sustainable economic policies.
The extension of the tax exemption deadline for Special Economic Zones (SEZs) and Special Technology Zones (STZs) until 2035, despite initial IMF insistence for 2027, is aimed at generating additional revenue, contributing to fiscal policies, and balancing economic growth with fiscal responsibilities.
The tax cap on SEZs and STZs could impact investments within these zones as some investors may be deterred, but the phased approach offers businesses a transition period to adapt, ensuring continued economic development and growth.
As the government phases out tax exemptions in SEZs and STZs, it may need to explore alternative incentives to maintain their competitiveness, such as providing better infrastructure or streamlining regulatory environments.

Enterprises within Special Economic Zones (SEZs) and Techno-Logistics Parks (STZs) suggested to limit tax exemption benefits by the National Authority panel.