Businessmen take tax holiday incentive with a pinch of salt

Going back on promises in the past leaves industrialists less hopeful.

KARACHI:

When Finance Minister Ishaq Dar came to the fag end of his budget speech, the announcement allowing five-year income tax holiday to businessmen who build new factories in Khyber-Pakhtunkhwa (K-P) failed to spark much attention.

There was not a lot of desk thumping by parliamentarians and newspapers gave it a passing mention.

But people who have worked for Pakland Cement and Dewan Salman Fibre would have taken Dar’s words with a pinch of salt. After all, these were Pakistan’s biggest companies, which suffered when the government went back on its words and took back tax concessions.

“I don’t think that would happen again,” says Atif Ikram, President of the Haripur Chamber of Commerce and Industry, which had pushed the federal government to announce incentives for setting up new industrial units to revive the economy of the war-torn province.

“It’s true that when such incentives were first announced for the Hattar Industrial Estate in 1988, a lot of investment came in and some of the investors suffered later on,” he said.

However, tax benefits at the time were announced in SROs – the notorious Statutory Regulatory Orders – that could be introduced and rolled back without notice, he said.

“Incentives this time around will come in the shape of an ordinance, that can’t be changed easily.”

Businessmen are still waiting for clarity on the exact nature of the incentives. For instance, they do not know if they apply to the companies paying 32% corporate tax.

Investors from various industries including edible oil, steel and chemicals showed interest if tax holiday was introduced, Ikram said.

While details are awaited, Dar said factories which are built in the next three years up to June 30, 2018, will be able to claim tax exemption.

MH Mistry, who worked for Pakland Cement for 20 years, said tax holiday often overrides other considerations for businessmen as it frees up cash flow for reinvestment in other projects.

“I am all for it but let’s hope better sense prevails and past mistakes are not repeated. We all know how rules and laws are changed at someone’s whims in Pakistan.”

A leaf from history

Pakland Cement, located outside Karachi, was one of the largest Portland cement producers in the country with perhaps the most efficiently run plant.

In 1993, it invested in another cement plant in Hattar on the back of tax concessions announced by the then government. Paper work was done, money borrowed from banks and machinery ordered. But when machinery and equipment was in high seas, the government took back the concessions, distorting financial feasibility of the entire project.

“We went to court and even won the case, but by then demurrage had taken its toll. Parts from equipment at the port went missing and that was it for the company,” recalled Mistry.

Dewan Salman Fibre, once the largest polyester staple fibre manufacturer, which was also located in Hattar, attributes its financial problems to Islamabad’s habit of going back on its words as well.

Some industry people question the logic behind making a particular region attractive for investment by introducing artificial fiscal measures when markets for raw material and consumption centres are far off.

Pakistan Fruit Juice Company CEO Ikram Elahi said such measures would usually benefit companies with high turnover and margins.

“I believe businesses that don’t have large profits wouldn’t get much out of this.”

Published in The Express Tribune, June 10^th, 2015.

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