Fiscal incentives for SEZs

We need advisers in the Board of Investment who can improve the policies of SEZs the right way

Neeha Tariq/Abid Rehman March 27, 2019
Abid Rehman is a PhD Fellow in Economics and Visiting Faculty Member at the National University of Sciences and Technology in Islamabad

Special Economic Zones (SEZ) are the key reason for economic upheaval in many countries. SEZs are mainly important to bring Foreign Direct Investment (FDI), but for this a country has to trade off some revenue in the form of fiscal incentives for investors in the SEZ. There are seven notified SEZs and about nine SEZs under the China-Pakistan Economic Corridor. The matter is: Do such zones make any difference for Pakistan’s economy? How the tax rules proposed by Pakistan differ from other countries? How the policies for SEZs can be improved?

Our country faces a number of issues that prevent the industrial sector to exploit its potential, including energy shortage, security issues, and tax evasion. According to sources, the corporate income tax relief that SEZs and the government have proposed to the investors includes 100% tax exemption from all taxes on imported goods and accruable income for 10 years. On the other hand, India is providing 100% income tax exemption for first five years. In China, there is 25% exemption from taxes for all businesses in and outside SEZs. Bangladesh is providing 100% exemption for first 10 years, 70% for 11th year and 30% for 12th year.

Looking at the customs and import duty relief, Pakistan is providing one-time exemption from all the custom duties on plant and machinery imported into SEZ whereas SEZ units in India are free to import from domestic sources without paying any duty on raw material and capital goods for implementation of project without any approval. In Bangladesh, there is duty exemption on items that cannot be locally sourced. General equipment of office and household items are not duty-exempted. In China, Vietnam and Myanmar, there is exemption on the import of production equipment, material required for construction and the inputs necessary for the production purposes.

Comparing with other countries, our incentive packages need to be amended right away. We should follow the incentive packages of China, India and Bangladesh to attract investors.

As Pakistan is a developing country and we have to achieve multiple targets for the effective working of SEZs, we have to focus on the administrations working for these zones. Countries where SEZs are working efficiently have strong administrative structure and authorities. For example, Bangladesh Economic Zones Authority (BEZA) took initiatives to boost the economy by establishing new zones generating 10 million jobs and $40 billion worth of exports.

Next, we have to work on our energy sector so that there is uninterrupted power supply to these zones along with other facilities. There should be proper regulations with our bureaucracy working in right direction. After that we can work on our incentives packages as no investors are attracted to a country with inadequate administrative setup and poor working facilities.

After coping up with the administrative flaws, we need to improve our policies by amending the income tax exemption and dividing it in five years where exemption should decrease after every 5th year. Tax should be applied to the profits earned after five years of business establishment with appropriate tax rates. Customs duties should be applied on the machinery according to the weightage of machines imported. Raw materials and office equipment other than machines should be duty-free. All the exemption of custom duties should be removed after 10 years of the functioning of a zone. There should be proper governance so that no investor or authority misuses SEZs. Besides, we need some advisers in the Board of Investment who can improve the policies of SEZs the right way.

Published in The Express Tribune, March 27th, 2019.

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