The Federal Board of Revenue (FBR) has proposed that the government exempt all special economic zones (SEZs) - already working or projected to start working - under the China-Pakistan Economic Corridor (CPEC) from the Turnover Tax, FBR sources confided to The News on Sunday. However, the FBR has also warned the government that the businesses in other SEZs may react strongly to the exemption and recommended therefore that the government should also consider giving them some turnover tax-related relief.

“Exporters and foreign investors working in SEZs have been expressing dissatisfaction with the turnover tax. The government believes that the CPEC SEZs can substantially increase exports and should therefore be relieved from the turnover levy,” said a high-ranked FBR insider. The decision can encourage further foreign investments in Pakistan, he said. However, the business community wants withdrawal of turnover taxes from all sectors. Most economists are of the opinion that the levy is justified in some cases and unnecessary in some sectors.

The SEZs enjoyed a complete exemption of taxes till 2019 when the then FBR Chairman Shabbar Zaidi recommended the imposition of a 1.5 percent turnover tax. The Board of Investment had opposed the idea as it had assured the investors that there will be no taxes in SEZs. The current status of the turnover levy is that where the tax payable by a company is less than 1.5 percent of the turnover, the company will pay a minimum
tax that amounts to 1.5 percent of the turnover. In some sectors,
the turnover tax ranges from
0.25 percent to 0.75 percent of turnover.

If the government announces a turnover tax exemption for SEZs, it will further squeeze the volume of the revenue. Finance Minister Shaukat Tareen recently claimed that the government will not impose new taxes in the annual budget for 2021-22. In March 2021, the FBR had apprised the federal cabinet that the volume of the tax exemptions had gone up to Rs 1.4 trillion in the past eight months with an unprecedented increase of Rs 232 billion. By June 2020, the total tax exemption amounted to Rs 1.15 trillion.

If the government announces a turnover tax exemption for SEZs, it will further squeeze the volume of the revenue.

The cabinet was told that the tax exemptions now stood at 2.9 percent of the gross domestic product (GDP) as compared to 2 percent in India, 1.9 percent in Bangladesh and 1 percent in South Korea by March 2021. Economist Qais Aslam says, “Turnover tax is unjustified in the sectors that are already paying sales tax on retail and production. It should not be imposed on the SEZs, contributing to the exports,” However, it is justified in SEZs that enjoy maximum exemptions in taxes and get facilities like free land and electricity but don’t export their products, he added. Aslam strongly supported the idea of turnover tax exemption for exporters based in the SEZs.

Almas Haider, a former president of Lahore Chamber of Commerce and Industry (LCCI) told TNS, “Turnover tax is an injustice to the business community.” He said it is not adjustable like income tax. “No matter if a businessman is making a profit or suffering losses, he has to pay the turnover tax.”

To a question about the proposal for exemption from turnover tax for the export sector, he said that the exporters have already been enjoying maximum immunity, it is the businessman who serve the domestic markets that pay the maximum taxes. Turnover tax causes anxiety in the business community and should be abolished across the board, said Haider.

Till date, nine SEZs have been set up under the CPEC. These include Rashakai Economic Zone, M-1, Nowshera; Dhabeji Special Economic Zone; Bostan Industrial Zone; Allama Iqbal Industrial City, Faisalabad; ICT Model Industrial Zone, Islamabad; Industrial Park, Pakistan Steel Mill, Port Qasim; Mirpur Industrial Zone, Azad Jammu Kashmir; Mohmand Marble City; and Moqpondass SEZ, Gilgit-Baltistan.

The Special Economic Zone Act was promulgated on September 13, 2012. Under the law, the federal and provincial governments can set up SEZs singlehandedly or in collaboration with the private sector. Private sector can also set up an SEZ with the recommendation of the provincial government and approval of the federal authority. The economic benefits under the SEZ law include a one-time exemption from custom duties and taxes for all capital goods imported into Pakistan for the development, operations and maintenance of an SEZ (both for the developer as well as for the zone enterprise) and exemption from all taxes on income for a period of ten years. The provincial SEZ authorities, set up under the law, are required to move the applications received from developers to the Federal Board of Investment which is to act as the secretariat to the Board of Approval and the Approval Committee.

The writer is a senior journalist, teacher of journalism, writer and researcher. He tweets at @BukhariMubasher