Tax breaks for Chinese won’t hit economy

ISLAMABAD: Chinese investors in the $56 billion China-Pakistan Economic Corridor (CPEC) are enjoying all sorts of tax breaks from customs, income, sales, federal excise and withholding taxes.

But despite all the tax discounts and exemptions, which amount to around Rs150 billion in lost revenue, the government is claiming there will be no adverse impact on local industries and domestic investors.

In a written reply submitted to the National Assembly last week, the finance ministry explained the series of tax exemptions or discounts offered to Chinese investors, which have been notified through statutory regulatory orders (SRO).
Finance ministry provides NA details of exemptions granted to companies for CPEC projects

The SRO is a piece of statute that has been, in the past, condemned by the Pakistan Muslim League-N for being discriminatory and causing revenue loss to the state.

In his reply, Finance Minister Ishaq Dar did not quantify the financial cost of the revenue exemptions.

According to him, exemptions from levy of customs duty at import stage have been specifically designed, notified and made available to Chinese contractors for a few projects of roads, mass transit and Gwadar port.

They include exemption of customs duties on the import of plant machinery and equipment, if not manufactured locally, by the China State Construction Engineering Corporation Limited and the China Communication Cons­truction Company for the construction of Sukkur-Multan section of Karachi-Peshawar Motorway and Karakoram Highway Phase-II (Thakot-Havelian section), respectively.

Also included in this category are the customs duty exemptions on the import of equipment and material for Lahore’s Orange Line Metro Train Project. The original exemptions were notified on Jan 25 and further eased through another notification on March 6.

Similarly, customs duty exemptions were also allowed on imports to the concession holder and its operating companies for the construction, operations and development of Gwadar port and all port-related businesses established in Gwadar Free Zone.

In addition, concessions and exemptions from levy of customs duty on import of goods were already available to some early projects of Thar coal field sector, which have now been extended to CPEC projects.

Some of them include the exemption of customs duties on import of coal mining machinery, equipment and spare parts not manufactured locally, for Thar coal field.

For the power sector, a concessionary duty rate of zero per cent, 3pc and 5pc on the import of machinery, equipment and spare parts, not manufactured locally, is available for generation projects using oil, gas, coal, wind and tidal energy.

On top of that, income derived from port operations by the China Overseas Ports Holding Company Limited, the China Overseas Ports Holding Company Pakistan (Private) Limited, the Gwadar International Terminal Limited, the Gwadar Marine Services Limited and the Gwadar Free Zone Company Limited has been granted exemption from income tax for 23 years, with effect from Feb 6, 2007.

Besides, income generated by contractors and sub-contractors of those five companies from port operations has been granted income tax exemption for 23 years from July 1, 2016.

Similarly, income and interest earned by a foreign lender or a local bank — with more than 75pc government or State Bank of Pakistan shareholding — by virtue of a financing agreement with the China Over­seas Ports Holding Company Limited, are exempt from income tax for 23 years with effect from July 1, 2016.

Dividends received by the China Overseas Ports Holding Company from the China Overseas Ports Holding Company Pakistan (Private) Limited, the Gwadar International Terminal Limited, the Gwadar Marine Services Limited and the Gwadar Free Zone Company Limited have also been granted income tax exemption for 23 years from July 1, 2016.

If this was not enough, exemptions from sales tax and federal excise duty have been provided on materials and equipment for construction and operation of Gwadar port and Gwadar Free Zone through the Finance Act, 2016 to the China Overseas Ports Holding Company Pakistan (Private) Limited and its operating companies, their contractors and sub-contractors. This exemption is equally available for imported and locally-manufactured materials and equipment.

Plant machinery and equipment, including dumpers and special purpose motor vehicles, imported for the construction of the Karachi-Peshawar Motorway Project and the KKH Phase-II are also exempt from income tax and sales tax.

Likewise, exemption from sales tax and federal excise duty has also been granted to machinery, apparatus, materials etc imported by the China Railway Corporation for the Orange Line project.

Rail-based mass transit projects in the four provincial metropolises have also been exempted from the provisions of Section 148 of the Income Tax Ordinance, 2001, which deals with advance income tax at the import stage.

This is in addition to exemption from income tax to interest and income derived by the Industrial and Commercial Bank of China (ICBC) and the Silk Road Fund in Pakistan from loans relating to the energy projects mentioned in CPEC Energy Projects Cooperation Agreement signed in Beijing in Nov 2014.

The finance minister asserted that since all the concessions and exemptions were subject to the condition that the imported goods were not manufactured locally, except in case of power plants above 25mw, local industry had been provided necessary cushion from the impact of imports for CPEC projects.

The ministry’s response also said the income tax exemption for the income of companies, contractors, sub-contractors etc engaged in CPEC projects was not likely to impact the interests of local contractors and sub-contractors, etc.

Published in Dawn, April 24th, 2017