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NA passes STZ Authority Act 2021, zone developers get 10-year tax break

National Assembly on Friday passed “The Special Technology Zones Act, 2021” to set up an authority to boost the IT sector of Pakistan. The bill promises many incentives and exemptions to zone developers and enterprises to develop STZs in the country.

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National Assembly on 16th July passed “The Special Technology Zones Act, 2021” to set up an authority to boost the domestic IT sector by attracting investment to uplift the domestic IT sector.

The bill has given “Exemptions and Incentives for zone enterprises” and “incentives for the Authority and zone developers from the date of signing of the Development Agreement” for a period of 10 years.

Zone Developers and Authority

The incentives and exemptions for the Authority and Zone Developers were given for a period of 10 years in clause 20 of the bill, include Exemption from all taxes under the Income Tax Ordinance, 2001 including tax on profits and gains, income tax, turnover tax, withholding tax, capital gains tax, income tax on dividend income and withholding tax on dividend.

Secondly, it includes Exemption from sales tax under the Sales Tax Act, 1990.

It also offers, exemption from Customs Duty under the Customs Act 1969 on the import in Pakistan o/ all Capital Goods including but not limited to materials plant, machinery, hardware, equipment and software, devices, instruments, accessories, attachments, building materials, materials and any other equipment required to perform functions of the Authority, zones and zone developers, whether or not manufactured locally, for use in zones.

The Zone Developers and the authority are exempted from property tax.

Exemption on dividend income and capital gains of any venture capital fund (whether local or foreign) derived from investments in the zone developers, has also been granted.

Lastly, the Zone Developers have the permission for opening and maintaining of foreign currency accounts, availability of foreign exchange, full convertibility to foreign currency and repatriation, and free transfer of foreign currency to meet the requirements of investors, lenders, contractors, operators, consultants, insurers, reinsurers, vendors and advisors in relation to any compensation amounts, loan repayments, equity and return on equity, profits, works, goods, and services in accordance with the foreign exchange regulations of the State Bank of Pakistan for zones.

For the avoidance of doubt, the co-zone developer shall be entitled to the tax exemptions and incentives permissible to the zone /developers under Section 20.

Read More: STZs establishment: A revolutionary move for Pakistan’s IT sector

Zone enterprises and Authority

There are many incentives for the zone enterprises from the date of issuance of license for a period of ten years, including exemption from all taxes under the Income Tax Ordinance, 2001 including tax on profits and gains, income tax, turnover tax, withholding tax, capital gains tax, income tax on dividend income and withholding tax on dividend.

Sales tax under the Sales Tax Act, 1990, and property tax are also exempted for zone enterprises.

The bill offers exemption from Customs Duty under the Customs Act 1969 on the import in Pakistan of all Capital Goods including but not limited to materials, plant machinery, hardware, Equipment, and software, devices, instruments, accessories, attachments, building materials, materials and any other equipment required to perform functions of the zone enterprises, whether or not manufactured locally, for use in zones.

Tax exemption has been given on dividend income and capital gains of any venture capital fund (whether local or foreign) derived from investments in the zone enterprises; and

Lastly, the Zone Enterprises have the permission for opening and maintaining of foreign currency accounts, availability of foreign exchange, full convertibility to foreign currency and repatriation, and free transfer of foreign currency to meet the requirements of investors, lenders, contractors, operators, consultants, insurers, reinsurers, vendors and advisors in relation to any compensation amounts, loan repayments, equity and return on equity, profits, works, goods, and services in accordance with the foreign exchange regulations of the State Bank of Pakistan for zones.

According to the official document, the reasons and objective of the bill are to provide institutional and legislative support for the national technology sector with internationally competitive and export-oriented structures and ecosystem, in addition to developing collaboration between academia, research, and the technology industry.

This would help in creating jobs in the technology sector, capitalizing on our youth dividend.

The creation of the Authority will also build an environment, which would attract foreign direct investment, apart from improved quality of domestic technology products and services and fostering innovation.

Read More: Special Technology Zones to double Pakistan’s IT industry to $6b

Background

Pakistan with an aim to boost its IT exports is setting up special technology zones across the country.

This initiative began on 2nd December 2020, when the Government of Pakistan passed an ordinance to develop Special Technology Zones Authority (STZA) in Pakistan, with the purpose of entering Pakistan into the globally exploding Information Technology sector.

Imran Khan is himself overseeing the progress by serving as the president of the Board of Governors of the STZA. On December 17th, the premier appointed a global strategist, IT executive, and entrepreneur Amir Hashmi as the chairperson for the STZA.

This is a step to get a $15 billion share in a $5 trillion IT market globally. The plan is to set up 60 STZs all around the country.

The zones will have certain incentives for stakeholders as mentioned in the Ordinance, like:

  • Exemption from all income taxes (withholding tax, presumptive tax) for a period of ten years from the date of issuance of a license by the STZ Authority.
  • Exemptions from all customs duties and taxes on capital goods including but not limited to materials, plant, machinery, hardware, equipment, and software imported into Pakistan.
  • Exemption from property tax for ten years from the date of issuance of a license by the STZ Authority.
  • Exemption from general sales tax (G.S.T) on goods and services on import of plant, machinery, equipment, and raw materials for the consumption of these items within zones by the Authority as well as zone enterprises.
  • Tax exemption on dividend income and long-term capital gains from investments in a venture capital (VC) undertaking for a period of ten years from the date of issuance of the license by the Authority.
  • Supply of uninterrupted power and other resources.
  • Guaranteed high-speed internet for the companies as well as the data centers which will be established inside the STZs.

With the passing of this bill, the implementation work is to begin soon.

In a recent interview to Business Recorder, STZA Chairman Hashmi said, “…the idea behind the Prime Minister’s initiative, to create a similar enabling environment in Pakistan where young entrepreneurs, large IT companies, R&D centers, and universities, all come together to add to the GDP growth of the country.”

Read More: PM IK to set up 60 Technology Parks and targets $10bn in IT exports in 2 years

He added, “Hence we needed Special Technology Zones (STZs), and that’s the genesis behind this new authority. Within two to three years, this ecosystem will become a big catalyst for job creation, technology transfer, and economic growth”

 

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