Why Pakistan’s SEZ law may need fixing?

Pakistan SEZ law has many lacunae: from having an incentive structure that was initially proposed in 2012 and has not been updated to incorporate incentives for new SEZs now being set up in 2020, not giving businesses speedy resolution, to BOI’s bureaucratic impediments to SEZs to taking off.

SEZ Law

Recently, the PM gave the go-ahead to 3 new special economic zones (SEZs), including National Science & Technology Park, Islamabad, JW-SEZ China-Pakistan SEZ Raiwind in Punjab and Dhabeji SEZ in Sindh. This makes it a total of 20 in the country.

Punjab government in July 2020 announced it would establish Pakistan’s largest SEZ in Layyah expected to be around 20,000 acres. Sindh is planning two new SEZs, while nine SEZ’s have been put under CPEC’s ambit with three of them on a prioritized path: Allama Iqbal Industrial City (inaugurated January 2020), Rashakai (inaugurated September 2020) and Dhabaji (said to be inaugurated in December 2020 – although more likely to shift to first quarter 2021).

Special Economic Zones (SEZ) are promoted around the globe, mainly in developing countries, as a strategy to industrialize, accelerate economic growth and fast track development. It is set up as a separately demarcated territory with its fiscal regime which is different from the one prevailing in the country, backed by quality infrastructure, regional connectivity, uninterrupted power supply and other facilitation services to fuel the economy.

Read more: China and the history of its Special Economic Zones

The aim is to provide attractive incentives for investors – both external and local to attract them to set up industry in the SEZs. Unfortunately, the ‘attractiveness’ of the incentives in Pakistan has been overhyped, especially in light of the overall cost of business companies face in terms of high electricity prices (when there isn’t load-shedding), lack of skilled/trained workers and the general unpredictability of government policies (witness the recent change in IPP power agreements).

Trying to emulate the Chinese model of industrial development through SEZ’s, Pakistan has incorporated these as an essential part of its CPEC-phase 2 industrial development platform. The framework for SEZs was initially made in the SEZ Act of 2012, SEZ Rules of 2013 and amended last in 2016.

Under the SEZs (Amended) Act 2016, SEZs can now be established by the private parties exclusively, or by Federal or Provincial Governments or in partnership with private parties through Public-Private Partnership (PPP).

Why Pakistan’s SEZ law is not accomplishing what it set out to do?

The first hurdle is Pakistan’s Board of Investment (BOI) that is supposed to work as a one-stop window and get everything done quickly for companies–invariably does not follow the timelines explicitly set out and companies still need to run around to numerous government agencies.

Read more: BOI awards SEZ status to Allama Iqbal Industrial City!

Successful SEZs around the world are managed and operated locally by the independent administrations and boards, which organize affordable utilities and one-window operations. This is one reason why for CPEC SEZs, the CPEC authority was created to help expedite this running around.

Second, provincial BOIs exist, but it is not clear what mandate they have over and above the federal BOI. After 18th Amendment provinces set up their own BOI’s but they have no power to change what the federal BOI has authorized. SEZ’s are granted from the federal government and majority of the incentives given at the federal level.

Similarly, across the country, private-public management companies have been set up to manage the SEZs but have not been given any mandate to provide any approvals to the businesses that decide to set up under their control. The BOI is involved at every step from the approval of the SEZ to the allotment of plots to investors.

Vagaries of policy are such that, recently, SEZ management have been told to stop land sales until further consultations on SEZ Zone Enterprise Admission and Sale of Plot Regulations, 2020, was completed, without taking into consideration that the SEZ developers need to sell future land to pay those they bought it from (which is done in instalments).

Read more: SEZs, roads, motorways & energy projects under CPEC to change fate of country: Asim Bajwa

Another issue with Pakistan’s SEZ law is that it does not give those operating inside the SEZ extra legal protections or exemption from the country’s general laws. Dubai’s highly cited Dubai International Financial Center (DIFC) that has brought in billions of dollars and hosts regional headquarters for many of the world’s largest legal, banking and many other firms, has exclusive laws (British law) created for the SEZ under which these companies operate that is separate from those firms working in the rest of the UAE.

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Dubai International Financial Centre (DIFC), a Special Economic Zone in Dubai, UAE

The same applied to Chinese SEZs when these were set up in the 1980s. For Pakistan, this is not the case, companies operate under the laws of the country which means they are subject to the lengthy procedures faced during cases, by comparison, DIFC has tribunals that offer a speedy resolution for businesses.

Furthermore, the SEZ law does not offer any meaningful policy and fiscal concessions to investors. For example, the one-time exemption from custom duties and taxes on import of plant and machinery discourages future modernization and replacement expansions needed by companies.

Read more: PIEDMC’S SEZs declared estates across Punjab

Besides, many of these exemptions are currently already available for many companies importing from China under the Pakistan-China Free Trade Agreement signed and given the cost of equivalent machinery from western countries majority of companies already only import from China.

The law has not been updated to encourage companies going into new SEZ’s and still stands at a 10-year tax holiday on investment in these zones before the end of June 2020 and a five-year tax holiday for units established after that. Furthermore, under section 113 of the Income Tax Ordinance they are all liable to pay minimum income tax and under Sections 148, 153 and others they are due to pay withholding tax on raw material imports and so on as well as on utilities.

Read more: SEZ policy of Pakistan

Similarly, import of plant and equipment needs to be exempted from the payment of 17% sales tax as well as withholding tax to reduce the capital cost of establishing units, particularly for small and medium-sized companies.

To make SEZs attractive for national and international firms, the government needs to update it’s 2016 amended SEZ policy to reassess the policy and fiscal incentives given but more importantly given the effective management and governing boards of the zones they need to be empowered to be able to make many decisions at their SEZ level.

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