The Federal Government has exempted Special Economic Zones (SEZs) from minimum turnover tax.
The Special Economic Zones (SEZ) Act, 2012, had already exempted SEZs from all taxes, but some Chinese and other investors had complained that they are still being charged turnover taxes, Business Recorder reported on Monday.
During the 6th meeting of the Board of Approvals, held in October last year under the chair of PM Imran Khan, it was highlighted that even though SEZ Act provides “Exemption from all taxes on income” to Zone Developer and Zone Enterprises under sections 36 & 37 of the said Act, the SEZ enterprises were still being subjected up to 1.5 percent turnover tax.
During the meeting, it was informed that Section 126E of the Income Tax Ordinance 2001 also offers the same exemptions. However, at the same time, Section 113(3)(a) of the Income Tax Ordinance 2001 necessitates turnover taxes for the economic zones under concern.
The companies operating within these SEZs are required to incur heavy depreciation costs in the first few years of their establishment. If turnover taxes are applied on top of that, it steeply reduces the value of any sale proceeds that these new companies may make in their initial years. Put together, the depreciation costs and taxes negatively impact the profitability of these enterprises and may also lead them towards failure right from the beginning of their operations, the news report added.
After hearing these arguments, the meeting unanimously decided to refer the matter to the Ministry of Law, which later clarified that the “exemption from all taxes on income” already available through the Act includes exemption from minimum turnover tax as well.
While this clarification was also communicated to the FBR, the investors operating in the SEZs complained that they were still being charged with the minimum turnover tax.
The FBR said in response that the Federal Government needs to bring appropriate amendments in clause 11A of the Income Tax Ordinance 2001, through the forthcoming Finance Bill, if it intends to extend the exemption from minimum turnover tax to the SEZs.
On the other hand, the Board of Investment – being the SEZ Secretariat – has said that the ‘exemption from income tax’ already includes ‘exemption from minimum turnover tax.’ Therefore, amending the tax ordinance, etc., will make it a new incentive to the SEZs, which might have other undesirable impacts.
BoI has proposed that the Economic Coordination Committee (ECC) of the Cabinet may direct FBR to implement the exemption from the minimum turnover tax being a tax on income, exemption from which is available to both SEZ developers and its enterprises. On May 21, 2021, the ECC approved the exemption, which was later ratified by the Cabinet.