January 19, 2003	Sunday	Ziqa'ad 15, 1423

ISLAMABAD, Jan 18: The government has decided to attract much-needed local and foreign investment by urgently removing some of the irritants/hurdles and offering fiscal and non-fiscal incentives to the investors.

Recently a meeting was presided over by the commerce minister to consider the problems and prospects of export processing zones, and Karachi Export Processing Zone in particular.

According to the details, the chairman, Export Processing Zone Authority (EPZA), identified the following problem areas: Withdrawal of income tax exemption and levy of presumptive tax on exports from EPZs; levy of customs duty on full value of exports to tariff area; restriction on export of imported merchandise from warehousing units of EPZs to tariff area on payment of normal duties and taxes; levy of 0.5% cess by Sindh on consignments relating to EPZ Karachi; problems relating to financing of EPZ projects by local banks/development financing institutions (DFIs); disposal of used machinery from KEPZ to tariff area; of vehicles imported by KEPZ investors after completion of five year usage; of water and scraps originating from KEPZ; and problems relating to extension in lease period of land in KEPZ.

The meeting decided to withdraw income tax exemption and levy of presumptive tax on exports from EPZs. The EPZA chairman stated that the competitiveness among manufactures in the zone has eroded due to withdrawal of income tax exemption and levy of presumptive tax on all exports from July 2000. Especially, the inputs purchased from tariff area are treated as exports from Pakistan and are levied presumptive tax at the time of exports to tariff area at the rate of 0.75% to 1.25% of their FOB value, which means that exports from tariff area are doubly charged to presumptive tax. This double taxation makes the investors less competitive in the market.

The chairman suggested that levy of presumptive tax on exports from EPZs should be withdrawn to bring them at par with other such zones of the region, especially those of the UAE.

It was also decided that CBR will look into this matter in the regional perspective and furnish its views on the subject. About the levy of customs duties on full value of exports to tariff area, it was stated that the goods produced in EPZs utilize local labour and utilities like electricity, gas, water, telephone etc. These goods were not charged import duties and taxes vide SRO No.249 (1)/81 dated March 25, 1981.

Subsequently, the part which allowed duty exemption on value addition was withdrawn vide SRO 1096(1)/84 dated December 24, 1984. Similar goods, if produced in tariff area, would entail only duty on raw material while the portion of value addition through local inputs, labour, and utilities is also taxed for manufactures in the zones without any logic. This adds disadvantage to EPZs investors as compared to tariff area factories adding another reason for not attracting substantial foreign investment in the EPZs.

This facility is also available to units of neighbouring competing zones like those in the Philippines, Malaysia, India and the UAE as well as to the goods manufactured in manufacturing bonds in tariff area.

About the restrictions on export of imported merchandise from warehousing units or EPZs to tariff area on payment of normal duties and taxes, the EPZA chairman stated that the facility of trading was allowed in the original concept of EPZ vide SRO 1058(1)/81, but denied by the CBR. This created a negative impact and trading activity could not flourish from EPZs of Pakistan as compared to neighbouring zones like Jebel Ali.

It was proposed that apart from items already on the negative list, re-export of all imported merchandise may be allowed to Iran, Afghanistan, Central Asian States, besides other countries and also to Tariff Area of Pakistan on payment of duties and taxes.

The chairman did not agree in allowing trading of all the items other than 11 items already allowed. The Secretary I&P was of the view that EPZ was primarily meant for manufacturing as against trading. It should not be converted into hub of trading activities for which a new area at Gawadar has been ear-marked.

Regarding non-permission of goods from EPZs/KEPZ to Iran, Afghanistan and Central Asia states via land rout, the Ministry of Commerce issued an SRO 137 (1)/2002 dated 7 march 2002, amending Export Policy and Procedure Order, 2000 as under:

“Export of all commodities produced or manufactured in Export Processing Zones and manufacturing bonds, except vegetable ghee and cooking oil shall be allowed via land route subject to the condition that these exports shall not be entitled to (I; zero rating sales tax on taxable goods. (ii) rebate of central excise duty; and (iii) repayment or dram back of customs duty.

It was decided that Ministry of Commerce will look into this matter and submit its considered views on this subject after due examination of the pros and cons of the concept in the light of ground realities obtaining in Pakistan.

About the levy of 5% cess by Sindh on consignments relating to EPZ Karachi, it was said that the government of Sindh has levied a cess for maintenance and development of infrastructure on goods at the rate of 0.5% of their value for carriage by road upon entering or levying the province from or for outside the country, through air or sea. In this connection, the EPZA chairman was of the view that the concept of export processing zones was based on duty and tax free manufacturing in order to become competitive while selling the products in international market. To remain competitive with other countries of the region, the government has categorized the zones as duty-free for manufacture of exportable products.

On problems relating to financing of EPZs projects by local banks/DFIs, the meeting was informed that presently all investments in EPZs were to be arranged by the investors through their own resources. Under sub-rule 13(3) of EPZA Rules 1981, industrial undertakings of the zone have been debarred from any credit facility from Pakistan’s resources, including financing by Industrial Development Bank of Pakistan.

Regarding problems relating to disposal of used machinery from KEPZ to tariff area, the meeting was told that the ECC of the cabinet has allowed disposal of used machinery to tariff area after three years of import subject to Import Policy Order and leviable payment of duties and taxes. Thus the EPZs were to be treated at par with similar imports from foreign countries to tariff area. But the CBR was not treating such disposals at par with similar imports from foreign countries to tariff area. A reference was made by the collector of customs (exports) to the CBR in April 2001, which is still pending for decision. The CBR promised to look into this matter to ensure compliance with the ECC decision.

About problems relating to disposal of vehicles imported by KEPZ investors after completion of five years of usage, it was said that the investors of EPZs were allowed to import three duty free vehicles, including one car, since the inception of the zone in 1980. The rules for disposal of old cars were not made for almost 20 years. In July 2000, however, the ECC approved disposal of vehicles imported by the zone investors after five years of usage, after payment of leviable duties on the depreciated value of vehicles as allowed to the privileged persons. The CBR was not following the ECC decision in letter and spirit. Therefore, disposal of old vehicles was not taking place. The CBR promised to look into this matter in order to resolve the issue.

About problems relating to extension in lease period of land in Karachi zone, the meeting was told that presently the lease period of land in KEPZ is 30 years, which is extendible to another 30 years. The EPZA chairman proposed that the lease period may be extended up to 99 years. The proposal was found premature and not agreed to.