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Upgrading mineral policy

November 18, 2012

EVEN though Pakistan is end-owed with huge mineral deposits, its mineral sector currently contributes less than one per cent to GDP. This is despite official estimates that minerals have the potential to contribute up to five per cent of the national income.

Pakistan has a large base of industrial minerals and the growing interest from international mining companies carries great potential for the rapid development of the sector—even though some of the major initiatives have been bogged down by legal disputes at home and abroad owing to weak contracts and non-implementation of policies.

The neglect of the sector could be gauged from the fact that the National Mineral Policy 1995 required mandatory biannual meetings of mineral boards headed by the prime minister and comprising chief ministers. But only a couple of inter-provincial meetings at the highest level have been held over the last 17 years.

This forum will remain in place but with the amendment that chief ministers could depute their nominees to attend its meetings, at least once a year. The non-availability of all the chief ministers for biannual meetings was one of the key reasons for non-functioning of the inter-provincial Mineral Investment Board.

Keeping in mind the changing global environment and constitutional requirements, the Council of Common Interest (CCI) approved in principle a revised National Mineral Policy 2012 early this month subject to removal of certain reservations expressed by chief ministers of mineral rich provinces — Sindh and Balochistan. Under the new mineral policy, the federal and provincial governments have agreed to provide for appropriate institutional arrangements, a modern regulatory framework and a programme to expand geological database.

While the new policy envisages greater role for the provincial government through devolution of federal corporations in the mineral sector like Pakistan Mineral Development Corporation (PMDC) and Pakistan Gemstone Corporation, it also increases contribution by investors in the form of taxes. At the same time, the crucial role of Geological Survey of Pakistan as a central database organisation has been protected while the federal government would have a say in execution of agreements with international firms.

As required under article 172 of the constitution, the provincial governments have been empowered to make rules for the grant of mineral concessions and titles in respect of any mineral falling in its jurisdiction. The federal government has on the other hand committed to provide a standard model agreement that would be followed by the provincial governments to ensure reduced role of bureaucracy in dealing with grant of contracts and licences.

Article 172 requires that any property which has no rightful owner shall, if located in a province, vests in the government of that province and in every other case, in the federal government.

All lands, minerals and other things of value within the continental shelf or underlying the ocean beyond the territorial waters of Pakistan shall vest in the federal government. Also, subject to the existing commitments and obligations, mineral oil and natural gas within the provinces and the territorial waters adjacent thereto shall vest jointly and equally in that province and the federal government.

The policy draft seeks to strengthen provincial institutions dealing with minerals and requires setting up of provincial Mineral Investment Facilitation Authority (MIFA) to be headed by the chief ministers or prime minister in the case of AJK.

On the same lines, a federal government would also have a MIFA to be headed by secretary petroleum and representatives of planning, finance, states and frontier region, Pakistan Environmental Agency, private miners and universities. The MIFAs would be responsible for monitoring and facilitating mineral activities and help the federal government in negotiating mineral agreements with foreign mining companies.

The federal government will make amendments in rules and laws to place mineral sector of FATA, Islamabad capital territory and International Offshore Water Territories under regulatory control of the petroleum ministry. A Geo-Data Centre of Pakistan will be established within the ministry of petroleum to collect, keep, update and disseminate to provincial governments and the industry the geo-data in standardised system and coordinate with provincial mineral departments, Wapda , OGDCL and directorate general of petroleum concessions.

The federal and provincial governments would jointly formulate rules for licences of reconnaissance, prospecting, exploration and mineral deposit retention and mining leases. As a broad principle, the foreign companies will be free to apply for and be granted licences without the need for local incorporation but would not get mining lease unless they are incorporated locally.

The new policy changes arbitration clauses. In the 1995 policy, the resolution of disputes was allowed to be directly taken to the international centre for settlement of investment disputes (ICSID). The new policy requires disputes to be submitted to the procedures for sole expert determination or arbitral or any other tribunal agreed in the each agreement before taking the disputes to ICSID or International Chamber of Commerce. The local companies would resolve their disputes through Pakistani arbitration tribunals.

The earlier policy envisaged 35 per cent corporate income tax on public companies and 43 per cent for banking and private companies. Now the 35 per cent tax rate would be uniform for all. The new policy has increased the minimum corporate tax from 0.5 per cent to one per cent of the declared turnover while where the corporate tax exceeds this limit the minimum tax would be charged.

The withholding tax on dividends paid has also been increased to 10 per cent from 7.5 per cent unless protected by the avoidance of double taxation treaties. On the other hand, the rate of withholding tax on non-resident contractors in construction and mining operations has been brought down to six per cent from 15 per cent.

As a new measure, a 15 per cent tax shall be deducted from the gross amount paid to non-residents on account of royalty and fee for technical services. An additional profit tax is payable by large scale mining companies at agreed rates on the economic projection stipulated in agreements through a three-tier mechanism. Where the rate of return is 15 per cent, the rate of tax would be 10 per cent while the rate of tax would increase to 15 per cent and 18 per cent when rate of return goes beyond 20 per cent and 25 per cent.

Some nominal charges have been introduced in the revised policy. These include Workers Profit Participation Fund, Workers Welfare Fund, Workers Children Education Cess, Employee’s Social Security Contribution, Employees Old Age Benefit and surface rent and compensation. All dispatches of specified minerals from mines would also be subject to a cess or excise duty ranging between Rs1-5 for each ton.

The mining companies would be exempt from customs duties and sales tax on import or machinery, equipment , material, and heavy duty non-luxury vehicles provided these were not sold locally without payment of normal taxes.

While the provincial government would be free to revise rates of royalty for coal, there would be fixed royalty rates for other minerals ranging between 10-15 per cent for precious stones, 3-5 per cent for precious metals and semi-precious stones, 2-5 per cent for base metals and 1-2 per cent for other metals and stones. The royalty in all cases would be determined on advalorem basis instead of gross value.

Except for royalty, there would be no other provincial or local taxes and levies on minerals and mining operations. The mining sector has also been granted a cover from complete protection of investment and repatriation of profits and capital abroad like other private investments.