Pakistan defers tax relief for Gwadar Free Zone

The Express Tribune

Pakistan has once again delayed approval of sweeping tax concessions for the Gwadar Free Zone, being set up under the China-Pakistan Economic Corridor (CPEC), because of its adverse implications for other economic zones of the country.

The Economic Coordination Committee (ECC) of the cabinet on Tuesday directed the stakeholders to sit again and thoroughly review the proposed income tax, sales tax and customs duty exemptions for the Gwadar Port Authority and Gwadar Free Zone.

The Ministry of Maritime Affairs briefed the meeting about various concessions granted to the Gwadar Port and Gwadar Free Zone, according to an official statement issued by the finance ministry. It added that the ECC directed the Board of Investment (BOI), Ministry of Planning, Ministry of Maritime Affairs, Law Division and Federal Board of Revenue (FBR) to review the proposals and come back to the committee.

Pakistan has already given huge tax concessions to Chinese companies working on projects set up under CPEC, which has put local companies at a disadvantage.

The maritime affairs ministry proposed that all tax benefits should be extended to the Gwadar Free Zone, which were initially meant for the Gwadar Port only. Now, the Chinese are pressing Pakistan to extend the benefits to the Gwadar Free Zone and the businesses being set up there.

It was for the second time that the Ministry of Maritime Affairs tabled the proposal in front of the ECC in the past nine months. Earlier, former prime minister Shahid Khaqan Abbasi put off decision on further concessions and constituted a committee. But the committee did not held a single meeting.

About four years ago, Pakistan had approved a 23-year tax holiday for the China-run Gwadar Port in an attempt to make the deep-sea Arabian port a hub of commercial activities.

During the ECC meeting, Adviser to Prime Minister on Commerce and Investment Abdul Razak Dawood suggested that the government should not give special tax incentives to the Gwadar Free Zone, officials told The Express Tribune. He was of the view that the Gwadar zone should be given only those concessions which would be offered to other economic zones.

According to the officials, Dawood said any preferential treatment to the Gwadar zone would put other economic zones at a disadvantage.

Pakistan has already set up seven SEZs while five more are planned under the CPEC framework.

BOI Chairman Haroon Sharif pointed out that the Gwadar Free Zone did not fall under the Special Economic Zone Act of 2011. The zone is being set up under a special arrangement with Beijing.

The officials said Finance Minister Asad Umar was also of the view that the Gwadar zone should be given incentives similar to the other zones.

The original Gwadar Port Concession Agreement had been signed between the Gwadar Port Authority and the Port of Singapore Authority, which the ECC approved in 2007. In February 2013, China Overseas Ports Holding Company Limited (COPHCL) took over operations of the port from the Singaporean company.

In April 2015, the ECC decided to extend the tax holiday for the Gwadar Port from 20 years to 23 years on an understanding that the 23-year period would come into effect from 2007. But China has now demanded that the tax holiday should be applied from July 2016 instead of 2007. This would allow Chinese firms to enjoy the tax-free status till 2039, even beyond the scope of China-Pakistan Long-Term Plan of CPEC, which will end in 2030.

Gwadar Port is described as the most significant strategic pearl in China’s plan of expanding its influence in the Arabian Sea – a move that India sees as a threat to its hegemonic designs.

Nature of tax incentives

Chinese operators of Gwadar Port have demanded that the tax incentives should be available to China Overseas Ports Holding Company Limited and its subsidiaries namely China Overseas Ports Holding Company Pakistan Limited, Gwadar International Terminals Limited, Gwadar Marine Services Limited and Gwadar Free Zone Company Limited.

In addition to the earlier benefits, the Chinese are now looking for sales tax exemption for imports and zero-rated supplies to the businesses to be established in the free zone.

The maritime affairs ministry proposed that the income derived by the Gwadar Free Zone should be exempted from tax for 23 years, starting July 2016. It suggested that the income of contractors and sub-contractors of the free zone should also be exempted for 23 years and profit on debt by foreign lenders of the free zone should be exempted from tax for 23 years.

“All the visiting ships including foreign and local and fishing vessels at Gwadar Port,” should also be exempted from import duties, according to the proposal. All the businesses established at the Gwadar Free Zone should be exempted from import duties.

The Chinese also sought permission to set up a duty-free shop at the Gwadar Free Zone.