Pakistan Investment Policies V. Investors Security

PAKISTAN'S INVESTMENT POLICIES PAKISTAN'S INVESTMENT POLICIES V. INVESTOR'S SECURITY By M. Iqbal Patel, Chartered Accountant, Karachi It is well established fact that Pakistan has enormous potential and opportunities for investment because it has vast reservoir of natural resources backed by skilled hard-working people and liberal incentive packages. There are generous tax and customs incentives for import of ' raw materials plant and machinery into Pakistan and above all free repatriation of profits and capital. Recently enacted Special Economic Zone (SEZ) Bill, 2012 allows one time exemption to all goods, machinery and equipment from customs duties and entrepreneur will also be exempted from income tax for ten years. The Bill is claimed will legal cover to the investment in Pakistan, hence it is hoped that it would attract foreign direct investment and encourage local investors too. The Bill provides attractive incentives such as exemption from customs duties and taxes for all capital goods imported in Pakistan for the development, operations and maintenance of the SEZ, exemptions of all taxes on income accruable in relation to the develop , and operations of the SEZ. The time limit for these incentives is set for ten years, commences from the date of signing of a development agreement, within which an investor will have to develop an area declared as SEZ. As explained by the Bol Chairman the economic zones would be created on the basis of public-private partnership. The local investors are equally qualified to create SEZ. The incentives allowed under the Bill are restricted to apply to only capital investment in SEZ and it does not cover investment in real estate or housing colonies businesses etc. in SEZ. He said that the Bill provides for liberal incentives and investor facilitation services with an objective to enhance productivity and reduce cost of doing business for economic development and alleviation of poverty from the country. He has claimed that the investors from South Korea, China, Turkey and Japan have expressed their interest to invest in SEZ. The governments' efforts to attract foreign investment are commendable as it has offered similar investment promotion schemes through the Finance Act, 2010 which has introduced a tax credit scheme under section 65D of the Income Tax Ordinance, 2001 (Ordinance) for a newly established industrial undertaking. The scheme envisages that tax credit up to 100% of the tax payable is allowed to a company that is formed for establishing and operating a new industrial undertaking for manufacturing in Pakistan. The tax credit is allowed for five years commencing from the date of setting up or commencement of commercial production, whichever is later. The scheme is introduced with a view to provide incentive for investment in establishing new industrial undertakings in Pakistan to boost its ailing economy and create employment opportunities. The Federal Board of Revenue has shown surprise that in 2012 not a single investor has availed this lucrative tax credit for equity investment scheme. The matter in fact is really surprising that that 100% tax credit for equity investment scheme was the biggest tax relief allowed in the budget 2010-2011 but not a single investor has availed the benefits of the tax credit scheme so far. Similarly another tax credit scheme is introduced under section 65E of the Ordinance whereby investment made by a company set up in Pakistan before July 1, 2011 through 100% new equity raised through issuance of new shares in the purchase and installation of plant and machinery for an industrial undertaking including corporate dairy farming, such company is entitled to tax credit in the ratio of the new equity and the total equity, in case where separate accounts are not maintained and in the cases where separate accounts are maintained, it shall be allowed 100% tax credit of the tax payable. The reasons, for failure to avail such a lucrative tax- incentive schemes by the investors may be attributed to the political uncertainty, poor governance, corruption all around and lack of security of life of the entrepreneurs and their families. What to talk about of fresh investment in the country if the present economic scenario is taken into account, where the existing industries are confronted with multiple problems, mainly scarcity of power and gas has stopped the wheel of industries. The bad law and order situation of the country has created insecurity of the life and property of the people. The country has suffered billions of rupees losses due to target killings and frequent strike calls by the political parties of the coalition government. Of course only after the BoI has considered several factors it came up with this proposal, but its proposal is not supported with the remedial measures of the host of problems faced by the investors. The major problem amongst others is the energy crisis which the government has failed to resolve so far. Interestingly though the government increases the cost of the electricity and gas on weekly basis yet it resorts to long hours load/gas shedding. Consequently several industries have closed or are running at low capacity and the consumers are suffering of high prices of the goods. We talk of economic development of China but fail to note their government's sincerity for growth of their economy. One of the benefits that China provides to its investors is free electricity and natural gas. One may know that the fiscal incentives alone do not attract investment unless security of life and property of an investor, his family and team is guaranteed and protected. The law and order position in Pakistan as a whole and Karachi in particular is that the suicide-bombings, target-killings, kidnappings for ransom, extortion, murderers, firing of factories and such other crimes are regular public discourse. In a country where the life of common man is not secure and is treated as trading goods and above all in-action and helplessness of the law-enforcement agencies is not questioned by the government; how can we expect that foreign investors will dare to invest in Pakistan. In fact the position of local investors is that they are pulling out their investment from Pakistan and shifting it abroad. According to a press report about 80% of the local industries have been shifted to Bangladesh. The industrialists keep their family abroad due to fear of kidnapping for ransom and murder. The recent July-August, 2012 report of the State Bank of Pakistan is eye opener for all concerned, particularly for the BoI who may take it seriously if it has planned to market- the SEZ among the countries who are keen to make investment in Pakistan. The SBP reports that Direct Foreign Investment (FDI) has narrowed down by 68% in July-August, 2012 compared to corresponding period of last year. It further reported that flight of capital from FDI continues to surge and outflow of $198.5 mln. has been recorded compared to $140.7 mln. in corresponding period of last year. It reported that the adverse law and order situation, lack of infrastructure and rising energy shortfall are main reasons for decline in net foreign investment. Economists observe that the government is not serious to solve these issues. It is a fact that the government remains busy in keeping its political coalition parties in fact, and never talks of economic issues. Recently a round table conference in Beijing on "Accelerating China-Pakistan Economics Partnership' hosted by China Development Research Foundation the participants recognized the fact that Pakistan has tremendous opportunities ranging from small and medium enterprises to huge infrastructure projects for lucrative investments especially in energy sector, oil and gas exploration and production, the largest and least exploited coal reserves, unexploited mineral deposits, huge potential for agricultural expansion, considerable potential in the IT sector and modernization of railway, steel, airlines and other sectors. But they expressed concern that the obstacles to investment in Pakistan is the security conditions which prevents them from investing in Pakistan. Similar remarks were passed recently by a Japanese consultant who was giving a presentation in the Planning Commission. In the presence of Japanese businessmen and investors, he stated that security situation in Pakistan was seriously affecting foreigners. He urged the government to launch a crack down on robbers and house breakers in residential areas, besides stressing upon the need for a stable power supply. In the circumstances mentioned above investment s schemes offered in any form would be a futile exercise. There is need to end the political instability which is largely blamed for the slumping economy. The politicians and State institutions who are wrangling with one another for selfish motives at the expense of the economy and the people at large never talk about controlling lawlessness. The state of the economy demands focusing on the real economics issues, broadening of tax base, tax reforms on equity basis, creating energy infrastructure, improving law and order in the country. These measures are necessary to encourage the investors to invest into Pakistan, as it will boost industrialization, investment and create employment opportunities for the people.