Pakistan – Specific Information

Consider Pakistan!!

Pakistan sits on one of the most important trade routes of the world. This area has traditionally been a centre for exchange of cultures and commerce of South, South East, West and Central Asia. The country shares borders with China to the North, Iran and Afghanistan to the West, and India to the East, while the Arabian Sea to the South offers a vast coastline for maritime trade. Itself a country with a population of approximately 140 million, Pakistan also has easy access to the markets of Iran, Afghanistan, the Central Asian Republics and the Middle East. With the fast developing communication infrastructure in the country, Pakistan is well placed as a transit route for East-West trade in this era of increasing globalization.

Highlights of the Current Investment Policy

Investment Policy

The main objective of the present Investment Policy of Pakistan is to enhance the level of foreign investment, concentrating specifically on the fields of infrastructure, software development, electronics, engineering, agro-food, value-added textile, tourism and construction industries. The main features of this policy are listed as follows:

The Investment Policy deals with investment in all sectors of the economy and not merely in the industrial/manufacturing sector;

The Investment Policy is business friendly and provides equal investment opportunities for domestic and foreign investors as well as Overseas Pakistanis;

The essence of the Policy is to keep Pakistan competitive in the International Investment Market by:

• liberalizing the policy regime;
• offering fiscal and tariff incentives; and
• providing procedural and social facilitation.

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• Pakistan’s Investment Policy regime is the most liberal in the region;
• Foreign investors can hold 100% foreign equity in industrial projects;
• No Government sanction is required for setting-up an industry except in the following sectors:

- Arms & Ammunitions.

- High Explosives.

-Radio-Active Substances.

- Security Printing, Currency or Mint.

• Foreign investment on repatriable basis is now allowed in Service, Infrastructure, Social and Agriculture Sectors;
• In the Service Sector, foreign investors are allowed to hold 100% foreign equity subject to the condition that the repatriation of profits will be restricted to a maximum of 60% of total equity or profits, and it will be mandatory to meet the condition that minimum 40% of the equity is held by Pakistani investors (including sales of shares in stock exchange) within two years time;
• Foreign investors can hold 100% foreign equity in Social and Infrastructure projects;
• Foreign investors can come in Agriculture projects on joint-venture basis by associating minimum local equity of 40%;
• An amount of foreign equity shall be at least US$0.5 million.

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 Incentive Packages

• The new Investment Policy has shifted priority for investment in industry from traditional sectors towards high value added, export based, hi-tech, engineering, chemicals, petro-chemicals, oil refining, mining and agro-based industries. Foreign investors should now consider these priorities while investing in industrial sector;

• Customs Tariff on import of plant, machinery & equipment (PME) for hi-tech, value added and export industries is zero rated. In addition, tax relief in the shape of First Year Allowance (FYA) is admissable @90% of cost of PME;
• Customs Tariff on import of PME for agro-based, engineering, petro-chemicals and chemical industry is 10%. Tax relief is available in shape of FYA @75% of cost of PME;
• FYA @50% of cost of PME is available to all other new industries.

• Attractive incentives have been provided to promote investment in Service, Infrastructure, Social and Agriculture Sectors;
• Import of machinery for agriculture projects is fully exempted from the levy of customs duty;
• For Service, Infrastructure and Social Sector projects, rate of customs duty has been reduced to 10%;

• Tax relief on investments in these sectors has been provided in the shape of First Year Allowance @50% of PME Cost.

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Facilitation

To provide support services and utilities under one umbrella and to remove procedural & operational bottlenecks, the following measures have been taken:

• Encouragement of technology transfer;
• Simplification of immigration and work visa procedures;
• Simplification and consolidation of labour laws;
• Protection to investment and domestic manufacturing;
• Duty free import of food items

  ($ 1000 per person per year);

• Airport entry pass for protocol purpose;
• BOI’s website has been developed for easy access to information.

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National Industrial Zones

The Investment Policy also envisages a composite scheme for the development of National Industrial Zones (NIZs) engulfing Industrial Estates, Free Industrial Zones, Free Trade Zones and Export Oriented Units within the areas of their boundaries. Export-oriented Units (EOUs) will, however, be allowed to be set up all over the country. The scheme focuses on efficient industrialization and development with export-led strategy in a contiguous, congenial investor-friendly-environment, and adequate attraction for local and foreign investment. It provides for participation of the private sector in development of the zones, and also offers incentives, facilities and One Window Service by the government to support investors in establishment and operation of their projects. Investors/developers will have a choice to select prime sites for establishment of Zones. The development, management, maintenance and marketing of the Zones to attract industrial projects will rest with the developers/investors. The National Industrial Zones Authority (NIZA) will be set up under an enactment, with the responsibility for regulation of the development of Zones, public services, revenue collection and providing assistance to the Zones for arranging required utilities and other facilities in coordination with the concerned government agencies and departments.

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Other Major Policies and Initiatives

Industrial Policy

The Government of Pakistan is pursuing a policy of deregulation, privatisation, rationalisation of tariffs and development of industrial infrastructure. Its main thrust is on attracting industrial investment, and hence boosting production in the economy. The scope of privatisation has been extended to include infrastructure, oil and gas, public utilities, roads, railways and airports, alongwith industry, power generation and banking. Listed below are some highlights of this policy:

• No duty, no draw back, scheme with the aim to promote exports, improve the liquidity of exporters and save them from time consuming procedures;

• Foreign investment extended to additional sectors like infrastructure, housing and real estate, wholesale and retail trade, agriculture, health, and education;
• To boost the car industry in the country, a new policy has been announced which provides for exemption of cars from Capital Value Tax (CVT), and for raising of funds for increasing indigenisation of high tech parts to make this industry export-oriented;

• An incentive package for the shipping industry. According to the package, the import of ships will be exempted from all import duties and other levies applicable on imports. Income from operation of ships will be exempted from income tax.

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 Trade Policy

The Trade Policy is an important instrument in the strategy for achieving long-term objectives of economic development, improvement in balance of payments position and meeting the future challenges of globalization. The Trade Policy is also the corner stone of the Medium Term Export Development Strategy, which aims to achieve equilibrium at a higher export growth path, ensuring larger market access for Pakistani exports.

With these objectives in view, the Government has introduced a number of measures through the federal budget of 1999, to achieve economic and social uplift of the people. These measures relate to education, health and population welfare, and include the Social Action Programme, the Self-Employment Scheme and establishment of a Fund for Eradication of Poverty.

Some of the steps taken by the Government in recent years to remove or reduce anti-export biases are as follows:

• Exporters are being provided Export Refinance at 8% per annum i.e. at half the normal lending rates of 15%-16% being charged by commercial banks;
• Recently, in addition to direct exporters, indirect exporters who supply goods to exporters for production, have also been allowed the facility of Export Refinance;
• Duty Drawback Rates of some 300 items have been rationalized;
• All direct and indirect exporters were allowed the facility to import inputs through ‘No Duty No Drawback’, ‘Manufacturing in Bond’, and other temporary import schemes, without payment of customs duty, sales tax and withholding of income tax;
• The Central Board of Revenue (CBR) is developing exporter profiles with the assistance of the Export Promotion Bureau (EPB);
• A system for inspection of all rice shipments to ensure quality exports was implemented by the Ministry of Commerce in consultation with the Rice Exporters Association of Pakistan from July 1, 1999;
• The ‘No Duty No Drawback’ scheme has been further simplified, and the ambit of the Common Bonded Warehouse Scheme has been extended to cover indirect exporters and Small and Medium Enterprises (SMEs);
• Some Provincial taxes like ‘Octroi’ and ‘Zilla Tax’ have been abolished with effect from July 1, 1999;

• Maximum tariff rates on imports have been reduced to 35%;
• Export to Afghanistan has been allowed against the Pakistan Rupee.

The Government has further introduced the following measures under the Trade Policy 1999-2000:

• To increase export of engineering, contracting and consultancy services, it has been decided that foreign exchange income through such contracts will be charged income tax at a rate of 1%;
• Income tax on export of branded rice upto 5 kg. packs has been reduced from 1% to 0.5%;
• Commercial importers who import sewing machines and other machinery for clothing and textiles and sell them to exporters are entitled to sales tax refund adjustment;
• Income tax for canned and bottled fish (including seafood) has been reduced from past levels of 0.75% - 1% to 0.5%;
• Canned and bottled food exports will be allowed 90% depreciation allowance in the first year. This translates to a virtual exemption from income tax for about four to five years;
• Export of cotton has been allowed without any restrictions;
• Export of all edible oils in bottles or other consumer packs has been allowed, provided that there is value addition of 15% for edible uses in packs upto 5 litres, and value addition of 15% for non-edible uses in packs upto 0.5 litre;
• Income tax on export of rough, uncut, cut or polished precious or semi-precious stones has been reduced from 1% to 0.5%;
• Import of rough, uncut, cut or polished semi-precious stones for re-export, without involving foreign exchange of the country, will be allowed duty free as was done previously;
• Industrial establishments registered as importers have been allowed imports upto the value of US$ 7,000 per fiscal year, against foreign currency demand draft, without opening a letter of credit, provided such import is made by air or by courier;
• Exporters who are manufacturers can also import their raw material requirements under certain Temporary Import Schemes without payment of duties. In order to provide further facility, exporters will now be allowed to meet their raw material requirements from Public Bonded Warehouses without payment of duties and taxes;
• Oil & Gas companies and refineries can now import their specific requirements without obtaining the recommendation of the Ministry of Petroleum and Natural Resources.

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Agriculture

Agriculture remains the key sector of Pakistan’s economy, accounting for one-fourth of the GDP, with one half of the population dependent on it for their living and employment. It therefore has a high priority on the agenda of economic revival. An incentive package for agriculture has been announced, and includes the following:

• The support prices of wheat, rice, canola and sunflower oil seed will be increased;
• A ceiling of Rs. 1 million will be placed on agriculture credit;
• The allocation of credit for agriculture sector has been increased by 33%;
• The Agriculture Sector will be given maximum attention for achieving self-sufficiency in food. Over 1.25 million acres of land in possession of landlords in violation of agriculture land reforms will be reclaimed and distributed among landless farmers who could cultivate the land better;
• Certified cotton seed will be exempted from GST;
• In line with the reforms announced in the agriculture package, there will be no upper ceiling of land for registered agricultural companies which are involved in production, processing and marketing of agricultural products on commercial lines. However, the income of these companies will be taxable;
• Land for agriculture purpose can be obtained on lease basis for long periods, i.e. initially up to 50 years, extendible for an additional period of 20 years.

The following areas are available for foreign investment in the agriculture sector:

• Land development/reclamation of barren, desert and hilly land for agriculture purpose and crops farming;
• Reclamation of waterfront areas/creeks;
• Production of crops, fruits and vegetables, and integrated agriculture (cultivation and processing of crops);
• Modernisation and development of irrigation facilities/water management;
• Plantation, forestry and horticulture.

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Energy and Petroleum

Adequate and assured availability of energy is a prerequisite for sustained economic growth of a country. Despite having enormous potential of energy resources, Pakistan is facing shortage of energy supply, as existing energy resources have not been sufficiently explored and exploited to meet the energy requirements of the country. The energy sector is in high need of investment to be able to offset the demand of domestic, industrial, commercial, and power generation needs.

In 1997, a new petroleum policy was announced to promote investment in this sector. This policy provides concessions to attract and enhance the role and performance of private investment, particularly of offshore investment. The following are some highlights:

• The new policy inter-alia provides for royalty holiday, low tax rate, cost recovery and revenue;
• Import parity price formula for new oil refinery projects has been linked to a market mechanism of refined product prices, based upon Singapore mean FOB spot;
• All existing lube reclamation plants will enter into technical services agreement with the HDIP for effective quality control;
• A new anti-adulteration law will be introduced for stringent quality control;
• Instead of increasing the consumer price of gas to improve the profitability of gas companies, non tariff measures have been taken;
• The Government has liberalised integrated infrastructural projects of LPG from guarantees and permissions;
• The new policy package for off-shore areas is based on Production Sharing Arrangement;
• Exploration and discoveries in the field will be based on a production sharing system instead of a concessions system.

Further specific investment opportunities are being offered by Pakistan in the following sub-sectors of energy:

• Integrated coal mining and power generation projects;
• Hydro power projects;
• Power Transmission.

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Services and Infrastructure

Pakistan is linked to the world through its five international airports at Karachi, Islamabad, Lahore, Peshawar and Quetta. The network of Pakistan International Airlines covers 37 domestic stations and 55 international stations on 4 continents. Four private airlines i.e. Shaheen Airlines, Bhoja Air, Aero Asia and Safe Air are also currently operating in the country.

The shipping sector was nationalised in 1971 and the Government has recently issued 35 licenses to private sector companies; so far two of these have been set up. Pakistan has two major ports namely Karachi Sea Port and Port Mohammed Bin Qasim. Two fish harbours-cum-ports are being developed at Gawadur and Keti Bunder. The Karachi port handled 17.586 million tonnes of cargo during July-March 1998-99 compared with 17.02 million tonnes during the corresponding period of the same year. . A "World Trade Centre" is to be established at Port Qasim to provide facilities of international exhibitions, a permanent display centre and warehousing with refrigerated storage.

1998-99 also saw the introduction by Pakistan Railways of fast non-stop passenger services with lower class air-conditioned coaches between large industrial cities. The road system in Pakistan links the remotest of areas. The total length of roads is approximately 181,836 km., including 118,194 km. of high type and 63,642 km. of low type roads. The construction work on the Islamabad-Peshawar motorway, which started in 1998, is expected to be completed by December 2000. The Islamabad-Lahore motorway was completed in 1997.

Pakistan is also well connected to the world through international gateway exchanges. Value added services such as Internet access, e-mail, cellular mobile telephones, optical fibre systems, card pay phones, paging services etc. are readily available in the country.

Investment to further develop the services and infrastructure sectors is now being invited by the Government of Pakistan. Some incentives/requirements for investment in these sectors are given below:

• The amount of foreign equity investment to be at the level of at least US$1 million;
• The import tariff on Plant, Machinery & Equipment (not manufactured locally) is leviable at a standard rate of 10% and no sales tax.

The following areas are available in these sectors for foreign investment:

• Wholesale, distribution and retail trade, transportation, storage and communications/infrastructure projects including development of industrial zones;
• Telecommunication;
• Real estate development (development of commercial buildings, apartment buildings, housing projects, supermarkets/shopping malls, urban development, development of new communities);
• Technical testing facilities;
• Audio-visual services;
• Sporting and other recreation services;
• Rental/leasing services relating to transport equipment and machinery;
• Equipment and tools for land development & agriculture purpose;
• Environmental services.

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Hotels and Tourism

Pakistan is a land endowed with scenic beauty, and a rich variety of cultures. The country can also safely boast of being the cradle of one of the oldest and richest civilisations in the world, the Indus Valley Civilization. The tourism sector, unfortunately, has not seen development to its potential in the past, and consequently Pakistan has lagged in terms of tourist influx in comparison with other countries in the region. Realising the need to promote growth in this field, tourism has now been opened to the private sector.

Incentives:

• Hotels, resorts, tour operators, tourism and recreation-related projects/facilities like amusement parks, aviation, adventure tourism, mountaineering, water sports etc. will continue to enjoy the status of industry, and will be considered as industrial undertakings;
• Accelerated depreciation allowance available to industrial units for income tax purposes will also be available as follows:

Description ADA

a. Building 10%

b. Furniture, Plant and Equipment 25%

• Locally Manufactured Machinery (LMM) credit financing will be available to hotel/tourism industry as well as to tour operators;
• Electricity, gas and other utilities will be charged at industrial rates from businesses entitled under this policy;
• Adequate facilities for tourists will be established along highways. Necessary infrastructure including land will be provided by the concerned departments such as the National Highways Authority (NHA) and Provincial Highways Boards;
• Alcoholic drinks (local as well as imported) will be allowed to be served in exclusive rooms (for non Muslim foreign guests who are entitled under the law);
• Old buildings which are important from historical or cultural aspects will be preserved with proper maintenance for tourists, and suitable ones amongst these may be available as hotels.

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 Software

The Government of Pakistan has extended liberal incentives for software experts. The incentive package consists of two major categories i.e. Fiscal Incentives and Corporate Incentives.

• All computers and related hardware peripherals including communications hardware and software, telematic infrastructure, and software development tools to be used exclusively by software experts, are exempt from all duties, taxes, surcharges etc. The mandatory export obligation in net foreign exchange terms in US Dollar value is as follows:

• Export obligation to be fulfilled over a period of five years = 3 times CIF Value of the imported computer hardware, software and/or software development tools.

Example:

CIF value of imports = $ 100

Export obligation = $ 300 (Over a period of 5 years)

• The export obligation for software houses / software companies shall be authenticated and verified by the Pakistan Software Export Board (PSEB);
• Software houses / software companies are exempt from corporate income tax on export earnings from "Software and Related Services". Besides this, the exporter need not be a company for availing this exemption. Export earnings shall be authenticated/verified by the PSEB;
• Profits and gains derived by an assessee from the running of any computer training institution or computer training scheme approved by the Central Board of Revenue (CBR), set up between the first day of July, 1997, and the thirtieth day of June, 2000, will be exempt from tax for a period of five years, beginning with the month in which such an institution is set up;
• Financial assistance will be provided to software houses/software companies by extending the facility of the Export Financing Scheme - Refinance by the nationalized/commercial banks, for export of computer software by software houses/software companies. The State Bank of Pakistan, under its Circular No. 23, has fixed an export re-finance limit of 50% of the last year’s exports;
• The Pakistan Telecommunication Corporation Limited (PTCL) shall provide international high speed data circuits to software houses/software companies at rates which are highly competitive as compared to rates offered by other telecom companies in the region;
• Subsidized rentals for office facilities/office space in Software Technology Parks (STPs) shall be charged, which shall be competitive to such rentals offered by techno-parks in the region. STPs will be made available to software houses/software companies. The first such park has been established in Islamabad;
• Software houses/software companies are allowed to re-export capital goods without any levies;

Software houses/software companies that wholly and exclusively import their hardware are exempt from sales tax and are not required to register with the Sales Tax Department.

• Foreign investors will be allowed up to 100% ownership of equity in software houses / software companies;
• STPs will act as ‘One Stop Solutions’ to the needs of software houses/software companies;
• Software developed in Pakistan, or part of which is developed in Pakistan, will be protected by law from piracy, and complaints can be lodged with the PSEB;
• Software houses/software companies can be located either within STPs, or anywhere else in Pakistan. Software houses/software companies located within STPs shall be allowed to carry our only software-related businesses and no other business within their respective STP bounds.

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