ISLAMABAD, 14 May — Pakistan is offering new incentives to foreign and domestic investors and businessmen in order to boost its economy that has been in a trough for a good deal of time.
The incentives that are expected to be included in the budget will improve profitability of banks, the corporate industrial and business sector, corporate farming, investment by expatriate Pakistanis, and foreign trade in the form of reduced taxes and cheaper credit.
Ministry of Finance (MoF) officials say that proposals for a number of incentives and tax cuts have been agreed upon at the inter-ministerial meetings and the Cabinet. Finance Minister Shaukat Aziz will announce these with measures in the national budget on June 16.
The new element in the government policy is to encourage corporate farming, both by foreign and Pakistani investors as Pakistan has a number of advantages in establishing and promoting agri-industry including livestock, dairy products, fisheries, and poultry.
In its latest move to attract foreign and domestic capital in corporate farming, the government has discarded the mandatory condition to of an investment of at least $300,000 that had previously been set starting an agri-industry in the country.
Wasim Haqqi, chairman of the government’s Board of Investment (BoI), says “the new policy will promote corporate farming. It will permit foreign investors to investment any amount in corporate agricultural farming (CAF). CAF will now have the status of industry and will be entitled to all such concessions and incentives that are available for manufacturing industry.” The BoI lists several attractions and incentives for CAF investors, including:
Foreign and local private and public limited companies can undertake corporate farming.
— Credit facilities and incentives enjoyed by other industries are now available for CAF.
— Easy transfer of land for CAF companies listed on the stock exchanges.
— No ceiling on land holdings for CAF companies.
— Favorable tax treatment to CAF income.
— No customs duty on import of new or used farm machinery, if that machinery is not manufactured in Pakistan.
The objective of encouraging CAF is to promote a faster and sustainable development in food and agriculture field, and to help it do so, give it all incentives that are available to manufacturing industry. The facilities to this new agri-business and industry, will offer a great potential to earn a high rate of profit on investment for foreign and local CAF companies. BoI is the coordinator for such companies. Haqqi hopes that once CAF establishes itself on modern lines, it may contribute to upto $1 billion in annual exports of agri-products.
The government has decided not to set an upper limit for land holdings for CAF firms. The government will also provide legislative protection for operating CAF companies, their land-holdings and business interests. Some of the existing laws and regulations that limit the ownership of land holding are being amended to allow CAF companies own as much land as they require for their operations. Labor laws applicable to manufacturing will not be enforced on CAF. This is a facility that is also available to the industries established in export processing zones. The government has also asked the Central Bank to advise the banks to set a target for providing credit to CAF.
The government, separately, has devised a tax-cut plan to improve the profitability of banks, the financial sector, and the corporate business and industry. The plan is spread over four years. It aims at gradually reducing the present level of taxes.
The plan covers reduction of corporate tax on banks from 58 percent to 50 percent. The reduction will take place at the rate of 2 percent each over the next four years. The tax rate will be down from 58 percent to 56 percent in the first year — fiscal 2002 that starts July 1 this year.
The rate will come down to 50 percent in fiscal 2005. The banks, at present annually pay Rs.20 billion in taxes. The tax on privately-owned companies will be reduced from 44 percent at present to 43 percent in fiscal 2002, and moving down 1 percent a year, it will reach a level of 40 percent in fiscal 2005. The annual tax collection from these companies is Rs.14 billion.
However, the public companies, that have investment by shareholders, will pay 33 percent tax effective fiscal 2002, that is 1 percent lower than the existing level. The tax will be annually reduced by 1 percent and taken down to 30 percent by fiscal 2005. These companies annually pay Rs.15 billion.
The government has adopted a policy of gradual tax reduction because it does not wish to, suddenly, loose revenues. It has a substantial budget deficit which in recent years was as high as 6 to 7 percent, but has slowly come down to 5 percent, although the government is shooting for a deficit of around 4 percent.
However, against the government’s caution and arguments to go on with the present high rate of taxation, there is considerable weight in the reasoning of the corporate sector and the economists.
They, strongly, are of the view that if the government agrees to loosen the tax regime and puts the business and the industry on reduced rates, it will ultimately raise more revenues as the business, industry and the economy will flourish.
In yet another move, to promote business and exports, the State Bank (SB) the central bank, has announced that exporters will be provided with pre-shipment and post-shipment financing on 7.65 percent annual interest. The financing will be done under foreign currency export finance facility (FCEFF).