The federal government is proposing major amendments to the Protection of Economic Reform Act (PERA) 1992. The goal is to offer stronger safeguards for foreign exchange remitted from abroad. These funds will receive enhanced protection when specifically invested in Pakistan’s industrial sector, aiming to attract crucial foreign capital for economic revitalization.
A Policy for Industrial Revival
These proposed legal reforms are a central component of a new draft Industrial Policy. This comprehensive policy aims to revive the nation’s stagnant industrial sector. Key objectives include generating substantial exportable surpluses and promoting sustainable, long-term economic growth for Pakistan, moving towards greater industrial self-sufficiency.
Seeking Crucial IMF Approval
Government officials have confirmed that the draft policy has already been reviewed with Prime Minister Shehbaz Sharif. However, its finalization and implementation are contingent on approval from the International Monetary Fund (IMF). Pakistan’s current status under an active IMF program makes this international endorsement a necessary step for these significant economic reforms to proceed.
Protecting Investor Rights Retrospectively
A pivotal change under PERA involves introducing a section preventing the retrospective withdrawal of fiscal incentives. This ensures any future amendments to fiscal laws cannot adversely impact projects already initiated. Once an investor commits capital based on an existing incentive, they acquire vested rights, shielding them from future policy reversals.
Also Read: World’s First Flying Car Finally Gets Airport Testing Approval After 10 Years of Development
Amendments to the General Clauses Act
The draft policy also suggests modifications to the General Clauses Act, 1897. A proposed new clause, Section 10A, would mandate that entities retain their financial records for a period of ten years following the close of a financial year. Furthermore, if legal proceedings are ongoing, records must be maintained until a final verdict is issued.
Tax Exemptions Proposed to Attract Foreign Investment
To further encourage foreign capital, amendments to the Income Tax Ordinance, 2001, are planned. A new sub-section under 111(4B) would exempt foreign exchange remitted via banking channels from FATF-compliant jurisdictions. This exemption applies when funds are invested in industrial undertakings, shielding them from scrutiny under Section 111(1) related to unexplained income.
FBR Raises Compliance Concerns
The Federal Board of Revenue (FBR) has expressed serious concerns regarding the proposed tax changes. It warned that altering Section 111 could potentially undermine the extensive efforts and negotiations Pakistan undertook with the FATF to exit the grey list. Officials also highlighted significant compliance challenges with the IMF.
Balancing Regulation and Investment
Despite its concerns, the FBR acknowledges the necessity of facilitating genuine investment flows. An agreement has been reached for the State Bank of Pakistan (SBP) and the FBR to collaboratively design a new mechanism. This system will simplify income declaration procedures for foreign investors without requiring immediate legal amendments.
A Streamlined Path Forward
This joint SBP-FBR mechanism aims to streamline capital inflows destined for the industrial sector. The goal is to strike a careful balance between maintaining strict regulatory compliance and actively promoting foreign investment. This approach offers a potential interim solution while broader legislative changes are debated and finalized.