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Textile Industry Development Policy 2007: Tax incentives to encourage investment

By Sajid Chaudhry

ISLAMABAD: The Textile Industry Development Policy 2007 is expected to offer 10-year tax holiday to encourage foreign investment in textile machinery manufacturing and 10-year tax holiday for foreign investment in establishment of bonded cotton warehouses in the country, official sources told Daily Times on Wednesday.

The Ministry of Textile Industry has proposed an attractive incentive package, which is expected to be included and announced in forthcoming Textile Industry Development Policy 2007, the official added.

A high level meeting in near future would finalise incentives to make the said policy attractive for the textile sector. The aim of the policy is to develop textile sector on war footing and modern line to secure the market share of Pakistan in the international markets in the short as well as in the long run.

Export Plan 2006-13 seeks to increase textile and garment sector’s exports from $9.98 billion in the fiscal year 2006 to $24.36 billion by the fiscal year 2013 with an ACGR of 14 percent. The textile exports target for the current fiscal year has been set at $12 billion.

The proposed policy says that textile industry, being the largest industrial sector of Pakistan requires a sizeable machinery-manufacturing base inside the country. Textile machine manufacturers are relocating in China and this is the right time to attract machine manufacturing in Pakistan. Till now the import of textile machinery shares a big part of foreign currency outflow in the annul trade bill. To attract foreign investment in textile machinery manufacturing incentives like zero-rating for import of plant and
equipment, tax holidays for initial 10 years, inclusion of their end-product in any future scheme designed to subsidise import of textile machinery be allowed.

The ministry is of the view that these incentives may not prove attractive enough. The government should also consider that an additional package for provision of land on concessionary terms to be included in the package.

The policy also encourages foreign investment in cotton warehouses, this initiative is part of export development plan prepared by Planning Commission and already approved by Prime Minister. Bangladesh provides 10 years tax holiday and reduced rate for the next five years for investment in bonded warehouses for cotton. The ministry has proposed that similar incentives of tax holidays for 10 year and 50 percent of the normal rate for the next 5 years may be provided to attract foreign investment in cotton warehouses.

It will address the concerns of APTMA (spinners) regarding high price of local cotton. The ministry doesn’t expect large-scale investment in this regard. Therefore, it will not result in to potential loss of revenue for FBR.

The proposals also include tax incentives for Chinese investment in dedicated textile industrial parks to be setup by the government. A package of tax incentives has been approved by the government for Chinese investment in Hier Ruba industrial estate for all those companies that may have at least 40 percent of Chinese equity. Some of the major concessions that have been proposed are allowing full exemption of custom duties and taxes on import of capital equipments (plant, machinery and accessories), corporate income tax holiday for a period of five year form the date of starting commercial operation. This shall also be available for the developers of the zones. Depreciation allowance 100 percent for five years form the date of starting commercial operation.

It has requested that similar package may be allowed for Chinese investment in existing and future textile industrial parks setup by the government. On this issue a draft summary was circulated to FBR, Board of Investment and Privatisation Division and ministry of foreign affairs, all of them have supported this proposal. The ministry has proposed to provide incentive to more companies by way of ‘merger tax credit’ at the rate of 15 percent on merger asset value. The project is part of export development plan approved by the Prime Minister of Pakistan.

Pakistan textile industry across the value chain lacks skills in higher and middle management. To fill the gap immediately, hiring cost of foreign technicians and consultants may be cheaper for local industrialists. The ministry has proposed that foreign consultants/technicians should be exempted from income tax to increase productivity of local business. It will send a good signal to the local textile industry.

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