1. CUSTOMS WING FEDERAL BOARD OF REVENUE Presented by: Sheeraz Ahmed Deputy Collector, MCC Exports, PMBQ MERGER OF TAX EXEMPTION REGIMES For Temporary Importation 0

2. Introduction: Tax Relief Regimes, Rationale, Risk Areas, Preference Core Components of effective tax relief scheme Possible Scenarios for Merger Comparison of existing tax exemption regimes, Evaluation of Proposals Merging EOU & Warehousing Rules – Salient Features of proposed rules Existing Issues at Implementation Level Proposed Measures 1

3.  Grant duty/tax relief on goods  Which are imported or procured locally  For Exportation Tax Relief Regimes 2

4. Imported Goods used in production of Exports Duty/Tax on such imports increases cost of production on exports Country’s competitiveness decreases in world market Rationale Behind Duty/Tax Relief: To promote exports by reducing cost of production Non-Collection of Duty/Taxes on Imports Tax Refund/Duty Drawback on Exports *Unnecessary cost of collection and then repayment *Lesser risk to Government – revenue realized & refund process in control *Unnecessary cost of collection and then repayment *Lesser risk to Government – revenue realized & refund process in control Schemes to Reduce Cost of Production *Reduces cost of collection and then repayment *Cash-flow advantage for industry Higher risk to Government *Reduces cost of collection and then repayment *Cash-flow advantage for industry Higher risk to Government 3

5. Difficulties in Administration * Poor Legislation *Inefficient Business Processes (i.e. design of physical and documentary controls) *Lack of skilled Staff Risk Area: Revenue loss - diversion of duty/tax free goods into the domestic market Right Customs Control Regime (i.e. legal and administrative environment) to ensure that any claim for duty/tax relief is legitimate and can be audited 4

6. Interest of the Government Interest of the Business Decision : Which Scheme and Customs Control Regime to Prefer? Pakistan: both forms of duty/tax relief options available i.e. 1. exemption-based schemes and 2.drawback/refund-based schemes Exemption- based schemes - administratively complex – suitable for manufacturers regularly exporting significant quantum of production Drawback - better option for occasional exporters - doesn’t have the same administrative overhead as an exemption- based scheme Socio-Economic Environment & capacity of customs administration 5

7.  Pre-Authorization or Licensing  Re-Exportation  Cross-reference: Identification of duty/tax free goods and Exported Goods  Specification of the use to which the goods may be put  Important because temporary importation procedure allows the goods to circulate quite freely  Rate of Yield/ I.O Ratio  Security for Duties and Taxes Core Components of an Effective Duty/Tax Relief Scheme 6

8.  Time limit for re-exportation  Should be consistent with the intended use of the goods and risk to revenue  Customs Controls  Periodic Returns/ Documentation  Audit & Monitoring  To verify the percentage of total production exported against that sold in the domestic market to ensure duty/tax relief is legitimate  Document Retention Core Components of an Effective Duty/Tax Relief Scheme 7

9. Activities eligible for Duty/Tax Relief  Temporary admission for re-exportation in same state [DTRE]  Temporary admission for inward processing [DTRE, SRO 492]  Manufacturing under bond [Manufacturing Bonds & EOUs]  Customs Warehousing  Export Processing Zones 8

10. Tax RELIEF Regimes ( To boost exports by reducing cost of production) I.Chapter XV of SRO 450(I)/2001 dated 18.06.2001 (Warehousing Rules) II.Sub Chapter 7 of Chapter XII of SRO 450(I)/2001 dated 18.06.2001 (DTRE Rules) III.SRO 327(I)/2008 dated 29.03.2008 (Export Oriented Units Rules). IV.SRO 492(I)/2009 dated 13.06.2009. 9

11. 1 SRO 450- DTRE 7,552 60,996.7318,005.7034.12% 14 % 2 SRO 450- Warehousing 39264.2313,370.0825.33% 3 EOUs13,89531,039.3510,690.2620.25%25 % 4 SRO 4923384226,957.0910,704.3920.28%61 % Total55,289158,257.4052,770.43- Tax Relief Regimes Comparative Share: 2014-15 Rs. In Million 10

12. Customs Control Regimes  Manufacturing Bonds & EOUs (Manufacturing Under Bond)  Concept of Face-Value, Items, Analysis Certificate  Export viz-a-viz Annual Production - Considered  DTRE : (Inward Processing – goods circulate freely)  Concept of fixed quantity of Input and Output Goods on the basis of I/O ratio, Samples  Export viz-a-viz Annual Production – Not Considered. Input Goods to be exported in full.  SRO 492 : (Inward Processing – goods circulate freely)  Identifiable goods  No Regulatory Collectorate, No Face-Value, No I/O ratios determined  Export viz-a-viz Annual Production – Not Considered. Input Goods to be exported in full. 11

13. Possible Scenarios  One Scheme for all Export Based Units  Question: DTRE mode or Bonds/EOU mode?  Question: Export Target viz-a-viz Annual Production to be considered or not?  Unjustified to give same treatment to units with 10% Vs 90% export! Scenario 1 12

14. Possible Scenarios  Two Schemes by setting export benchmark: may be 70%  Bonds/EOU mode (Face-Value) - Exports 70% (or more) of annual production  DTRE mode (Fixed Inputs/Outputs) - Exports less than 70% of annual Production Scenario 2 13

15. Possible Scenarios  Letting SRO 492 continue owing to huge quantum of GDs filed  Most popular and widely used scheme - GDs filing 61% share  33,842 GDs filed in 2014-15 14

16. COMPARISON OF EXISTING TAX RELIEF REGIMES 15

17. Existing Tax Relief Schemes FeatureManufacturing Bonds Export Oriented Units DTRESRO 492 Regulatory Collectorate Yes No Export Target Vis-à- Vis Annual Production Yes (60%)Yes (80%/60%)No Control RegimeFace Value Fixed I/OUnregulated Licensing Mandatory (Premises) Mandatory (Premises) DTRE Approval (Person) Not required Validity 3 years ( in practice annual renewal) 2 years ( in practice annual renewal) Approval for every DTRE N/A 16

18. Existing Tax Relief Schemes FeatureManufacturing Bonds Export Oriented Units DTRESRO 492 Eligibility for users Manufacturer-cum- exporter Manufacturer- cum-exporter as well as commercial exporter Manufacturer-cum- exporter Security prescribed for Licensing / DTRE Approval Insurance Policy deleted vide SRO 202(I)/2014 dated 18.03.2014 Insurance Policy IB+PDC or BG or Corporate Guarantee as per category of applicant N.A Security prescribed for import stage Indemnity Bond + PDC Nil BG or Pay Order or IB+PDC I/O RatioDetermined Not determined Role of IOCO / EDBOptional MandatoryNot applicable 17

19. Existing Tax Relief Schemes FeatureManufacturing BondsExport Oriented UnitsDTRESRO 492 Analysis CertificateMandatory IOCO/EDB's recommendation in lieu of analysis certificate Not Required Jurisdiction Territorial (Where manufacturing unit / factory is located) Territorial. If more than one manufacturing premises, then where the applicant's sales tax registered address is located Territorial (Where manufacturing unit / factory is located) Not specified Zero-rated local purchases Not AvailableAvailable Not Available Acquisition of duty paid inputs Permissible DDB facility in case of use of duty paid inputs Available Available with 20% capping Available 18

20. Existing Tax Relief Schemes FeatureManufacturing BondsExport Oriented UnitsDTRESRO 492 Goods importable/ Input goods Raw materials, accessories, sub components, components, sub-assemblies, assemblies and includes unrecorded media for development of software and recorded software used as tools for development of software Plant, machinery, equipment and apparatus, including capital goods to be used solely within the limits of an Export Oriented Unit and Raw materials, accessories, sub-components, components, assemblies, sub- assemblies used in the manufacture of output goods Raw materials including trims and accessories & services, electricity and gas, furnace or diesel oil for the generation of electricity Only such goods as are capable of identification at the time of re- exportation and for operations specified except few exceptions Condition of separate warehouse for duty free inputs Mandatory Not required Utilization / retention period 2 Years (extendable upto further one year) 2 Years utilization period for raw materials and 10 years retention period for machinery / spares 1 Year (w.e.f. 01.06.2012) 18 months extendable by 6 months 19

21. Existing Tax Relief Schemes FeatureManufacturing BondsExport Oriented UnitsDTRESRO 492 Export in Same State condition Permissible as re- export only Permissible only in the manner of return to the same supplier Not specified Indirect exportAllowed Allowed upto 20% against securities AllowedNot allowed Remission of duty / taxes under exceptional circumstances Provided Not provided Vendor facilityAllowed Disallowed ImpliedlyNot specified Other ways of disposals of inputs Bond to Bond Transfer, Re-export, ex-bonding in exceptional circumstances and destruction Return to same supplier or sale to other licensee of EOU Return to supplier, sale to other DTRE user, destruction Not provided 20

22. Existing Tax Relief Schemes FeatureManufacturing BondsExport Oriented UnitsDTRESRO 492 Local sale of finished goods 40% on payment of taxes 20% on payment of duty / taxes, or 20% for indirect export Permissible to other DTRE user only Not specified Local sales of Factory rejects Permissible on payment of duty & taxes Not provided Local sales of Wastages Permissible on payment of sales taxes Permissible on payment of duty & taxes Not provided Monitoring / Release of securities Audit and proof of export Audit, NOC and proof of export Post exportation audit Submission of proof of export Record maintenancePrescribed Not specified 21

23.  “Exports Facilitation Rules, 2014”  “Apparel Export (Special) Rules, 2014” Evaluation of Proposals From Trade 22

24.  Too Liberal  e.g. No need of physical verification due to WeBOC  Replacement of DTRE scheme with SRO 492  Single DTRE scheme based controls for all Export Based Unit  Unnecessary change of language & addition of new terms/ definitions  “Foreign origin imported goods”, “Chief Executive Officer”, “single yield report”, “standard yield report”  Faulty and impractical Monthly Statement Format  Useful Suggestions:  Concept of Self-Audit  Department's Audit Selection on the basis of Self Audit Report Critical Analysis on Proposed Schemes by Trade “Exports Facilitation Rules, 2014” 23

25.  Undue role to ADRC to avoid legal action, e.g. 90% export target but in case of violation, matter goes to ADRC instead of cancellation of license  Faulty and impractical Monthly Statement Format  Insurance policy condition present  Useful suggestion:  Electricity, natural gas, oil and lubricants may be included in the definition of input goods Critical Analysis on Proposed Schemes “Apparel Export (Special) Rules, 2014” 24

26. Boosting Merging Warehousing and EOU Rules Rescinding SRO 327(I)/2008 dated 29.03.2008, Replacing Chapter XV of SRO 450(I)/2001 dated 18.06.2001 with Proposed Rules “Warehousing and Export” 25

27.  SRO Reduction  Single WeBOC Module  Rectification of issues in existing rules and procedures  Introduction of more facilitatory measures  Self Audit  Duty/tax free import of capital goods  Reduction is retention period for technology transfer etc Benefits 26

28. 27 Feature Existing SchemesProposed Scheme WarehousingExport Oriented UnitsWarehousing and Export Import of Duty Free Plant & Machinery Not AllowedAllowed Plant & Machinery Retention Period N/A10 Years5 Years Zero-rated local purchases Not AvailableAvailable Export Target60%80%70%

29. 28 Feature Existing SchemesProposed Scheme WarehousingExport Oriented UnitsWarehousing and Export Security prescribed for Licensing Insurance Policy deleted vide SRO 202(I)/2014 dated 18.03.2014 Insurance Policy Required Insurance Policy Not Required Output Goods Definition Not Provided Does not include factory rejects & wastages Widened to include Factory rejects and wastages Input Goods Definition Does not include electricity, gas and fuel for generation Electricity, gas and fuel for generation of electricity included

30. Feature Existing SchemesProposed Scheme WarehousingExport Oriented UnitsWarehousing and Export Indirect Export Allowance No Limit20%30% Local Sales Allowance40%20%30% Exclusive Use of Premises Not Provided CategoricallyProvided Export in Same state condition Permissible as re-export only Permissible only in the manner of return to the same supplier Permissible as re-export only

31. 30 Feature Existing SchemesProposed Scheme WarehousingExport Oriented UnitsWarehousing and Export Other ways of disposals of inputs Bond to Bond Transfer, Re- export, ex-bonding in exceptional circumstances and destruction Return to same supplier or sale to other licensee of EOU Bond to Bond Transfer, Re-export, ex-bonding in exceptional circumstances and destruction Remission of duty / taxes under exceptional circumstances Provided Vendor facilityPermissible Local sale of raw materials Permissible for leftover stock in exceptional circumstances and subject to prior permission Permissible to other licensee only Permissible for leftover stock in exceptional circumstances and subject to prior permission

32. 31 Feature Existing SchemesProposed Scheme WarehousingExport Oriented UnitsWarehousing and Export Local sales of Wastages Permissible on payment of taxes only Permissible on payment of duty & taxes Self AuditNot Provided Provided Monitoring / Release of securities Annual Audit and proof of export NOC from Regulatory Collectorate, Annual Audit and proof of export Mandatory Self Audit and proof of export

33. Key Points  On Facilitation Side:  Duty Free import of Plant & Machinery  Reduction of Retention Period for plant & machinery  Complete Zero-rating including utilities allowed  Indirect Export & Local Sales – 30%  Self-Audit 32 Interest of the Government Interest of the Business

34. Key Points  On Control Side:  On-line Passbook Ledger and WeBOC Module  Improvisation of Monthly Returns Format  Standardized Audit Report Format  Rectification of input/output goods definition  Exclusive use of premises 33 Interest of the Government Interest of the Business

35. PROPOSED MEASURES  Marketing and Promotion – Media, Associations  Seeking explanation/justification at the time of refund/rebate filing - why not availing tax relief regime suitable for them  Improvisation of monthly returns format, Standardized Industry-wise Audit Reports Format  On-line ledger in line with Passbook practice in India and Bangladesh, On-line access to documentation, Periodic Ledgers 34

36. THANKS 35 Feature TMA Version Existing Schemes Proposed Scheme Warehousing Export Oriented Units Warehousing and Export Import of Duty Free Plant & Machinery Import of Plant, machinery, equipment and apparatus, including capital goods Not AllowedAllowed Plant & Machinery Retention Period Retention Period of Plant, machinery, equipment and apparatus, including capital goods N/A10 Years5 Years Retention period of Spare Parts (Capital goods) etc N/A10 Years1 Year

37. 36 Feature Existing Schemes WarehousingExport Oriented UnitsWarehousing and Export Control Regime for Plant, machinery, equipment and apparatus, including capital goods Face Value No Face Value. Separate Post dated cheque for each consignment Jurisdiction Territorial (Where manufacturing unit / factory is located) Territorial. If more than one manufacturing premises, then where the applicant's sales tax registered address is located Duty Draw BackAllowed Duty Draw back allowed after deducting the value of imported raw material from FOB Value of Exported Goods. Duty Draw back allowed after deducting the value of imported raw material which are specifically mentioned in first column of duty draw back SRO from FOB Value of Exported Goods.

38. 37 Feature Existing Schemes Proposed Scheme TMA VIEW Warehousing Export Oriented Units Warehousing and Export Local Sales of Wastages Permissible on payment of taxes only Permissible on payment of duty & taxes Wastages established by IOCO are Freely Saleable as it is input cost of finish Product