The federal government is planning significant amendments to the Protection of Economic Reform Act (PERA) 1992 to provide stronger protection for foreign exchange remitted from abroad when invested in the country’s industrial sector.
The proposed reforms are part of the draft Industrial Policy aimed at reviving the stagnant industrial sector, creating exportable surpluses, and promoting sustainable economic growth. Officials said the draft has already been reviewed with Prime Minister Shehbaz Sharif, though its finalization depends on approval from the International Monetary Fund (IMF), as Pakistan remains under the IMF program.
One of the most notable changes under PERA would be the addition of a section preventing the retrospective withdrawal of fiscal incentives for projects already initiated. This would ensure that any future changes in fiscal laws cannot negatively impact prior investments. Once an investor has acted based on a fiscal incentive, they would acquire vested rights, protecting them from policy reversals.
The draft policy also suggests amendments to the General Clauses Act, 1897. A new clause under Section 10A would require entities to retain records for ten years after the close of a financial year. However, in cases involving legal proceedings, records would need to be kept until a final verdict is issued.
Tax Exemptions Proposed to Attract Foreign Investment
Proposed changes to the Income Tax Ordinance, 2001, are also under discussion to encourage foreign capital inflows. A new sub-section under Section 111(4B) would exempt foreign exchange remitted through regular banking channels, from jurisdictions compliant with the Financial Action Task Force (FATF), when invested in industrial or manufacturing undertakings. This exemption, supported by a bank certificate, would shield such investments from scrutiny under Section 111(1), which covers unexplained income and assets.
The Federal Board of Revenue (FBR) has raised concerns about this proposal, warning that altering Section 111 could undermine the extensive negotiations Pakistan undertook with FATF. Officials also noted that implementing such changes during the IMF program could create compliance challenges.
Still, the FBR acknowledged the need to make genuine investment flows easier. It has been agreed that the State Bank of Pakistan (SBP) and the FBR will jointly design a mechanism to simplify income declaration procedures. This system would streamline capital inflows for industrial use without requiring immediate legal amendments, striking a balance between regulatory compliance and investment promotion.