Islamabad: The federal government of Pakistan is set to gradually phase out tax exemptions for businesses operating in Special Economic Zones (SEZs) over the next decade, in a move aligned with the country’s commitment to the International Monetary Fund (IMF). This change, which will reduce the existing tax-free status for SEZs to nine years starting from July 2024, is part of broader fiscal reforms aimed at meeting IMF conditions.

According to sources, the government plans to amend tax laws in the upcoming federal budget to reflect this shift. The decision comes as part of Pakistan’s pledge to the IMF, which had raised concerns over the long-term sustainability of the current fiscal incentives offered to businesses within SEZs.

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In line with this policy change, the government has assured the IMF that it will no longer extend fiscal incentives, such as tax breaks and subsidies, to businesses operating in SEZs. These incentives, which were originally introduced to attract investment and foster economic growth, have been a key part of the incentive package for companies in the zones.

To assist with the implementation of these reforms, the government has enlisted the consultancy firm AT Kearney to evaluate the fiscal costs and effectiveness of the existing incentives. The firm is expected to complete its assessment by the end of June, and its findings will inform the government’s policy going forward.

Under the revised approach, no new fiscal incentives will be granted to either existing or new SEZs, and the renewal of current incentives will not be permitted. The government has also outlined a clear timeline for the phase-out, with a detailed plan expected by June 2025. The ultimate goal is to eliminate all existing tax incentives by 2035, although the transition will respect any pre-existing contractual obligations.

The policy will shift away from profit-based incentives and toward cost-based incentives, with the change expected to be implemented gradually from 2024 through 2035. Where contracts allow early termination or renegotiation, the government intends to phase out the current incentives as much as possible, in line with legal requirements.

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The move is part of Pakistan’s broader efforts to reduce fiscal deficits and meet IMF demands for more sustainable economic practices. While it may face opposition from businesses in SEZs, who have relied on these incentives for competitive advantage, the government argues that the transition will help create a more balanced and transparent fiscal environment in the long term.

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