Subject :-Updation/Revision of Investment Policy(IP),2013

With reference to the above referred letter the recommendation regarding the investment
policy (IP) 2013 the undersigned have studied in detail the various issues effecting the
Foreign Direct Investment in Pakistan and possible recommendations through which they can
be addressed.

Despite a relatively open foreign investment regime, Pakistan remains a challenging

environment for foreign investors. An unpredictable security situation, chronic energy shortages
and a difficult business climate including lengthy dispute resolution processes, poor intellectual
property rights (IPR) enforcement and inconsistent taxation policies have contributed to a
significant drop in Foreign Direct Investment (FDI) in recent years. Pakistan ranked 138 out of
189 countries in the World Banks Doing Business 2016 rankings, falling two places from the
previous year.

Foreign investors in Pakistan report that the wide array of federal and provincial taxes and tax
regulations are difficult to navigate. For example, as detailed in World Banks doing Business
2016 report, companies have to pay 47 different taxes in Karachi as compared to an average of
31.3 in other South Asian countries. These payments require an average of 594 hours per year
to pay off. In addition, tax assessment procedures often lack transparency, something that has
led to complaints of discrimination from foreign taxpayers. In some cases, multinationals have
been asked to make advanced tax payments against future earnings. Attempts to reform the tax
system date back to the 1980s. Efforts, thus far have failed to deliver significant results, except
for an increase in indirect (i.e. sales) taxes. Pakistan has one of the lowest tax-to-Gross
Domestic Product (GDP) ratios in the world - approximately 11.0 percent in 2015 - and
multinational corporations shoulder the largest portion of the tax burden.

Foreign investors in Pakistan report that the wide array of federal and provincial taxes and tax
regulations are difficult to navigate. For example, as detailed in the 2015 World Bank Ease of
Doing Business Report, obtaining construction permits in Karachi requires 11 procedures,
takes an average of 222 days.

The company registration process can be challenging. According to the World Banks Doing
Business 2016 rankings, Pakistan ranked 122 out of 189 countries in terms of the time it took to
start a business. Starting a business in Karachi, for example, took 19 days on average as
compared to 15.7 days on average in South Asia and 8.3 days in OECD high income countries.

In order to overcome the issues highlighted above the following suggestions are proposed in
investment policy 2013:-
II. Liberal Investment Regime

2.2 Ease of registration and entry:-

2.2.1 Current registration process with SECP under the companies ordnance 1984 is complex
and lengthy. Rules and Regulations are difficult to abide by .Process of registration should be
made simple.

2.2.2. Restriction of thin capitalization under section-106 of the income tax ordnance 2001
should be removed to encourage foreign investments which states that where a foreign
controlled resident company (other than a financial institution or a banking company or a
branch of a foreign company operating in Pakistan ,has a foreign debt to foreign equity ratio in
excess of three to one at any time during a tax year , a deduction shall be disallowed for the
profit on debt paid by the company in that year on that part of the debt which exceeds the three
to one ratio

2.2.7. Pakistan does not have a bankruptcy law, and court-appointed liquidators who auction the
property of a bankrupt company organize the bankruptcy process. This process can take years
to complete.

(III )Investment Protection:

3.2 Right to due process of law:

One of the main reasons for a decline in the foreign direct investment (FDI) is the difficulties
faced by investors related to timely settlement of their investment disputes. Pakistan is a
member of the International Center for the Settlement of Investment Disputes (ICSID). However,
foreign investors are still concerned about how the arbitration cases are resolved in Pakistan.
Several high profile foreign investment disputes in the mining and energy sectors remain active
cases in Pakistani courts. Even though, the Pakistan Arbitration Act of 1940 provides guidance
for arbitration in commercial disputes; Commercial cases in the courts typically take years to
resolve, and most foreign investors typically write into their contracts the right to international
arbitration. For example, in1998 a U.S. multinational filed a lawsuit against its Pakistani partner.
Despite a favorable ruling by the International Chamber of Commerce (ICC) Arbitral Panel in
2000 and subsequent rulings by the Lahore Civil and High Courts upholding the ICC verdict, the
local partner dragged the case on in Pakistani courts until finally withdrawing its appeal in 2009.
There is no specific duration for dispute resolutions. Dispute resolutions can take decades to
resolve. There is no specific duration for dispute resolutions. Dispute resolutions can take
decades to resolve.

3.4 intellectual Property Rights Protection:-

Pakistans 2012 Intellectual Property Organization law provides for specialized IPR tribunals to
adjudicate cases and a policy board with private sector representation to assess policy
decisions. However, the implementation of these laws is a slow and protracted process.

Although progress remains slow, the Government achieved an important milestone when it set
up three IP tribunals in 2015. One IP tribunal, in Lahore, is operational; meanwhile, judges have
been appointed to tribunals in Islamabad and Karachi, but these courts are not yet hearing
cases. The tribunals effectiveness and the overall impact on Pakistans IP regulatory
environment is not yet clear.

Pakistan has enacted five major laws relating to patents, copyrights, trademarks, industrial
designs, and layout designs for integrated circuits, but weak enforcement have limited the
impact of these laws.The government is working to update these laws with technical assistance
from the U.S. Commercial Law Development Program (CLDP). However, the process is
protracted and progress is slow.

In April 2005, in an effort to improve IPR protection, the Government transferred inter-agency
responsibility for the enforcement to the Federal Investigation Agency (FIA). Expanding
manpower and training at the FIA remains a key challenge. The FBR, which manages customs
authority in Pakistan, faces numerous challenges in properly identifying and interdicting
counterfeit material at Pakistans borders. However, in a promising sign, the FBR recently
established an IPR Directorate to improve enforcement capacity. In May 2015, FBR launched
an electronic recordation system and drafted Trade Related Intellectual Property Rights
Enforcement Rules, although they have yet to be published. Additionally, the IPO signed an
MOU with FBR in October 2015, agreeing to strengthen IPR enforcement at the border through
data sharing and capacity building initiatives; however, this agreement is pending
implementation.

IV. Establishment of special Economic Zones

4.3 Incentives/Exemption policy Package:-

Presently only income tax exemption is available. Hence in order to promote and encourage
investors. Following exemptions/reductions are also suggested;

(h) Exemptions/reductions in custom duty on imports should be given; and

(i) Exemption/reductions in GST on purchase and supply should be given.

V. Facilitation

Currently investors have no facility in Taxation matters and often face a lot of problems in
dealing with the Federal Board of Revenue(FBR).Following suggestions are proposed as far
as facilitation with tax department is concerned;

1. Current process of registration with tax department is very complex. Process of registration
with income and sales tax department should be simple.

2. Currently CEO and MDs of the companies have to visit FBR many times to get registration
with FBR .Companies should also be allowed the facility of self registration as has been allowed
to individuals.

3. GST is an indirect tax.Therefore, withholding of GST is confusing and not in accordance with
international business standards and practices .Sales tax special procedures (withholding)
Rules 2007 should be abolished.

4. Moreover different rates of taxes for different items and different tax rates for different
sectors against same items should be removed and a uniform rate of tax should be available
implemented

5. In order to achieve the targets FBR has developed a technique to issue undue/unauthorized
show cause notices against which, unlawful recoveries are made .Protection from issuance of
such notices and recoveries thereof should be available to investors.

6.Furthermore FBR officials involved in issuance of unauthorized and unlawful

notices/recoveries should be checked and enquired in accordance with law and a mechanism
should be developed to fix the responsibility and some sort of punishment be suggested viz-
a-viz incentives .

General Recommendations

1. According to World Bank, Pakistan needs to remove the barriers which are supporting
automotive industry and preventing import of cars and their spare parts.

2. Stable macroeconomic policies, discontinuation of previous economic policies with

change of the governments is one of the factors that result in low FDI.

3. When 92 percent of businesses are managed by the private sector they should have a
say in framing economic policies too.

4. Investment in physical and human capital is required for the growth of economy. Skilled
labour is one of the major factors in developing a nation, which makes human capital as
important as physical.
5. Gulf countries are budget surplus. There is huge potential in attracting FDI from Gulf
countries. Government needs to focus on this region in order to attract FDI, particularly
in agriculture sector.

6. Better quality of infrastructure and conducive business environment will attract investors.
Government has planned to establish land port authorities, however this process should
be accelerated.

7. WTO has pointed out that Pakistans heavy dependence on particular export items such
as cotton can make it vulnerable to external distortions and restrictions. Pakistans
exports market is dependent on European Union, US and Japan. Therefore, it is a dire
need that government should diversify export industry.

8. Since 2007, more than 50 percent FDI has been attracted only in two sectors, i.e., Oil &
Gas and Telecommunication. Though government had introduced energy emergency but
it failed to attract FDI as much as it was required in the country. There is a need that
government should also make other sectors more attractive and diversify FDI inflows.

9. There is a need to reduce tariff percentage. However this reduction should be gradual
and industries which are not competitive should be exempted from this tariff reduction.