Debating Tax Incentives for Gwadar Free Zone in Pakistan

Pakistan has once more postponed its decision on granting substantial tax concessions to the Gwadar Free Zone, a critical component of the China-Pakistan Economic Corridor (CPEC). The delay is attributed to concerns over potential adverse effects on other economic zones within the country.

In a recent session of the Economic Coordination Committee (ECC) of the cabinet, it was decided to revisit the proposed tax exemptions for the Gwadar Port Authority and the Gwadar Free Zone. The Ministry of Maritime Affairs presented an overview of the concessions already bestowed upon the Gwadar Port and advocated for their extension to the Gwadar Free Zone, under pressure from Chinese interests.

This marks the second presentation of this proposal to the ECC within nine months, following the previous deferral of the decision by former Prime Minister Shahid Khaqan Abbasi, who had formed a committee that failed to convene.

Pakistan had previously granted a 23-year tax holiday to the China-operated Gwadar Port, with the aim of transforming it into a thriving commercial hub.

During the ECC meeting, Abdul Razak Dawood, Adviser to the Prime Minister on Commerce and Investment, suggested that the government should refrain from providing special tax incentives to the Gwadar Free Zone. His rationale was that it should receive identical concessions as other economic zones to maintain fairness.

Pakistan has already established seven Special Economic Zones (SEZs), with plans for five more under the CPEC framework. Haroon Sharif, Chairman of the Board of Investment (BOI), noted that the Gwadar Free Zone operates under a unique arrangement with Beijing and does not fall under the Special Economic Zone Act of 2011.

Finance Minister Asad Umar also supported the idea of offering incentives to the Gwadar zone in line with those provided to other zones.

The original Gwadar Port Concession Agreement, approved by the ECC in 2007, was signed between the Gwadar Port Authority and the Port of Singapore Authority. In 2013, China Overseas Ports Holding Company Limited (COPHCL) took over port operations from the Singaporean entity. In 2015, the ECC extended the tax holiday for the Gwadar Port to 23 years, with an agreement that this period would begin from 2007. However, China now insists that the tax holiday should start from July 2016, potentially allowing Chinese companies to enjoy tax-free status until 2039, beyond the scope of the China-Pakistan Long-Term Plan of CPEC, which concludes in 2030.

The Gwadar Port holds immense strategic significance in China's plan to expand its influence in the Arabian Sea, a development viewed with concern by India.