The Sindh High Court (SHC) has issued notices to the federation on the writ petitions of manufacturers located within the Karachi Export Processing Zone, who challenged the levy of sales tax under the Finance Supplementary Act, 2022.

The SHC has also allowed the industrial undertakings for provisional release of their consignments meant for the Export Processing Zone after the deposit of the disputed amounts of sales tax through pay order/bank guarantee.

The SHC has passed the restraining order against the federation and barred it from taking any adverse coercive action against the investors of the EPZ under the provisions of the Finance Supplementary Act 2022.

According to an order issued by the SHC, the petitioners (industrial undertakings) have invested huge amounts in the Karachi Export Processing Zone Authority engaged in the business of import of raw materials, etc, manufacturing and export of 100 percent of their products so manufactured.

Under the Finance Supplementary Act, 2022, exemption from sales tax on the import of machinery, equipment, and materials has been withdrawn unilaterally in violation of the law and the rules i.e. EPZA Rules, 1980.

It has been contended for the petitioners that the industrial undertakings have invested a huge amount in the EPZ pursuant to the scheme of the government as reflected in various SROs issued by the government from time to time including SRO 88(I)80 whereby, the exemption from payment of taxes including income tax, sales tax, and customs duty has been granted to the industrial undertaking in Export Processing Zone.

The abrupt and unilateral decision to withdraw the exemption clause as per entry number 102 of the Sixth Schedule besides, is unlawful and contradictory to the said SROs issued by the government, which are still in the field. Under the Rule 24-A of the Export Processing Zone Authority Rules, 1980, there can be no change or withdrawal of any exemption or incentive given by the government to the investors without their consent, whereas, no such exercise has been undertaken by the government while withdrawing exemption from payment of sales tax.

The petitioners further argued that this is also a case of discrimination as such incentive and exemption from payment of taxes is still available to the investors in the Gwadar Free Zone, as the exemption available to them has not been withdrawn. It will adversely affect the financial interests of the petitioners whose businesses will be rendered uncompetitive.

More than 700 containers are lying at the ports whereas, the companies have imported raw materials to be utilised for the purposes of manufacture and export through the EPZ but the tax department is not allowing the release of such consignments without payment of sales tax.

The petitioners are not even registered with the sales tax department and therefore there seems no mechanism provided to make payment of such amount of sales tax or to claim a refund of the said amount in due course of time.

The SHC ordered that let the notice be issued to the tax department and the attorney general for Pakistan. The tax department may not take any adverse coercive action or pass any adverse order pursuant to the provisions of the sub-section (8)(a)(i) of section 3 of the Finance Supplementary Act, 2022 to the extent of omission of entry 102 of the Sixth Schedule of the Sales Tax Act, 1990.

In order to avoid piling up of demurrage charges, the request of the petitioners for provisional release of their consignments meant for the Export Processing Zone shall be considered in accordance with law; however, subject to deposit of the disputed amounts of sales tax by way of pay/order/bank guarantee, the SHC order added.

The story was originally published in Business Recorder on January 23, 2022.