ISLAMABAD: The government on Friday granted Rs20-billion tax relief to Lahore Orange Line Metro Train Project and decided to extend the same benefits to three future projects of similar nature in Karachi, Quetta and Peshawar to avoid controversies.

The decision was taken at a special single-point meeting of the Economic Coordination Committee (ECC) of the Cabinet presided over by Finance Minister Ishaq Dar.

“The ECC approved the proposal of the Planning, Development and Reform Division at the request of the government of Punjab to grant exemptions from withholding tax beyond six per cent of E&M (electrical and mechanical) contract price, and from tax/duties on import of equipment to be installed for the Lahore Orange Line Metro Train Project,” a brief official statement said.

Similar exemptions will be given to Karachi, Quetta and Peshawar projects

“The ECC also decided that a similar dispensation would also be extended to the other rail-based mass transit projects in Karachi, Peshawar and Quetta at the appropriate time,” it added.

In the recently concluded 6th Joint Cooperation Committee meeting held in Beijing, it was announced that the Rs166bn train project had been made a part of the China-Pakistan Economic Corridor (CPEC) along with rail-based mass transit projects in other provincial capitals.

The meeting was told that the Punjab government had signed a contract with Chinese Norinco-led consortium in April 2015 to provide, install, commission and test E&M equipment and sublet civil works to a local firm.

The commercial contract envisaged withholding income tax at the rate of 6pc applicable at the time of bidding in the bid price for E&M works and contract price. The contract required the employer to be responsible for payment of balance due to increase in income tax withholding rate in accordance with the regulations of Pakistan.

“Unless otherwise stated, the contractor would be exempted from all obligations or responsibilities for the payment of all the other Pakistani taxes arising out of the contract, such as sales tax and contract tax,” the contract read.

The summary for the ECC said the contract also required the Chinese contractor to all E&M equipment under its own name for subsequent ownership of the Pakistani side. On the other hand, the employer, ie the Punjab government, was required to pay all customs, import duties and taxes for importing the equipment required for the Orange Line Project.

“If the contractor is required to pay such customs, import duties and taxes, the employer would reimburse the amount, thereof, within 30 days upon submission of proper documentation, invoice and proof of payment,” the contract said.

Based on this contract requirement, the Punjab government reported to the federal government that it was required to pay about Rs20bn to the contractors in the form of taxes and duties on the import of equipment for the train project. The provincial government said that unless waived, the liability would have to be borne by the provincial government as charge on Provincial Consolidated Fund.

Stretching arguments from tax exemptions being allowed in case of road projects of the National Highway Authority under the CPEC, the provincial government demanded that similar benefits should also be extended to the Lahore Orange Line project’s contractor by extending exemptions from withholding income tax beyond 6pc of E&M contract price. It also demanded that the Chinese Norinco consortium should be exempted from all tax amounts including but not limited to income taxes, withholding taxes, sales taxes, custom duties and taxes on import of equipment.

This exemption could have raised political controversies because of a post-contract revenue impact of Rs20bn on account of Lahore Orange Line project. Therefore, the Planning Commission requested that the Quetta Mass Transit Project, Karachi Circular Railway should also be given equal treatment whenever they are implemented.

While approving the proposal, the finance minister said the same facilities should also be available to the mass transit project for Peshawar.

The Lahore Orange Line Metro Train Project is being implemented by the provincial government on an engineering, procurement and construction basis and involves construction of a 27-kilomtere, dedicated, signal-free corridor for rail-based mass transit system. It has 26 stations, a depot and procurement of rolling stock with allied facilities. China is providing a $100 million (Rs103.1bn) long-term loan, payable by the Punjab government.

Published in Dawn, January 7th, 2017