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Businesses setting up shell companies in former FATA to evade taxes

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Businesses setting up shell companies in former FATA to evade taxes

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What happened:

The erstwhile Federally Administered Tribal Areas (FATA), which were merged with Khyber Pakhtunkhwa (KP) in 2018, are becoming a tax haven within Pakistan as businesses have either established shell companies or small setups of their main business in the former FATA region to evade taxes due to a five-year tax holiday in place there.

There are incentives that had been given for bringing the tribal areas into the mainstream and supporting the development process which are now being abused by businesses that already have a presence in the developed parts of the country, according to information given to the Federal Board of Revenue (FBR).

Businesses produce and sell goods in the developed parts of Pakistan but show production and consumption in tribal areas in order to evade taxes.

The FBR had granted exemption from 17% general sales tax (GST) on supplies and 2% withholding tax to the erstwhile FATA and Provincially Administered Tribal Areas (PATA) from June 2018 to June 2023.

Shell companies are also threatening the small foam manufacturing sector, now that a few big foam manufacturers have either set up in the erstwhile FATA or are planning to establish a presence there in coming months, according to the sector’s representation to the FBR.

The exemptions meant for the betterment of the erstwhile FATA “are being illegally misused by importing foam raw material in the name of an old shell company or by setting up a new low-cost small or manual box foaming unit in FATA/ PATA and illegally inland smuggling of non-duty paid imported raw material for exempted FATA/PATA to their foam factories situated in non-exempted areas in Pakistan,” said the association.

Manufacturers that are producing goods in Punjab are concerned that the exemption could continue beyond June 2023, as has happened in the case of Azad Jammu and Kashmir (AJK).

The background:

A sales tax exemption had been granted to factories working in AJK, in 1995, which continued for decades and factories set up in other areas of Pakistan also made parallel setups in AJK to evade taxes. The AJK sales tax exemption was finally withdrawn last year.

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