Pakistan’s government is preparing sweeping legal reforms to protect foreign investments and attract fresh capital to its struggling industrial sector, signaling a shift toward investor-friendly policies amid ongoing negotiations with the International Monetary Fund (IMF).
Key Focus: Protection Against Policy Reversals
At the heart of the proposed changes is an amendment to the Protection of Economic Reform Act (PERA) 1992, which would bar the government from retroactively withdrawing tax breaks or fiscal incentives granted to investors. Once an investment decision is made based on a government policy, those rights would be legally protected, shielding investors from sudden regulatory U-turns that have previously discouraged foreign participation in Pakistan’s economy.
Part of a Broader Industrial Revival Plan
The amendments are part of a draft Industrial Policy aimed at reviving Pakistan’s stagnant manufacturing base, boosting exports, and creating a more predictable environment for foreign investors. Prime Minister Shehbaz Sharif has already reviewed the proposals, but final approval will depend on IMF sign-off due to Pakistan’s commitments under its ongoing bailout program.
New Rules on Record-Keeping
The government also wants to modernize business regulations through changes to the General Clauses Act, 1897. The proposed update would limit mandatory record retention to ten years after the relevant financial year. However, if a business faces legal proceedings, it would still be required to keep its records until a case is resolved.
Tax Exemptions to Attract Capital Inflows
A separate amendment to the Income Tax Ordinance, 2001 seeks to encourage foreign investors by exempting certain industrial investments from scrutiny under Section 111, which addresses unexplained income and assets. Specifically, foreign exchange remitted through banks from FATF-compliant jurisdictions and invested in manufacturing would be protected if backed by proper documentation, making it easier to bring in legitimate funds without red tape.
Pushback From Tax Authorities
The Federal Board of Revenue (FBR) has expressed reservations, warning that relaxing Section 111 could complicate Pakistan’s compliance with the Financial Action Task Force (FATF) framework. FBR officials also cautioned that implementing such changes during the IMF program could raise concerns among lenders, though they acknowledged the need to simplify legitimate investment processes.
Coordinated Approach
In response, the State Bank of Pakistan (SBP) and the FBR have agreed to jointly design a mechanism that eases capital flows for industrial projects without requiring immediate legislative overhauls. The approach seeks to balance investor confidence with international compliance obligations.
Context: Why It Matters
Pakistan has struggled for years to attract long-term foreign investment due to policy unpredictability, bureaucratic hurdles, and concerns over regulatory transparency. If enacted, these reforms could send a strong signal to investors that Pakistan is serious about creating a stable and business-friendly environment—something crucial for revitalizing its economy and reducing dependence on foreign loans.
