The role of tax incentives in promoting environmental sustainability in Pakistan

Environmental degradation has become one of the most pressing challenges in Pakistan, ranging from air and water pollution to deforestation and energy inefficiency. With climate change intensifying and urbanization accelerating, the role of government policy in addressing environmental issues is more critical than ever. Among various policy tools, tax incentives have emerged as a powerful mechanism to promote environmental sustainability. By reducing the tax burden on environmentally friendly practices and imposing higher taxes on polluters, the government can influence corporate behavior, attract green investment, and support a transition toward a sustainable economy.

What Are Tax Incentives for Environmental Sustainability?
Tax incentives refer to fiscal measures introduced by governments to encourage specific behaviors or investments. In the context of environmental sustainability, these incentives are designed to:

• Promote the use of renewable energy sources

• Encourage energy-efficient technologies

• Reduce carbon emissions and industrial pollution

• Support afforestation and sustainable agriculture

• Discourage the use of harmful materials and fossil fuels

Tax incentives can take several forms, including tax exemptions, reduced rates, accelerated depreciation, tax credits, and investment allowances.

Legal and Policy Framework in Pakistan
Pakistan has gradually incorporated environmental tax incentives within its broader tax policy, especially after the ratification of global agreements such as:

• The Paris Agreement (2016)

• Nationally Determined Contributions (NDCs)

• Pakistan’s Vision 2025

• The Alternative and Renewable Energy Policy 2019

Key environmental tax provisions are embedded in:

• Income Tax Ordinance, 2001

• Customs Act, 1969

• Sales Tax Act, 1990

• Finance Acts (annually updated)

• FBR SROs and Notifications

Income Tax Incentives for Green Businesses
The Income Tax Ordinance provides several benefits to businesses involved in environmentally sustainable operations:

1. Tax Credit for Renewable Energy Projects (Section 65D & 65E):

• Companies setting up renewable energy projects such as solar, wind, biogas, and hydropower are eligible for 100% tax credit on profits for a specified number of years

• Conditions include registration with relevant authorities (AEDB, NEPRA) and timely filing of returns

2. Accelerated Depreciation on Energy-Efficient Equipment:

• Under Section 23 and Part II of the Second Schedule, certain energy-efficient equipment qualifies for higher depreciation allowances, allowing businesses to reduce their taxable income faster

3. Tax Exemptions for Green Export Zones and Industrial Parks:

• Units set up in Special Economic Zones (SEZs) focusing on green manufacturing or technology may receive income tax exemptions for 10 years

• Applicable to sectors like electric vehicles, clean technology, and green textiles

4. Tax Credit for Investment in R&D on Environmental Technologies (Section 59B):

• Companies investing in environmental research and product development can claim deductions or credits, promoting innovation in green technologies

Customs Duty and Sales Tax Concessions
To reduce the cost of adopting sustainable practices, the government offers various import-related incentives:

1. Zero-Rated or Reduced Customs Duty on Green Equipment:

• Solar panels, wind turbines, inverters, lithium batteries, energy-efficient bulbs, and smart meters are often imported at 0% or reduced customs duty under SROs

• Exemption is subject to certification by AEDB or relevant authorities

2. Sales Tax Exemptions (SRO 575(I)/2006 and others):

• Many renewable energy products and energy-saving devices are exempt from general sales tax (GST) to make them affordable

• These include solar water pumps, LED lighting systems, hybrid cars, and energy-efficient appliances

3. Duty Drawback Schemes for Exporters:

• Exporters using sustainable inputs may receive partial refunds of duties and taxes under the Duty Drawback of Taxes (DDT) and DLTL schemes

Incentives for Individuals and SMEs
Environmental tax incentives are not limited to large corporations. Individuals and SMEs can also benefit:

1. Tax Rebates on Solar Installation (Budget 2022-23):

• Homeowners and small businesses installing solar systems received import duty and sales tax exemptions

• Some banks, under the State Bank’s Green Financing Scheme, also offered subsidized loans

2. EV Incentives for Individual Buyers:

• Purchasers of electric vehicles up to 50 kWh are eligible for reduced import duty (1%) and exemption from registration tax in certain provinces

3. Net Metering Incentives:

• Income from net metering (sale of surplus solar energy to the grid) is exempt from tax for households under specific thresholds

Green Financing and Tax Support
In collaboration with the State Bank of Pakistan, tax incentives have supported green finance products, including:

• Subsidized financing schemes for renewable energy (e.g., SBP’s Refinance Scheme)

• Exemptions on tax for Green Bonds or Sukuk issued for eco-projects

• Encouragement for Green Banking Practices, such as tax-deductible carbon offset costs

Provincial Incentives and Policies
Many provincial governments have introduced their own incentives to promote sustainability:

1. Punjab Green Development Program:

• Offers tax relief and financial support to eco-friendly industries

• Tax breaks for businesses converting to Cleaner Production Techniques

2. Sindh Solar Energy Program (SSEP):

• Tax relief on imports of solar infrastructure through World Bank-backed projects

3. Khyber Pakhtunkhwa (KP) Forest Carbon Fund:

• Incentives for landowners who plant and maintain forests

• Some income from carbon credits may be tax-exempt

Challenges in Implementation of Tax Incentives
Despite a robust framework on paper, several implementation challenges exist:

1. Lack of Awareness:

• Many businesses and individuals are unaware of available tax incentives

• Poor promotion of SROs and related laws

2. Complex Procedures and Documentation:

• Compliance requirements for availing incentives can be cumbersome

• Inconsistent application across customs stations and tax offices

3. Limited Coordination Between Departments:

• Weak coordination between FBR, AEDB, Ministry of Climate Change, and provincial agencies delays approvals

4. Absence of Clear Green Tax Policy:

• Pakistan lacks a comprehensive Green Tax Policy or long-term roadmap for environmental fiscal reform

5. Risk of Misuse:

• Some entities misuse green tax incentives by falsely classifying operations or inflating costs to gain exemptions

Success Stories and Case Studies
Several organizations have successfully leveraged environmental tax incentives:

1. Solar Energy Startups in Punjab:

• Benefitted from GST exemption and zero customs duty on imports

• Achieved cost reduction of 17–20% on initial capital expenditure

2. Textile Units in Faisalabad:

• Adopted water-recycling and energy-efficient boilers using accelerated depreciation and investment tax credits

3. Agriculture Sector:

• Use of solar-powered tube wells and drip irrigation enabled by customs duty exemptions and bank financing schemes

International Comparisons and Lessons for Pakistan
Pakistan can learn from global best practices:

China:

• Offers VAT refunds and 3-year income tax holiday for green companies

Germany:

• Grants carbon tax rebates and lower corporate tax for circular economy participants

Malaysia:

• Implements Green Investment Tax Allowance (GITA) and Green Income Tax Exemption (GITE) for certified green activities

Adopting a similar unified Green Tax Code in Pakistan could streamline incentives and increase participation.

Future Outlook and Recommendations
To enhance the role of tax incentives in environmental sustainability, the following measures are recommended:

1. Develop a National Green Tax Policy:

• Introduce a comprehensive Green Taxation Framework aligned with Pakistan’s NDC goals and climate commitments

2. Digitize Application and Approval Processes:

• Create a central online portal for environmental tax claims and certifications

3. Increase Awareness and Training:

• Conduct nationwide awareness campaigns, especially for SMEs and startups

4. Monitor and Audit Green Claims:

• Establish clear KPIs and compliance checks to prevent misuse of incentives

5. Link Tax Benefits with ESG Reporting:

• Encourage companies to report Environmental, Social, and Governance (ESG) indicators to qualify for benefits

Conclusion
Tax incentives play a pivotal role in steering Pakistan towards a more sustainable and eco-friendly future. While a number of fiscal measures already support renewable energy, energy-efficient equipment, and clean production, their potential remains underutilized due to awareness and procedural gaps. Strengthening the legal framework, simplifying access, and aligning incentives with broader climate policies can ensure Pakistan meets its sustainability targets while encouraging private-sector participation.