Pakistan is preparing a wide-ranging fiscal incentive package to attract foreign investment into its mineral sector, with the government considering tax exemptions, reduced withholding tax rates and long-term fiscal protections for mining projects. The proposed measures are part of the National Mineral Policy 2026, which aims to help unlock the country’s estimated $8 trillion in copper and gold reserves and make large-scale mineral development more attractive to international investors.
The incentive framework has been developed using a model prepared by consultancy firm Wood Mackenzie. It includes proposals to reduce withholding tax on locally purchased goods and services to 4% and 8%, respectively, while allowing payment of these taxes to be deferred until mine production begins. The government is expected to present the proposed incentives to international investors at the Pakistan Minerals Investment Forum, scheduled for November 12 and 13.
The package was initially submitted to the Finance Division during the current year’s budget process. However, a comprehensive programme was not introduced at that time, highlighting the difficulties involved in finalising a policy that can address the investment requirements of the mining industry. Although the National Mineral Policy document is reportedly ready, officials believe that it will require a supporting fiscal framework to achieve its intended objectives.
The prime minister had directed the Petroleum Division to prepare and finalise the mineral policy. The Petroleum Division has subsequently asked the Finance Division to give priority to the proposed fiscal measures, as the Finance Division holds the authority to approve such packages. The proposals are intended to address the high initial costs, long development periods and financial risks associated with mineral exploration and production.
One of the major proposals is a 30-year exemption from general sales tax on the import and local purchase or supply of goods and services used by mining projects during exploration and development, continuing until commercial production begins. The proposal is intended to reduce the upfront financial burden on companies that must invest substantial amounts before generating revenue from mineral extraction.
The proposed sales tax relief may also continue after commercial production starts. This provision is particularly relevant for projects where a significant share of mineral output is exported and input sales tax may not be fully adjusted. If companies cannot recover or adjust the tax paid on project inputs, it can increase operating costs and affect the financial viability of their investments.
The government is also considering reduced withholding tax rates for contractors and suppliers working on mining projects during exploration and development. Under the proposal, the payment or deposit of these taxes could be deferred until commercial production begins. This arrangement would provide companies with additional financial flexibility during the period when projects require substantial spending but have not yet started earning income.
Another important component involves customs duties and import taxes on capital goods and equipment required for mining operations. The proposed package seeks exemptions on project-related machinery and equipment during exploration, development and construction. Wood Mackenzie’s model identifies customs and import duty relief as an important element of a competitive mining investment framework, particularly because large-scale mining projects depend on specialised equipment and significant capital expenditure.
A major tax proposal is to replace the conventional corporate income tax structure for mining projects with a 1% presumptive tax on export proceeds, alongside a 0.5% development surcharge. The suggested framework is intended to offer investors a simpler and more predictable tax structure. According to the Wood Mackenzie analysis, corporate income tax treatment is the single largest factor influencing improvements in an investor’s internal rate of return, making it a central consideration in the proposed package.
The consultancy has also recommended introducing fiscal stability clauses to protect the tax and fiscal conditions applicable when an exploration concession or agreement is awarded. These protections would broadly follow the stability framework available to the oil and gas sector. Such provisions are considered important because mineral projects can take several years to move from exploration to commercial production, and investors make decisions based on long-term assumptions about taxation, government revenue and project costs.
The proposed framework also includes a possible exemption from super tax for mining projects for at least 30 years. In addition, the government is considering exempting withholding tax on dividends distributed by mining projects for 15 years from the start of commercial production. Inter-corporate dividends within mining project structures may also receive exemptions to prevent tax cascading, which can increase the overall tax burden when income moves between companies operating within the same project structure.
The recommendations further address the financial risks associated with mineral exploration. Wood Mackenzie has proposed allowing mining companies to carry forward exploration losses indefinitely, recognising that exploration spending often takes place years before a project becomes commercially productive. Companies may also spend considerable amounts on exploration programmes that do not result in commercially viable discoveries.
Another proposal would allow losses from unsuccessful exploration projects to be adjusted against successful mining projects within the same corporate group, subject to appropriate safeguards. This approach could help companies manage the financial uncertainty of exploration by allowing losses from unsuccessful activities to be considered alongside income generated by commercially successful operations.
The proposed depreciation framework is another area where the government is considering changes. Wood Mackenzie has recommended allowing mining projects to carry forward depreciation allowances for 10 years after commercial production begins. It has also suggested accelerated depreciation of up to 100% to help investors recover capital expenditure more quickly.
In its model, the consultancy has highlighted a 10-year carry-forward period for depreciation allowances and an increase in the standard depreciation rate from 15% to 30%. These measures are intended to improve project economics by allowing companies to account for the cost of major investments over a shorter period.
The proposed fiscal framework may also be aligned, where appropriate, with the special tax arrangements available to the oil and gas sector under the Fifth Schedule of the Income Tax Ordinance, 2001. The recommendation is based on similarities between the two industries, including exploration risks, high capital requirements, lengthy development periods and the need for predictable fiscal conditions.
The government’s proposed incentives are expected to form an important part of its efforts to attract international mining companies and long-term capital. However, the measures remain proposals requiring the relevant approvals. Their final structure, implementation and legal status will depend on decisions by the concerned authorities. The Pakistan Minerals Investment Forum on November 12 and 13 is expected to provide an opportunity for the government to present its investment plans and discuss the proposed fiscal framework with potential investors.
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