ISLAMAABD : M/s Orient Power Company Limited and M/s Saif Power have opposed some amendments to the Income Tax Ordinance (ITO) 2001, which may hit incentives available to Independent Power Producers (IPPs), increase circular debt in power sector, further tighten liquidity for the power companies and power purchaser and lead to net negative revenue for GoP.

This apprehension was conveyed by the Chief Executive Officer (CEO) of M/s Orient Power Company Limited, Kashif Bashir Ran and Sohail. H. Hydari of Saif Power in different letters to Managing Director PPIB, Shah Jahan Mirza.

The wording of both letters is same in which the companies said they entered into Power Purchase Agreement (PPA) on November 8, 2006, as amended from time to time and Implementation Agreement (IA) November 10, 2006 as amended from time to time. Tariff of the company has been determined by National Electric Power Regulatory Authority (NEPRA). The PPA, IA and tariff are for a term of thirty years from Commercial Operation Date (COD), as extended in accordance with the terms of PPA and/ or IA.

According to the company, PPA of the Company has already been extended by over six months pursuant to PPA Amendment on February 11, 2021. The company maintains that certain changes have been proposed in the Finance Bill 2022 that are relevant to it and the IPPs.

The companies have issued the communication to highlight the following two issues. First pursuant to section 5 (54) (A) (h) of the Bill, an explanation is proposed to be added to the sixth proviso of clause 132 Part I of Second Schedule and thereafter seventh proviso is proposed to be added to clause 132 Part I of Second Schedule of the ITO 2001. Given that term of Company’s PPA, IA and tariff determination is for thirty years, as extended from time to time, the effect of proposed amendment is making the income of the company taxable beyond twenty fifth year.

For ease of reference, the company has reproduced clause 132 Part I of the Second Schedule as provided for in the ITO 2001. The proposed amendment in the Bill is reproduced below: (a) in clause (132), after the sixth proviso, - () the following new explanation shall be added, namely:-

“Explanation: - For the removal of doubt it is clarified that exemption under this clause shall continue to remain available to those persons to whom exemption under this clause was available on or before 30th day of June, 2021 before insertion of sixth proviso vide Finance Act, 2021: Provided further that the exemption under this clause shall be available for the lifecycle of the project or 25 years from the date of commencement of commercial production, whichever is earlier. In addition to this , pursuant to section 5(3) of the Bill, points to a new section “4C” is proposed to be inserted in ITO 2001 whereby every person is liable to pay 2% tax on income exceeding Rs. 300 million for tax year 2022. This proposed insertion in the Bill is general in its application, and to the company’s understanding is also applicable to IPPs. Proposed amendment #1 and proposed amendment # 2 are jointly referred to as “proposed amendments” herein.

The company maintains that, through the proposed amendment # 1, the company notes with concern that the Bill proposes to restrict the scope and application of the tax exemption contained in clause 132 Part I of the Second Schedule to the following time-frames: (i) either the lifecycle of a project; or (ii) 25 years from commencement of commercial production, whichever is earlier and through Proposed Amendment # 2 (iii) company would be liable to pay tax under proposed section 4C of the ITO 2001.

The companies argue that the proposed amendments do not take into account the specific fiscal incentive(s) that had been provided to IPPs under the Policy for Power Generation Projects 2002 whereby the Government of Pakistan had completely exempted power generation companies from the payment of corporate income tax, without the imposition of any time-frame for such exemption. Furthermore, this is reflected in the PPA, IA and tariff determination(s) by NEPRA. Any change in tax is recoverable as supplementary tariff under the terms of the PPA, IA and tariff determination(s).

“If proposed amendments are passed as is in the Finance Act, then these would have the consequence of (i) increase in circular debt in power sector (ii) further tightening of liquidity for the Company and Power Purchaser; and (iii) net negative revenue for GoP given sharing with provinces in the divisible pool, whereas burden of payments to IPPs as a result of change in tax would have to be borne by GoP alone.

M/s Orient and M/s Saif Power have requested Managing Director to use his good offices for redressal of the proposed amendments before passage of Bill in to Finance Bill.

“Since the proposed amendments would incur major financial repercussions, we request that this matter be treated urgently,” said, CEOs of Orient and Saif Power.—MUSHTAQ GHUMMAN