Fundamental policy for IPPs changed, points out tax expert

ISLAMABAD: The Federal Board of Revenue (FBR) has placed a time limitation on the income tax exemption of the power generation projects to be set up by the independent power producers (IPPs) by changing the fundamental policy for the IPPs through the Finance Bill, 2022.

In this connection, the former FBR chairman, Shabbar Zaidi, has written a letter to Federal Minister for Finance Miftah Ismail here on Tuesday on the issue of exemption from tax for power generation projects.

Shabbar Zaidi has highlighted that the fundamental policy has been changed and the present structure of law for the IPPs pertaining to the tax exemption and the amendment proposed through Finance Bill 2022 does not match.

According to the communication of the leading chartered accountant to the finance minister, the income of independent power generation projects is exempt from tax under Clause 132 of Part-I of the Second Schedule to the Income Tax Ordinance, 2001 without any time limit.

In 2021, the law was amended to the effect that such exemption shall not be available to power projects where the government has entered into an agreement or to whom a letter of intent is issued for setting up an electric power generation project in Pakistan after June 30, 2021. This was done by way of insertion of “proviso” six to this clause. This clearly means that exemption for existing plants continues without any time limit and the exemption shall also be available to plants which have not yet been set up; however, an agreement or letter of intent has been issued before June 30, 2021.

In the Finance Bill, 2022 as “explanation” has been inserted which also contains a proviso to that explanation whereby the exemption for those plants which are not yet set up but for which agreement and letter of intent has been restricted to life cycle of the plant or 25 years from the date of commencement whichever is earlier.

The exact wordings are as under: “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 June 30, 2021 before insertion of sixth proviso vide Finance Act, 2021: Provided further that the exemption under this clause shall be available for the life cycle of the project or 25 years from the date of commencement of commercial production, whichever is earlier.”

“It is to be brought to the notice of the finance minister that there are some interpretations that fundamental policy has been changed. In our opinion, the present structure of law and the amendment made does not corroborate the aforesaid understanding. In our view the limitation has been placed for the projects which are not yet set up,” Zaidi said.

The finance minister should instruct the FBR to clarify the position as the present structure of law supports what has been stated in this letter, Zaidi added.—SOHAIL SARFRAZ