Machinery for power plants: CBR against income tax exemption for indefinite period

The Central Board of Revenue (CBR) has opposed the proposal of Ministry of Water and Power for grant of income tax exemption, for indefinite period, on import of old and refurbished power plants under the "implementation agreement'' and power purchase agreement (PPA) for such plants.
Sources said on Wednesday that CBR has given its comments on Article IX (Taxation and Import Controls) of the draft ''implementation agreement'' relating to applicability of duties and taxes on import of overhauled power plants. The Private Power and Infrastructure Board is examining CBR viewpoint.
According to CBR, the implementation agreement offers incentive in line with clause (132) of Part I of Second Schedule, as available to independent power producers (IPPs), which provides exemption for indefinite period.
The CBR did not agree to it as, according to it, ground realities have changed since the introduction of exemption for IPPs under clause (176) of Part I of Second Schedule of the repealed Income Tax Ordinance, 1979.
The IPPs were granted exemption for indefinite period in very peculiar circumstances. A lifetime exemption once granted binds the government for indefinite period. Therefore, it has been proposed that exemption for ten years, at the most, may be considered sufficient at this point of time. The same can be reviewed before lapse of such exemption period, if so required, the CBR said.
Sources said that CBR has agreed to concessionary rate of customs duty on import of machinery/equipment under the agreement. The agreement envisages that plant, machinery and equipment not manufactured locally would be subject to payment of 5 percent customs duty on determined value. This is in line with the existing tariff structure available to IPPs.
The Board said it has no objection pertaining to levy of minimum 5 percent duty on the import of the above mentioned equipment. The draft agreement relating to sales tax says that the government encourages a company to be involved in power generation project and its contractors to incorporate as much locally produced material, equipment, and supplies as possible for the design, construction, completion, operation and maintenance of the complex, the CBR said.
Nevertheless, the company and its contractors shall be entitled to import, prior to the commercial operations, without restriction and payment of sales tax, but subject to payment of the applicable five percent customs duty on value of imported plant, machinery and equipment not manufactured locally, and required for design, construction, completion, operation and maintenance of the complex, provided that such imported plant, machinery and equipment shall be used at the site, in relation to the project and will not be sold, or otherwise transferred, to or used by a person other than the company or its contractors.
The CBR opined that the government had issued SRO 575(I)/2006 on June 5, 2006 to encourage the investment in local industry. Sales tax exemption is available on import of machinery, equipment and spares meant for initial installation, balancing, modernisation, replacement or expansion of projects for power generation through oil, gas, coal, hydel, nuclear energy etc including under-construction projects, which entered into an implementation agreement with the government, including construction machinery, equipment and specialised vehicles (excluding passenger vehicles), imported on temporary basis as required for the construction of project.
This is subject to the condition that such goods shall be cleared against a security in the form of a post-dated cheque for the differential amount between the statutory rate of customs duty and sales tax and the amount payable, along with an undertaking to pay the customs duty and sales tax at the statutory rates in case such goods are not re-exported on conclusion of the project.
Moreover, zero-rating of imported plant, machinery and equipment (whether or not manufactured locally), including parts thereof and supply of plant, machinery and equipment, whether locally manufactured or imported, is also allowed under SRO 530(I)/2005. The Board has therefore no objection to the proposed agreement on power generation, sources added.