IPPs shareholders: PPIB urges PD to help reinstate tax on dividends

ISLAMABAD: The Private Power & Infrastructure Board (PPIB) has urged the Power Division to play its role in reinstatement of tax on dividends to 7.5 percent as full and final liability for investors, as otherwise shareholders of Independent Power Producers (IPPs) may consider it as creating negative sentiments for their investment, well-informed sources told Business Recorder.

The issue of increase in tax on dividends is already a reason of dispute between the Power Division and the Federal Board of Revenue (FBR) as almost all the IPPs including CPEC power projects have agitated against this with the relevant authorities including the Prime Minister.

According to the PPIB, in order to attract much-needed private investments in Pakistan’s power sector, the government of Pakistan promulgated various power policies namely Power Generation Policy (PGP) 1994, 2002 and 2015, respectively. At the time of promulgation of all these PGPs, the dividend income of shareholders from IPPs was taxable at the rate of 7.5%, which was one of the basis upon which investment decisions were made by investor(s).

Subsequent to amendment to the Ordinance, various investors, particularly CPEC IPPs, have raised concerns that they have made substantial investments in dollars in various projects on the presumption that tax on dividend will remain at 7.5% and the increase in the tax rate has been leading to arbitrary reduction in rate of return for investors. Further, power sector in Pakistan is operating on single buyer mode which is strictly regulated by Nepra. The only return accruing to the shareholders of IPPs on their investment is Return on Equity (RoE) which ought to be paid in the form of dividends.

Rs15.2bn payment: IPPs serve notice to govt

The PPIB maintains that IPPs are obligated to provide all the power generated by them to national grid at tariff determined by Nepra for the term of the Power Purchase Agreement (PPA) and have no other option/recourse to enhance their tariff or return due to increase in input costs or taxes as compared to other corporate/industrial businesses operating in Pakistan.

Accordingly, the PPIB understands that increasing any tax on dividends for IPPs that have already undertaken their investment decision and are either in operation or at an advanced stage of completion will certainly ‘erode’ the return of shareholders of such IPPs contrary to allowed/committed in tariff determinations by Nepra (majority of which are under CPEC framework).

The PPIB’s Joint Director (Finance & Policy) Shahid Mehmood in his letter to the Power Division has asserted that such major change would shatter the investors’ confidence and may also create negative sentiments for attracting much needed investment in power sector of Pakistan, particularly for meeting the challenging targets of renewable energy generation.

Copyright Business Recorder, 2022