‘Illogical’ accounting standards: LHC issues notice to Secy finance, SECP chairman

ISLAMABAD: The Lahore High Court (LHC) issued notice to the Secretary Finance, and chairman Securities and Exchange Commission of Pakistan (SECP) to file the report and para-wise comments before December 12, 2022.

A single bench of Abid Hussain Chattha also issued notice to the Attorney General for Pakistan under Order XXVII-A of the Code of Civil Procedure, 1908, and suspended the impugned condition in notification/ SRO No 986 (1)/2019 dated 02-09-2019 till further orders.

The court said the dispensation sought for is allowed, subject to all just and legal expectations.

The petitioners have assailed the vires of a condition contained in notification/ SRO No 986(1)/2019 dated 02-09-2019, whereby, the exemptions granted vide SRO24 (1)/2019 dated 16-01-2012 with respect to the requirements of International Financial Reporting Standards (IFRS) to all power sectors companies, were curtailed to apply to only such companies that have executed Power Purchase Agreement before January 1, 2019.

The counsel for the petitioners submitted that imposition of this condition retrospectively takes away vested rights accrued to the petitioners through their respective Letter of Intent (LoI), Letter of Support (LoS), and Letter of Power Tariff Determination by the NEPRA. He added that the impugned condition is also discriminatory since similarly placed power companies are being subjected to different accounting standards which is also discriminatory since similarly placed power companies are being subjected to different accounting standards which is unconstitutional in term of Article 25 of the Constitution.

Master Green Energy Limited and 11 other power producing companies have filed the petitions under Article 199 of the Constitution and cited Secretary Finance Ministry, and Chairman SECP as respondents.

The petitioners have entered into Power Purchase Agreements with Central Power Purchasing Agency (Guarantee) Limited for the sale of electricity; the electricity is priced in American dollars but is payable in equivalent Pakistani rupees.

However, in an arbitrary, whimsical and illegal exercise of power, the SECP has suddenly imposed illogical accounting standards, by which the power companies are now required to calculate the average value of the exchange rate between the Pakistan rupee and the USD over the lifetime of their respective agreement (which is approximately 25 years). Moreover, they are then to calculate the revenue they would get in terms of this estimated average exchange rate. Thereafter, they have to see how much more revenue they would get in comparison to the revenue they would receive based on the exchange rate on the day on which the Power Purchase Agreement was signed.

They stated that bizarrely, they are supposed to show this entire differential (at net present value) as income for the first year. What is critical to note is that this is now categorised as “Other Income”, which resultantly, would now not be exempt from income tax. Thus, the petitioners face a situation where if their actual profits are maybe Rs100 they are now forced to declare (on paper only), let us say, the notional figure of Rs5,000 as their profits.

As a result, instead of paying no tax on the Rs100 (pursuant to the tax exemption granted by the Income Tax Ordinance) under the newly-imposed accounting standard they are now liable to pay tax on the notional figure of Rs5,000, which they may (or may not) receive over the lifetime of the agreements of 25 years.

The contended following such an accounting standard would force the petitioners to shut down; therefore, the chairman SECP, on the instruction of the federal government, realising the urgent need for power production, exempted all companies from applying such standards (through notification (SRO24(I)/2012) dated 16-01-2012.

Consequently, as per the normal accounting norms, every year the petitioners’ companies will declare their actually received revenue based on the number of units they will sell and this would then be used to calculate their respective profit of the year.

The petitioners have prayed before the LHC to declare that the 2019 notification does not apply to the petitioners as vested rights have accrued in their favour and direct the SECP chairman to treat them at par with those companies to whom the exemption continues to be available, or in the alternative, declare the 2019 notification be discriminatory, illegal, unlawful and ultra vires of the Constitution, and set it aside.

Copyright Business Recorder, 2022