ISLAMABAD: South Korean power firm, M/s KOEN has sought extension in taxes till June 30, 2024 arguing that withdrawal of desired exemption would seriously de-motivate the proven investors in hydropower sector of Pakistan which shall just delay the much needed FDI.
In a letter to Secretary Power, the company’s representative stated that KOEN is Korea’s leading state-owned electricity generation company, operating around 10,000 MW in South Korea. KOEN initiated a 100% foreign investment of around $ 1 billion in 2018 for two hydropower projects in the Swat Valley of Khyber Pakhtunkhwa (KPK), namely the 229-MW Asrit, Kedam Hydropower Project and 238-MW Kalam-Asrit Hydropower Project. The projects are being processed under Federal Government’s Power Policy 2015 and KPK Hydropower policy 2016. The Letter of Intent (LoI) for the projects was issued by KPK while the issuance of Tripartite Letter of Support is being processed by Private Power & Infrastructure Board (PPIB) of Ministry of Water and Power.
As per Clause (132) of the Part-l of the Second Schedule of Income Tax Ordinance, 2001, the income tax exemption available to the electric power generation projects shall be withdrawn from June 30, 2023. Last year before the promulgation of Finance (Supplementary) Act 2022, the company approached Federal Board of Revenue (FBR) to revise the proposed amendment wherein the word Letter of Intent was proposed to be replaced with word Letter of Support (LoS) in the said section. The FBR accepted the company’s request and proposed amendment was withheld. However, the exemption was made available with the condition that project obtains valid LoI issued before June 30, 2021, and obtain Letter of Support issued before June 30, 2023. The company appreciated FBR for consideration in saving the projects and Foreign Direct Investment (FDI) at that time.
Raise in FBR tax collection target
After the said amendment the KOEN mobilized all possible technical and financial resources to expedite the project progress so that project may obtain the LoS before June 30, 2023. For that KOEN finalised the feasibility studies of both projects in less than a year. As per the power policies and terms of the LoIs, after the approval of the feasibility studies, the projects become qualified for the issuance of the LoS from PPIB, subject to the determination of the feasibility stage tariff by National Electric Power Regulatory Authority (Nepra). One of the prerequisites for determining tariff is the generation licence award by Nepra.
Therefore, the projects immediately approached Nepra for grant of generation license. Nepra admitted the applications but stated that the grant of generation licences for the projects should not proceed until the projects are optimized in Indicative Generation Capacity Expansion plan (ICCEP) to be prepared by National Transmission &Despatch Company (NTDC). Even though KOEN projects were qualified to proceed to the next stages under the terms of the policies and LoIs, progress was halted till the finalization of the IGCEP.
IGCEP was awaited in April 2022; however, it was approved by Nepra after a delay of nine months on February 2, 2023. This delay has caused an immense disorder to the scheduled timelines, and the LoS before June 30, 2023 is highly unlikely keeping in view the typical time required for processing of generation licence and tariff petition by Nepra.
The company claimed that it made tremendous efforts and compromised specific incentives to receive the LoS before the expiry of the exemption. However, the preparation and approval of IGCEP, coupled with the subsequent delay in obtaining LoS, is beyond the control of KOEN. The company argued that withdrawal of tax exemption available to electric power generation projects shall make the tariffs of projects highly uncompetitive with other power projects (which already have obtained the LoS), especially in the context of the newly announced IGCEP.
As per Power Generation Policy 2015, the IPPs are exempt from this tax; therefore, a pass-through or adjustment in tariff shall be provided to immune the IPPs from dilution of returns which shall ultimately burden the end consumers.
The company maintains that considering the situation, it requested the government to extend the deadline till June 30, 2024 as the amendment shall not bring any immediate benefit to the exchequer as hydropower projects have a development period of 8-10 years, after which the project starts commercial operations and shall attract income taxes. The inordinate delays in approval of IGCEP and withdrawal of desired exemption have seriously de-motivated the proven investors in hydropower sector of Pakistan which shall not just delay the much needed FDI but also delay other taxes and duties payable during the construction of the said projects along with allied benefits of such projects to the country.
Copyright Business Recorder, 2023
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