7.5 percent tax on dividends: profits, gains of Sindh coal projects given tax exemption

The government has decided to exempt profits and gains of coal mining projects in Sindh supplying coal exclusively to power generation projects. Their dividends however would be taxed at a reduced rate of 7.5 percent to encourage electricity generation from local coal.
Sources told Business Recorder here on Friday that the new provision introduced in the Income Tax Ordinance 2001 through Finance Bill (2014-15) has also been discussed in the meeting of the Economic Co-ordination Committee of the Cabinet in May 2014. Under the Finance Bill (2014-15), the rate of tax imposed under section 5 on dividend received from a company shall be 7.5 percent in the case of dividends declared or distributed by purchaser of a power project privatised by WAPDA or on shares of a company set up for power generation or on shares of a company, supplying coal exclusively to power generation projects and 10 percent, in all other cases. Provided that the dividend received by a person from a stock fund shall be taxed at the rate of 12.5 percent for tax year 2015 and onwards, if dividend receipts are less than capital gains. Provided further that the dividend received by a company from a collective investment scheme or a mutual fund, other than a stock fund, shall be taxed at the rate of 25 percent for tax year 2015 and onwards.
Background of the issue revealed that Economic Co-ordination Committee of the Cabinet had considered the summary submitted by Ministry of Water & Power on "Incentive for Development of Local Coal" and had approved the incentive package. The coal based power projects and coal mining projects in Sindh shall have the same incentives, concessions, protections and security package as that available to IPPs developed pursuant to Power Generation Policy 2002.
Profits and gains of power generation projects are exempt as per clause (132), Part-1 of the Second Schedule to the Income Tax Ordinance, 2001. Dividend declared by a company set up for power generation, is taxed at a reduced rate of 7.5 percent instead of the normal rate of 10 percent as per clause (20), Part-II of the Second Schedule.
The ECC decision was in respect of "coal mining projects in Sindh" and not in respect of "coal mining projects in Sindh supplying coal to power generation projects". However, as the purpose of the said decision appears to be development of coal based projects for power generation, it was proposed that the words, "Coal mining Projects in Sindh" be replaced with the words, "Coal mining projects in Sindh supplying coal to power generation projects.
Sources said that Thar Coal field in Sindh spreads over more than 9000 square kilometres and is bestowed with 175 billion tons of lignite coal which can fuel power generation of over 100,000 MW for more than two centuries, lithe government succeeds in attracting investment in mining and power generation for Thai Coal, it will not only save on precious foreign exchange incurred on importing furnace oil for power generation but will reduce the average price of electricity due to its lower cost of generation per kWh of power.
In order to expedite development of Thar coal field and attract investments in Thar Coal, Federal and Provincial Government of Sindh have joined hands by constituting Thar Coal & Energy Board (TCEB) headed by the Chief Minister Sindh, empowered as a one-stop decision making body. Federal Government is represented in TCEB through Federal Minister for Water & Power as its Vice Chairman, Federal Minister/Advisor for Finance, Federal Minister far Law and Deputy Chairman Planning Commission, Government of Pakistan vide its Notification No 4-9/2008-Min-I, dated 26th November, 2009 has also endorsed the creation of TCEB.