Sales tax on EPC contract is estimated at $171.96 million (to be paid during construction period of five years), output sales tax of 1-30 years would be $124.28 million per year based on EPP and input sales tax on O&M for 1-30 years of $74.57 million. The sources said, it is clear that sales tax paid during the construction period cannot be recovered even in the concession period of 30 years and $122.25 million will still be the shortfall. This working does not account for the impact of time value of money otherwise the shortfall would become even worse than the above number.
The sources further stated that keeping in view the issue of unadjusted input tax (during construction period & operations period) the only option as per the provisions of the tax laws is to submit a refund claim with FBR. As per the ground realities, it involves a rigorous follow up by the claiming company, complex procedures with FBR and unnecessary delays by tax department, which make it very difficult to get the refund that could result in serious cash flow problems for the project company.
EPC stage tariff was determined by NEPRA for Karot on April 27, 2016 without incorporating the financial impact of sales tax. Karot has already released mobilisation advance (10% advance payment) to the Engineering and Construction (EC) Contractor for preliminary activities and financial close was targeted for December 28, 2016. Sales Tax was not charged by EC contractor on advance payment, however, FBR issued an order to Karot to deposit Rs 345 million as sales tax on advance payment not charged by the contractor. The matter is currently under litigation.
Three Gorges claims that Karot project was required to achieve financial close by December 28, 2016 as per the Letter of Support (LoS) issued by Private Power & Infrastructure Board (PPIB). However, owing to levy of Sates Tax, the project cost has increased by around $172 million, which will be difficult for shareholders and the lenders to arrange.
"Even if the company somehow manages to get the financing for the additional cost, the ground reality is that the refund process takes much time and only the actual amount paid as Sales Tax is refunded after a long delay and so the financing cost of this huge additional cost would have to be borne by the project company, in any case, and the company could face serious cash flow problems," the sources quoted Three Gorges as saying.
The KHCL is currently finalising the EPC contract, and will be submitting EPC stage tariff petition to the CPPA-G/ NEPRA shortly. The company has decided that the sales tax will be made part of the EPC cost in the EPC Stage tariff petition in order to get it as part of tariff.
Three Gorges further stated that sales tax paid during the construction period cannot be recovered even in the concession period of 30 years and there will still be a shortfall of $104.60 million. The working does not account for the impact of time value of money otherwise the shortfall would become even worse than the above number. Moreover, it may also be noted that if NEPRA does not allow this cost in the tariff then KHCL would face similar difficulties as KPCL is facing right now.
The sources said, Chinese have argued that in order to give relief to the project companies involved in development of hydropower projects under CPEC agreement and to simplify the matters, specific exemptions may be given by Government of Pakistan from levy of Sales Tax on construction and related services in view of article 4 of CPEC Agreement and the huge financial implications of the Sales Tax on the viability and finance-ability of these projects
There is a recent precedence available in the matter wherein the Government of Sindh on February 26, 2016 has exempted whole of the tax on the services in respect construction services (including turnkey projects) in case of Thar coal based power projects.
The sources said, hydropower projects under CPEC are also based on indigenous resource like that of Thar coal based power projects and article 4 of CPEC Agreement also states the following: "Pakistan party agrees.....that such preferable conditions given to Chinese investor will not be inferior to those to any third country, under the applicable power policies"
"We believe that since the government has already given certain exemptions to Thar coal based power projects, so not giving the same or similar exemptions to hydropower projects under CPEC agreement would be against the letter and spirit of the CPEC agreement," the sources quoted Three Gorges as saying in its letter written to the MP PPIB.