The Central Board of Revenue (CBR) has asked the new hydropower projects/independent power producers (IPPs) in Azad Jammu and Kashmir (AJK) to get registered ''''as companies'''' with the AJK tax officials for obtaining income tax exemption under the relevant law.
Sources said on Wednesday that the Private Power and Infrastructure Board (PPIB) has informed the Law and Justice Division about the legal implications of CBR''''s directive to the AJK investors for forming companies in AJK, instead of Pakistan, for exemption purposes.
The CBR said that it would be appropriate for the investors to form and register the companies in AJK, so that they automatically become entitled to fiscal incentive regime under the prevalent law. This would help in avoiding legislative changes, both in Pakistan and AJK, the Board added.
On the other hand, Ministry of Water and Power opined that income tax exemption is available for electric power generating projects to be set up in Pakistan and owned and managed by a company registered under Companies Ordinance, 1984, having registration office in Pakistan.
The same Ordinance has been adopted by AJK government by substituting the words ''''Pakistan'''' with ''''AJK'''', and the Companies Ordinance 1984 of the AJK is applicable for exemption in AJK. However, most of the independent power producers (IPPs) are owned by companies registered in Pakistan, while projects are located in AJK. Hence, these IPPs do not qualify for income tax exemption both in Pakistan and AJK.
In order to overcome this difficulty, the Ministry of Water and Power has proposed amending the Income Tax Ordinance 2001 to exempt power projects located in AJK with companies registered in Pakistan from the levy of income tax. For income tax exemption under the AJK law, the Kashmir Affairs and Northern Areas Division would move a summary to AJK Council for getting income tax exemption for such projects, sources added.
The PPIB has conveyed the following observations to the Law and Justice Division regarding CBR''''s viewpoint: First, many companies have already been incorporated in Pakistan and developing projects in AJK. They may need to wind up and transfer all documents, title deeds of assets including land acquired, all financial arrangements in the name of new company. The process can substantially delay the start of construction for such projects.
Second, companies with projects located in AJK signed implementation agreement with the AJK government. Moreover, Pakistan has guaranteed the obligations of AJK government. In this scenario, if companies are not incorporated in Pakistan, there could be possible complications pertaining to governing, law, jurisdiction issues, creating disputes within the AJK and Pakistan governments.
Third, Pakistan had inked bilateral tax treaties with many countries. Foreign investors would not be eligible for relief on tax deducted from dividends paid by a AJK company. Fourth, foreign investors rely on investment protection treaties between their respective governments and Pakistan, they may lose such protection if the companies are incorporated in AJK.
Fifth, AJK companies may face impediments in implementation of the commitments provided in the implementation agreement in relation to repatriation of funds, dividends, availability of foreign exchange for debt servicing, opening of foreign currency accounts outside Pakistan, etc;
Sixth, the concessions related to import duties are provided to companies incorporated in Pakistan and AJK-registered companies may face problems. Sources said that it is clearly a perception issue for investors and lenders for making investments in Pakistani vis-à-vis AJ&K companies.
As Pakistani companies would provide more comfort and confidence to foreign investors, as well as the benefit of bilateral and investment protection treaties between foreign countries and Pakistan, the proposed change in Income Tax law would certainly facilitate the harnessing of the AJ&K hydropower generation potential.
According to PPIB, income tax exemption has already been granted under the 1994, 1995 and 2002 power policies. These policies have been widely advertised, and projects have been approved/are currently being processed.
The policies of both GoP and AJK clearly provided income tax exemptions, and now there is a need to set legal framework right for successful implementation of these policies. The Law, Justice and Human Rights Division has rightly pointed out that amendments in the Income Tax Ordinance, 2001 - for accommodating the aforementioned change - will not be required.
Section 53(2) of the Ordinance empowers the federal government to make amendments in Second Schedule of the Ordinance, through issuance of notification in the official gazette. Regarding any change in the income tax exemption, PPIB opined that the withdrawal or limitation of exemption, at this stage, would firstly send a wrong signal to the investors, which could adversely affect the much needed private investment in the power sector.
Secondly, the application of income tax is a passthrough item in the tariff, and will ultimately result in higher tariff for the power consumers, which may necessitate an increase in GoP''''s subsidy to the power sector.
Keeping this in view, PPIB has said that the proposed changes in Ordinance 2001 are essential for successful and timely implementation of the GOP''''s approved and announced power policies. Similar changes would also be required in the AJK Income Tax law to complete the process of income tax exemption.