Mismatch identified in GST rates on supply, sales by IPPs

Mismatch identified in GST rates on supply, sales by IPPs

KARACHI: Overseas Investors Chamber of Commerce and Industry (OICCI) has identified mismatch in General Sales Tax (GST) rates between supply and sales resulting in excessive sales tax refundable build up.

The OICCI in its proposals for budget 2022/2023 submitted to the Federal Board of Revenue (FBR), said that Independent Power Producers (IPPs) revenue mainly comprises of two components “Capacity Price Payment” (CPP) and “Energy Price Payment” (EPP).

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As per the current sales tax law output sales tax is only applicable on EPP as a result IPPs are not able to fully adjust the input sales tax charged leading to build up of sales tax refund.

It is recommended that the IPP sector is already facing circular debt issues and in addition to that huge amount of Sales Tax Refunds are further worsening the working capital conditions of the industry. It is proposed that supply of fuel to IPPs (Coal/ Gas / HSD, etc.) should be exempted from Input Sales Tax.

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The OICCI said since 1994 the dividend income paid by Independent Power Producers (IPP’s) was subject to tax @ 7.5 per cent under the repealed Income Tax Ordinance, 1979 (ITO, 79). This was also the full and final tax in the hands of recipients and IPPs’ shareholders did not have to pay any additional tax when filing their tax returns, which have been revised as follows vide Finance Act 2019:

i. In clause (a), the reduced tax rate of dividend of 7.5 per cent for power generation industry (covering power purchaser, producer, and supplier of coal to power producer) has been restricted to power producers only where such dividend is pass through under CPPA, and

ii. Higher rate of tax of 25 per cent has been introduced under clause (c) of the said section for the Companies that have nil tax liability due to carry forward of losses, tax exemption or tax credits.

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Hence, in case of power producers (having non-pass-through agreements with CPPA) and coal suppliers, that previously enjoyed reduced rate under clause (a), the tax rate has been drastically increased from 7.5 per cent to 25 per cent due to exclusion from revised clause (a) and applicability of the new clause (c) as these entities are currently in tax holiday.

It is recommended:

i. Clause (a) of Division III of Part I of First Schedule as applicable before Finance Act 2019, should be reinstated, to include power producer companies (having non-pass-through agreements) and coal suppliers.

ii. Similarly, amendment be made for the withholding tax rates specified in clause (a) of Division I of Part III of the First Schedule, by reinstating the position prior to Finance Act 2019.

iii. The new clause (c) of Division III of Part I of First Schedule, inserted by Finance Act, 2019 be removed being against the fundamental principles of ITO, 2001.

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The chamber further informed that as a result of the passing of the Finance (Supplementary) Act, 2022 (“FSA”), the exemption provided to the power sector (“IPPs”) from payment of Sales Tax on the import of machinery and equipment provided under Table-3 of the Sixth Schedule to the Sales Tax Act, 1990 has now been withdrawn.

Under various power policies, the GOP has guaranteed the exemption of sales tax on the import of plant and machinery till the Commercial Operations Date of the IPPs.

It is recommended either the exemptions are restored or a proviso similar to the proviso inserted by the FSA in clause 132 Part I of the Second Schedule to the Income Tax Ordinance, 2001 be inserted.

(Provided further that the exemption under Serial 4, 5 & 6 Table 3 of the Sixth Schedule to the Sales Tax Act, 19s90 shall be available to persons who entered into the agreement or letter of intent is issued by the Federal or Provincial Government for setting up an electric power generation project in Pakistan on or before the thirtieth day of June 2021 and who obtains a letter of support on or before the thirtieth day of June 2023.