Economic Co-ordination Committee (ECC) of the Cabinet has allegedly cited National Electric Power Regulatory Authority (Nepra) without its concurrence to allow exemption from withholding tax on dividends to the 660MW transmission line project, well-informed sources told Business Recorder. In the documents submitted to the ECC, in its meeting held on February 22, 2017, Ministry of Water and Power revealed that ECC on December 20, 2016 had approved guidelines for Nepra.
According to which the regulator was to: (i) allow withholding tax on dividends as pass-through item in the tariff as per actual payments or gross up the Internal Rate of Return (IRR) to provide 17 percent IRR on net of withholding tax; and (ii) to allow Return on Equity (RoE) during construction from the actual construction start date to COD for the project subject to submission of verified documentary evidence to Nepra on equity injected and actually utilized before the financial close of the project.
Ministry of Water and Power further apprised the ECC that Nepra had accepted the directive related to the Return on Equity During Construction (ROEDC), however, regarding withholding tax on dividends, Nepra argued that it had neither allowed withholding tax on dividends as a pass-through item nor increased the RoE to provide 17 percent net of tax IRR for the upfront tariffs for coal. Nepra had proposed that the guidelines for allowing Withholding Tax (WHT) on dividends as pass-through (or grossing it up) for a net of tax 17 percent IRR needed reconsideration. WHT exemption granted to the shareholders of coal projects in Sindh, as per clause-78 of part-iv (schedule II) of the Income Tax Ordinance, 2001 was mentioned as a precedent.
Ministry of Water and Power maintained that :( i) Nepra had allowed withholding tax on dividends as pass-through for hydel IPPs as evident from the extract from the tariff determination for one hydel project; "withholding tax on dividends is also pass through item just like other taxes as indicated in the government guidelines. Withholding tax shall be paid at 7.5 percent of the RoE including ROEDC. The power purchaser shall make payment on account of withholding tax at the time of actual payment of dividend subject to maximum of 7.5 percent of 17 percent equity;"(ii) PPIB submitted tariff petition for upfront coal based power plants on February 3, 2012 recommending the withholding tax on dividends as pass through consistent with Nepra''s earlier practice. Nepra, in its original determination of June 6, 2013 allowed 17 percent RoE on imported and 20 percent RoE on local coal while not allowing pass-through mechanism of withholding tax. Upon reconsideration request of the GoP and comments of various stakeholders on the issue of RoE and withholding tax mechanism, the Authority, in its decision of June 26, 2014, increased RoE to 27.2 percent on imported and 29.5 percent on local for 660 MW project. The Authority allowed in the tariff determination "simple RoE based on generic draw downs and other reference parameters that also ensure adequate IRR ie 17 percent for imported coal and 18 percent for local coal other than Thar coal." Though Nepra disallowed the WHT on dividends in the determination, however, calculations evidence the fact that 17 percent IRR works out to be net of withholding tax in the case imported coal and 18 percent in the case of local coal while gross IRR (without netting of withholding tax) on dividends by grossing up the RoE instead of allowing it as a pass through; (iii) CPEC agreement provides to offer most preferable conditions to the Chinese investors and such conditions will be inferior to those to any third country; ( iv) the project is critical due to tight timelines and vital importance to evacuate power from the projects which are already under construction; (v) IRR for the project reduces significantly ( approximately to 15.21 percent instead of 17 percent) if 12.5 percent withholding tax on dividends is disallowed which is against the spirit of Co-operation Agreement wherein 17 percent ($ based) IRRs has been agreed; and (vi) there was precedence of exemption on withholding tax on dividends for coal projects in Sindh as allowed under clause 78 of part IV of schedule II of Income Tax Ordinance, 2001.
ECC, while considering the issue in its meeting held on February 13, 2017 had directed Secretary Water and Power to examine the issue holistically, in consultation with Secretary Finance and Chairman FBR and resubmit the case to the ECC for consideration.
According to documents, Ministry of Water and Power held a meeting of the stakeholders on February 16, 2017 where in it was recommended that "ECC may consider the proposal by Nepra to allow exemption from withholding tax on dividends to the transmission line projects under transmission line policy 2015". However, no documentary evidence of Nepra''s concurrence for allowing exemption from withholding tax on dividends to the transmission line project was presented to the ECC during the meeting presided over by Finance Minister Senator Ishaq Dar. Nepra''s spokesperson was not available for comments on the decision of the ECC.
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