TUESDAY JANUARY 31: Power ministry, MoF and FBR team up: 16 percent GST on hydro power to push up tariff

ISLAMABAD: The Ministry of Water and Power, the Ministry of Finance and the Federal Board of Revenue have joined hands to raise power tariff through imposition of 16 percent General Sales Tax (GST) on hydroelectric power, well informed sources told Business Recorder.
Wapda (hydroelectric wing) is engaged in the operation and maintenance of hydroelectric power stations and like other Independent Power Producers (IPPs) has two-part tariffs ie fixed and variable charges. Fixed charges consist of capacity purchase price, which includes salaries, administrative expenses, loan repayment and mark-up payments and return on equity, which are not subject to sales. Variable charges are fuel charges and variable components of operation and maintenance cost, etc, which are subject to sales tax.
As per sales tax special procedure for collection and payment, Hub Power Company (Hubco) and Kot Addu Power Company (Kapco) invoice NTDC/CPPA on energy includes purchase price (variable charges) only. However, there is an anomaly faced by Wapda as they are invoicing NTDC/CPPA for sale of power by applying two-part tariff ie fixed charge and variable charges. Nepra, being a regulatory body has also accepted the stance of Wapda.
"If Wapda hydroelectric charges output sales tax on total monthly invoice amount ie both fixed charges and variable charges, there will be huge output tax to be paid to Federal Board of Revenue (FBR) against a normal input (ie O&M of hydroelectric power) which is nearly 5 per cent of the total output tax. This very situation will have serious repercussions on the cash flows of Wapda," sources revealed.
Rule 13 sub rule (3) of the sales tax special procedure for collection and payment of sales tax on electric power states that "(3) in case of an IPP, Hubco or Kapco, the value of supply shall be the amount received by such IPPs or as the case may be, Hubco and Kapco on account of energy purchase price only and any amount in excess of energy price premium, excess bonus, supplemental charges, etc, shall not be deemed as a component of the value of supply."
The Ministry of Water and Power, on the same analogy of IPPs, maintains that Wapda hydroelectric also qualifies for levy of sales tax on variable charges only by including the name "Wapda hydroelectric Power" after the word Hubco and Kapco in the Rules 13 sub rule (3) of the sales tax special procedure for collection/payment of sales tax in electric power.
Ministry of Finance and Federal Board of Revenue (FBR) are supporters of this proposal of Ministry of Water and Power. Nepra in its determination of September 2010 mentioned that in addition, the petitioner, in support of its claim also referred to the issue of GST levied on the variable part of tariff, which at present is 30 per cent of its total tariff.
According to the petitioner, it has to pay GST on its net electrical output whereas there is insignificant amount of input tax to be adjusted against its output tax. Consequently its cash flows are adversely affected. The Authority had observed that actual composition of fixed and variable portion of its total cost and thus revenue requirement is around 95 per cent fixed in nature, which has also been confirmed from the break-up of costs and its annual revenue requirement requested by the petitioner.