Sales tax on services: Patrind seeks concessions similar to those given to CPEC projects

ISLAMABAD: Patrind Hydropower Limited has sought same concessions available to CPEC projects, if the government of AJK wants to collect sales tax on construction services and O&M services from July 2015.

In a letter to the AJK government and federal government, Chief Executive Officer (CEO) Waqar Ahmad Khan has asked the government to resolve this dispute as early as possible.

The company claims that at the time of signing of the Implementation Agreement (IA) between the President of Azad Jammu and Kashmir for and on behalf of the Azad Government of the State of Jammu and Kashmir, the Azad Jammu & Kashmir Council and the Company on February 11, 2012, there was no sales tax on construction services or on operation & maintenance service. The IA also granted change in tax protections to the sponsors pursuant to section 9.2 of the AJ&K IA.

The company GOAJK imposed Sales Tax on construction services and operation and maintenance services in July 2015. This resulted in huge sales tax incidence upon the EPC contractor of the project, which was not accounted for in the negotiated agreements and accordingly were also not envisaged in the project cost.

The company which is establishing 147 MW hydropower project, also noted that GOAJK has provided concession to CPEC projects to a levy of just 1% of Sales Tax on construction services for hydro power projects in AJ&K.

The Sales Tax on Services (both Construction and O&M) fall within the definition of change in tax pursuant to the AJ&KIA. Government of Pakistan through PPIB also concurs with this applicability of change in tax in this case.

The Company has been facing serious pressure from the AJ&K Revenue Service for the payment of the Sales Tax while the GOAJK has remained silent on the issue of change in Tax.

The issue has been lingering on since 2015 and must be resolved through serious interaction between the Company and the GOAJK.

The company argues that it had proposed earlier that since change in tax provision would lead to a net zero gain for the GOAJK, a solution in the following order of priority may be agreed between the parties: (i) Sales Tax on construction services for the hydropower projects should be withdrawn/exempted with retrospective effect from July 2015;(ii) if it is not possible to give exemption with retrospective effect, "change in tax" pursuant to AJ&K IA should be accepted and book settlement is made in the books of GOAJK without any cash exchange; and (iii) if GOAJK wants to create some revenue stream, it may legislate to provide the same concession to the company as given to CPEC projects, ie, 1% Sales Tax on construction services and O&M Services with effect from July 2015.

Copyright Business Recorder, 2020