AVN 65.45 Increased By ▲ 0.50 (0.77%)
BAFL 30.65 Decreased By ▼ -0.86 (-2.73%)
BOP 4.83 Increased By ▲ 0.04 (0.84%)
CNERGY 3.72 Decreased By ▼ -0.12 (-3.13%)
DFML 14.26 Decreased By ▼ -0.15 (-1.04%)
DGKC 41.06 Decreased By ▼ -0.54 (-1.3%)
EPCL 46.56 Decreased By ▼ -0.14 (-0.3%)
FCCL 11.35 Increased By ▲ 0.06 (0.53%)
FFL 5.03 Decreased By ▼ -0.02 (-0.4%)
FLYNG 5.78 Decreased By ▼ -0.04 (-0.69%)
GGL 10.28 Decreased By ▼ -0.17 (-1.63%)
HUBC 67.03 Increased By ▲ 1.39 (2.12%)
HUMNL 5.68 Increased By ▲ 0.02 (0.35%)
KAPCO 27.85 Increased By ▲ 0.10 (0.36%)
KEL 2.19 Increased By ▲ 0.04 (1.86%)
LOTCHEM 24.83 Increased By ▲ 0.48 (1.97%)
MLCF 21.37 Decreased By ▼ -0.11 (-0.51%)
NETSOL 84.20 Decreased By ▼ -0.59 (-0.7%)
OGDC 85.94 Decreased By ▼ -1.31 (-1.5%)
PAEL 11.01 Increased By ▲ 0.03 (0.27%)
PIBTL 4.17 Decreased By ▼ -0.05 (-1.18%)
PPL 74.56 Decreased By ▼ -1.14 (-1.51%)
PRL 13.40 Decreased By ▼ -0.25 (-1.83%)
SILK 0.92 Increased By ▲ 0.03 (3.37%)
SNGP 40.44 Decreased By ▼ -0.89 (-2.15%)
TELE 5.86 Increased By ▲ 0.01 (0.17%)
TPLP 15.42 Decreased By ▼ -0.22 (-1.41%)
TRG 111.63 Decreased By ▼ -0.07 (-0.06%)
UNITY 13.76 Decreased By ▼ -0.22 (-1.57%)
WTL 1.14 Decreased By ▼ -0.02 (-1.72%)
BR100 4,037 Decreased By -26.9 (-0.66%)
BR30 14,412 Decreased By -56.6 (-0.39%)
KSE100 40,471 Decreased By -262.4 (-0.64%)
KSE30 15,163 Decreased By -67.2 (-0.44%)
Follow us

In a summary moved to ECC, the government has sought approval to reduce the WHT on IPPs under 2015 policy for Chinese investors to 7.5 percent. The WHT tax rate was increased in 2019 (when Shabbar Zaidi was at the helm in FBR) to 25 percent from 7.5 percent. The reasons cited by the FBR back then was that these IPPs are making extraordinary returns, and since their income is tax exempted, higher WHT on dividend would rationalize the tax liability of IPPs.

Since these IPPs are quasi-debt projects, the returns are implied in the cost and revenue structure. Any additional tax reduces the income of investors which is already fixed (to an extent). This was tantamount to unilateral renegotiation by the government, without taking into account investor rights. Not a pretty sight.

In the 1994 and 2002 power polices, tariffs were defined on cost plus basis and the WHT on dividend was fixed at 7.5 percent, which is a pass through. In 2015 policy IPPs, tariff was changed to upfront basis, and the return on equity was computed by the investors at the given rate of WHT (at 7.5%) and zero tax on income (which is exempted). Now, any change in taxation would negatively impact the ROE as the IPPs are selling to distribution companies at pre-determined tariffs, and cannot pass on the additional tax to consumers, as is the case in other industries where producers have the pricing power.

There are both local and Chinese investors in IPPs under 2015 policy. Under the bilateral Pakistan-China Double Taxation Agreement, the tax rate for dividend is at 10 percent. Thus, increasing it to 25 percent does not affect Chinese investors. Their WHT increases from 7.5 percent to 10 percent. And this may likely be negotiated down to 7.5 percent. The bigger issue is for domestic investors who currently pay 25 percent WHT, instead of the 7.5 percent. This is akin to cornering local investors.

To date, none of the 2015 policy IPPs have paid any dividend. Not many projects are online yet. And those who are, and were unable to pay dividend due to circular debt related cash flow issues. Now the cash flows problems expect resolution soon. Higher dividend tax applied irrationally is going to bite the local investors hard.

FBR has taken the plea that it shall lose Rs57 billion in tax revenues due to the proposed revision, even though the tax shall only accrue once dividend is paid. And so far, that’s not happened. Fearing a media witch-hunt, power division has also opposed the revision. It fears that the proposal may be misread as government offering concessions to the IPPs.

In the process, the fate of investors is left in a lurch. Their fortunes will be impacted far worse than those of 1994 and 2002 IPPs, which were forced into contracture negotiations by PTI earlier in its tenure. The federal government benefits little from the imposition of higher tax anyway. WHT is a part of divisible pool and around three fifth of share goes to provinces. While the federal government must bear the subsidy element for not increasing tariff proportional to cost. A better option could be to bring the WHT to 7.5 percent and negotiate with local investors directly on return on equity. Unfortunately, fear of NAB/FIA is not letting the government to do so.

Upfront tariffs are usually adjusted at commercial operation date (COD). However, COD tariff is yet to be announced for IPPs that are online. NEPRA officials fear undue accountability as they have learned the wrong lessons from recent precedents, where people taking right decisions have been wrongly grilled by accountability agencies. It looks like that PTI’s accountability mantra has paved the road to hell, despite all the good intentions.

Comments

Comments are closed.

Talha Bhatti Feb 11, 2022 09:10am
Nothing to say
thumb_up Recommended (0)

IPP WHT revision: good move, poor optics?

Dar hits out at Imran Khan’s ‘irresponsible tweet’ about current govt

Alluding to PTI, PM asks where Rs417bn spent?

Govt says ‘will have to’ agree to IMF conditions

PTI chief won’t attend APC: Umar

US allows seized Russian money to go to Ukraine aid: report

Industry yet to export any amount of sugar

RDA: pace of growth slightly lower

‘Rules’ allow banks to seek asset details of civil servants

Likely output dip in Feb, Mar: Indus Motor offering full refund with interest to customers

Imran steps up criticism of PDM govt