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IPPs to pay 4 per cent withholding tax

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Govt's commitment relating to applicability of 4 per cent withholding tax has been further confirmed and strengthened in the Implementation Agreements

From YOUSAF RAFIQ
Special correspondent, Islamabad
Sep 20 - 27, 1999

The Economic Coordination Committee of the Cabinet has in its recent decisions decided that a rate of 4 per cent should be applied as withholding tax in accordance with the power policy and the Income Tax Act which specifically provides for this rate in the case of power projects and not 8 per cent. In order to attract overseas investment by the private sector in power generation in Pakistan the government of Pakistan issued in March 1994, a policy framework and package of incentives for private sector power generating projects in Pakistan. The Policy Framework constituted a specific representation of the Government of Pakistan in reliance on which several foreign investors made financial commitments to power generation in Pakistan. There were several fiscal incentives set out in the Policy Framework. One of these incentives was that power companies would be liable to withhold and pay to the Government of Pakistan as the full and final income tax liability of their contractors 4 per cent of the relevant payments made by the power company concerned to the relevant contractor.

The relevant clause of the power policy states, "The companies are liable to withhold and pay to the Government of Pakistan as full and final income tax liability of their contractors at the rate of 4 per cent of the relevant payments made by the Company to the Direct Contractors plus 4 per cent of the relevant payments made by the contractors to their direct sub-contractors so that (i) the Company shall deduct income tax at the rate of 4 per cent from its relevant payments to the Direct Contractors; (ii) the Direct Contractors will deduct 4 per cent from the relevant payments to the direct sub-contractors."

The Government of Pakistan's commitment to levy 4 per cent tax in full and final discharge of the tax liability is further evident from the fact that the same was specifically listed as a consent in the Implementation Agreements signed with the Independent Power Producers. All the companies with whom the Implementation Agreements have been signed, applied for the above consent to the Central Board of Revenue. The CBR responded stating that the withholding tax is 4 per cent in respect of non-resident contracts or sub-contracts for designing, supply of plant and equipment and construction of power projects (other than hydel power projects) and transmission line projects. Moreover, it said, "There is no provision in law under which the CBR may issue a binding confirmation in this behalf."

The commitment of the GOP relating to the applicability of 4 per cent withholding tax rate has been further confirmed and strengthened in the Implementation Agreements where a change in law has been listed as an event of default giving the right of termination to the Company. The intent and commitment of the GOP not to levy tax in excess of 4 per cent is also confirmed by the fact that the GOP has provided the excess, i.e. tax imposed in excess of 4 per cent as a pass through item being paid by WAPDA. In case occurring on or after the Commercial Operations Date such expenditures are payable by WAPDA at any time after first day of the month following the month in which such expenditure are incurred and the company may invoice for such expenditure showing the due date before 30 days after delivery of the invoice.

As per provisions of the respective PPA with various IPPs any withholding tax payable in excess of 4 per cent by the Company shall be Pass-Through item and be reimbursed by exact amount on or after Commercial Operations Date. Such Pass-Through Item for the purpose of invoicing shall be treated as supplemental charges. In case occurring prior to Commercial Operations Date shall earn interest at the average rate of interest accruing under the Financing Documents from the date paid by the company through the Commercial Operations Date, and the supplemental tariff payment shall be structured to allow the recovery of such expenditure through the first five agreement years of the PPA or in case of reduction in withholding taxes paid by the Company to WAPDA over the same term.

At present WAPDA is already in financial crunch, due to devaluation of Pak Rupee against US Dollar and non-availability of Foreign Exchange Risk Insurance Scheme with State Bank of Pakistan, due to increase in Residual Furnace Oil price/gas price and due to higher fixed capacity charges. Moreover, the AES Pak Gen (337MW), AES Lalpir (337MW), Kohinoor Energy Limited (120MW), Southern Electric Power Company Limited (112MW), have already completed their Commercial Operations Date and Uch Power (525MW), Saba Power (114MW), Rousch Power (358MW), and Habibullah Coastal (123MW) are under testing and likely to complete their COD's within one or two months and for these projects WAPDA has to pay the fuel amount within 25 to 30 days as per PPA. In case of increase in withholding tax WAPDA had no option, except to borrow the commercial loan from the market which was also not possible keeping in view WAPDA's liquidated position and then ultimate recovery through consumer tariff which also required NEPRA's approval.