Many IPPs generate power through using High Sulphur Furnace Oil (HSF) falling under PCT code 2110.1941. Previously, under the Sales Tax Act 1990(STA), HSFO was subject to a levy of 17 percent of GST which is adjustable against the GST payable on the sale of electricity, while any excess balance is recoverable from the FBR under the STA.
However, on September 30, 2015, FBR issued a new SRO, No.962 (1) 2015, according to which the import and supplies of furnace oil would now be subject to an increased levy of 20 percent GST. Hub Power Company (Hubco) had also approached the FBR seeking a reduction in sales tax rate from 20 to 17 percent on the supply of imported HSFO or enhancing sales tax on electricity from 17 to 20 percent to deal with problems of accumulated refunds and cash flows of the IPP. Hubco maintains that the company is generating electricity (both at Hub and at Narowal) by using HSFO falling under PCT Code 2710.1941. Under the Sales Tax Act, 1990 (STA) HSFO is subject to a levy of GST at 17 percent. This GST paid by the company is adjustable against the GST payable on sale of electricity. Any excess balance is recoverable from FBR under the Sales Tax Act.
Hubco further argued that by virtue of the SRO now the supply of imported HSFO by fuel suppliers would be subject to 20 percent GST instead of 17 percent while the GST rate payable on electricity remains at 17 percent. This will create serious problems as the enhanced rate will increase the amount of cash to be paid to fuel suppliers thus affecting the cash flow adversely.
According to the Ministry of Water and Power, increase in GST will result in an increased amount of cash to be paid to the fuel supplier, thereby affecting the cash flow of the IPPs adversely and will also result in a significant increase in the amount of refund claim from the FBR. The settlement of refunds from the FBR usually takes a long time and the IPPs are agitating at this state of affairs as their working capital requirements are significantly enhanced as a consequence.
The source said, Ministry of Water and Power understands that the enhanced rate of 20 percent GST for supply of HSFO, being a pass-through item, will result in an increase in tariff for end consumers and impact on the general price hike. The Central Power Purchasing Agency -Guaranteed (CPPA-G) Limited has also not supported enhancement of GST rate for supply of fuel to IPPs. FBR advised to move a summary to the ECC.
In a new summary, the ECC was requested to restore the original rate of 17 percent GST on the supply of HSFO for electricity generation and accordingly, SRO No.962(1) 2015 of September 30, 2015 may be withdrawn.
A summary for restoration of the GST rate from 20 percent to 17 percent was submitted to the ECC on April 8, 2016. The ECC after consideration of the summary gave the following decision: "the ECC deferred consideration of the summary and directed the Secretary Water and Power and Chairman FBR to further deliberate on the issue and submit its outcome to the ECC , however, the meeting could not be held and hence no agreement could be reached".
Water and Power Ministry has again approached the ECC, now headed by Prime Minister Shahid Khaqan Abbasi to take a decision on restoration of the original rate of 17 percent on the supply of HSFO for electricity generation and accordingly the SRO No 962(1) 2015 of September 30, 2015 may be withdrawn.
Copyright Business Recorder, 2017