Sources told Business Recorder here on Friday that the blanket exemption is available on the import of plant and machinery. The SOP for handling CPEC tax-related matters is still under process and will be formalized soon by the FBR. At present, the main issue is related to the exemption of sales tax on construction and related services for hydro power projects. A uniform sales tax exemption policy for hydropower projects under CPEC is required to ensure maximum investment and enhance investors' confidence in the CPEC projects.
Sources said that after the 18th Amendment to the Constitution, sales tax has been levied by the provinces & AJ&K on services including construction services (@16%) falling within their respective territorial jurisdictions.
Sales tax levied on the engineering, procurement and construction services in AJ&K, Punjab and other provinces can be claimed as input sales tax through adjustment against the output sales tax or a refund claim can be lodged with Federal Board of Revenue (FBR) of GoP or the provincial revenue authorities as per the provisions of applicable law of sales tax. However, the adjustment and refund mechanism between the federal government and provinces/AJ&K is yet to be determined and the adjustment as well as refund procedure is inadequate and insufficient for the power generation projects.
Under Sales Tax Special Procedures Rules 2007 for the Power Projects, the output tax on electricity produced shall be charged on energy purchase price (EPP) component of tariff at the prevailing rate after the COD, while there is no sales tax applicable on capacity purchase price (CPP). The EPP is almost 4% of the total tariff and output tax will be insufficient to adjust the input sales tax paid on construction and operations.
Keeping in view the issue of unadjusted input tax (during construction period and operations period) the only option as per the provisions of the tax laws is to submit a refund claim with the FBR. However, as per the ground realities, it involves a rigorous follow-up by the claiming company, complex procedures with FBR and unnecessary delays by tax department, especially when the amount of refund is very large, which makes it very difficult to get the refund. This could result in serious cash flow problems for the project company.
Nevertheless, even if the project company somehow manages to get the financing for the additional cost, the ground reality is that the refund process takes a lot of time and only the actual amount paid as sales tax is refunded after a long delay, and the financing cost of this h additional cost would have to be borne by the project company. In any case, the project company would face huge financial implications on the viability, finance ability and smooth operation of its hydropower project, sources said.
The added dimension in the hydropower projects is that they are located in multiple legal jurisdictions of the federal government, governments of provinces and AJ&K. This gives added complexity of overlapping of jurisdictions by tax authorities and risk of double taxation or components of taxes remaining unadjusted or not refunded. Moreover, legal seat of the company and project activities being carried out in different jurisdictions of AJ&K and provinces lead to further complexities. The NEPRA does not allow the sales tax as part of the project cost or as a pass-through item.
There is a recent precedence available in the matter, wherein the government of Sindh vide Sindh Revenue Board notification SRB3-4/3/2016, dated February 26, 2016, exempted the tax on the services in respect construction services (including turnkey projects) in case of Thar coal power projects.
Sources said that the Punjab has yet to issue a notification for exemption from provincial sales tax on CPEC projects. It may be noted that similar to Thar coal power projects, where the government has already given certain exemptions, hydropower projects are also based on indigenous resource.
As the project companies are involved in the development of hydropower projects, therefore for smooth construction and timely completion of the projects and to simplify the matters, exemption may be granted from levy of sales tax on goods and services during the construction period for hydropower projects, the sources added.
Copyright Business Recorder, 2017