Finance Minister Abdul Hafeez Shaikh has directed the Petroleum Ministry that issues concerning exemption from taxes, duties, etc, should be resolved in consultation with the Finance and Revenue Divisions, sources said.
They said that Iran-Pakistan (IP) gas pipeline project is aimed to import 750 million cubic feet daily million cubic feet per day (mmcfd) of natural gas, which is nearly 20 percent of Pakistan's current gas production. The project is now in its implementation phase and, upon completion, will be able to support 5,000 mw of power generation capacity. In the meanwhile, import of LNG, if pursued proactively, could provide 500 mmcfd gas within a year. The Engineering and Project Management (E&PM) consultant is already on board and is undertaking work on route survey, front end engineering design and bankable feasibility study. Further, for the timely financing of the project, proactive activities are undertaken in parallel to these working.
While the project demonstrates substantial savings to national exchequer, it is capital-intensive and technically complex, requiring timely foreign investment, funding and import of certain critical equipment, material and machinery. Keeping in view such high upfront costs as well as the country's risk profile, some attractive cost reducing and facilitative incentives are required to encourage foreign investors' participation in the project.
Moreover, project financing cost in case of Pakistan is higher than in other countries in the region due to higher premium for country risk and other factors that determine interest rates. The prevalent tax liabilities of such project, in terms of customs duty on plant, equipment and machinery, withholding tax and sales tax on services of foreign contractors, especially, Engineering, Procurement and Construction (EPC) services, rendered by foreign firms, at applicable rate of 16 percent substantially increase the cost of such projects.
According to official documents, Petroleum Ministry is of the view that the taxes and duties not only front-load the project, in terms of capital investments and funding but are also tantamount to taxing capital and foreign direct investment (FBI) for a sector which the government intends to open up for foreign investment. The cumulative effective of the proposed liabilities would increase the project cost by around 20-25 percent.
"This is contrary to the best international practices where foreign investment, especially in energy projects, is encouraged through attractive tax concessions and incentives," said the Petroleum Ministry.
The Ministry argues that the circumstances justify need for special incentives for the project. Instead of imposing taxes at the construction stage, the government may allow these companies to pay normal taxes after commencement of commercial operations. Any reduction in potential tax revenues on account of exemption from these upfront taxes at construction stage would be offset by the economics/savings on account of replacement of imported liquefied fuels for power generation.
After explaining the scenario, Petroleum Ministry has suggested following tax exemptions and other incentives for gas import projects including LNG. (i) Exemption from income tax and other taxes on the Pakistan-sourced income of foreign EPC contractors, material suppliers, design engineers and advisors/consultants etc involved in gas import projects; (ii) exemption from all import taxes and duties on the import of plant, equipment, machinery, material, pipes, pylons/piles and operational vehicles etc for construction of gas pipelines and LNG terminals; (iii) total exemption from customs duty and sales tax for temporary importation of plant, equipment and machinery etc, which will be used for construction, operation and maintenance of gas pipelines, LNG terminals and peripheral infrastructures; (iv) exemption from withholding tax on interest payments, markup, fees etc arising from loans as well as dividend to shareholders of companies undertaking gas import projects; and (v) exemption from income tax and turnover tax on the revenues of natural gas importers and LNG sellers and terminal operators.