"Through various letter, FBR was requested to reconcile and harmonise the Income Tax Ordinance 2001 (ITO 2001) and Sales Tax Act 1990 with approved Power Generation Policy 2002, Power Generation Policy 2015 and Transmission line Policy 2015," the sources added.
The issue required to be reconciled and harmonized are as follows: (I) exemption from imposition of income tax on transmission line projects - under the Transmission Line Policy 2015 section d(1), profits and gain derived by the Independent Transmission Company (ITC) from transmission line project shall be exempt from corporate income tax for 10 years from the date of establishment of the ITC or for the date of commencement of business whichever is earlier. However, under clause 126(M) of ITO 2001, the exemption is not applicable to the projects set up on or after June 30, 2018. Pak Matiari Lahore Transmission Line Company (PMTCL) is undertaking the first-ever private sector transmission line project and currently the project is in its development phase. However, the time period for availing exemptions has already lapsed and the PMTCL and all future transmission line projects under the Transmission Line Policy 2015 may not be eligible for exemption provided under clause 126(M) of ITO.
II) Sales tax on import of machinery and equipment for transmission line project - under the Transmission Line Policy 2015 section d(5), sales tax on import of machinery, equipment and other capital goods if not exempted under the Sixth Schedule to the Sales Tax Act 1990 shall be charged at the rate of 5 percent and shall be non-adjustable and non-refundable. FBR, through the Finance Act 2018, included the concessions in sales tax 1990 through insertion of serial number 9 in table 2 to eighth schedule to Sales Tax Act 1990. However, the concession is subject to condition that import of goods that are not mentioned in the list of locally manufactured items shall be eligible for exemption under eight schedule of Sales Tax Act, 1990, that is contradictory to the concession extended under Transmission Line Policy 2015 wherein concession allowed for all imports apart from being present in list of local manufacturing items are not.
III) exemption from imposition of tax on income from public sector power projects - as per Power Generation Policy 2015 clause 7(A), duly approved by Council of Common Interests (CCI), public sector power projects have been allowed exemption from imposition of income tax on profit and gains derived by them from electric power generation. However, as per condition contained in clause 132(c) of part-1 of the Second Schedule to ITO 2001, the exemption is not available to the entities in which 50 per cent shares are held by federal and provincial government thereby restraining the public sector power projects from availing requisite tax exemption in contravention with concession allowed under Power Generation Policy 2015.
IV) Payment of tax- sharing mechanism between FBR and CBR AJK-Karot Hydropower Project (KHPL) is part of the China Pakistan Economic Corridor (CPEC) project with its location both in Punjab and AJ&K. KPCL is primarily registered with FBR and tax authorities of Government of Punjab, however, owing to location of the project in dual territory, KPCL has also been compulsorily registered by Department of Inland Revenue AJ&K Council, Mirpur. Since, the project is being executed in shared locations with multiple jurisdictions of taxation authorities, it is imperative that a mechanism for sharing the tax revenue is evolved to ensure the admissible distribution of revenues between different government and authorities. In order to deliberate on the matter and to discuss the sharing mechanism of taxes between FBR and CBR AJK, two meetings were held, one on October 10, 2018 and second on February 22, 2019 between all the stakeholders. However, the second meeting held on February 22, 2019 was not attended by any representative from the FBR, therefore, income tax sharing mechanism remained un-discussed and un-resolved.
V) Tax on payment made to the offshore contractor imposed through the Finance Act 2018: At time of promulgation of the Power Generation Policy 2002 and execution of the CPEC agreement there was no tax applicable on payments made to the offshore contractor by IPPs. However, the Finance Act, 2018 broadened the tax on payments to the offshore contractor supplying goods to its associates or permanent establishment in Pakistan. On the other hand, Pakistan China Avoidance of Double Taxation Treaty of November 15, 1989 which is overriding and takes effect under section 107(2) of the ITO with respect to relief from the tax payable under the ITO 2001, and determination of Pakistan source income of non-resident person etc, still provided exemption from taxes on such payments. Accordingly, a clarification was sought from FBR if withholding tax on payments made to the offshore contractor shall continue to be governed by the provisions of the tax treaty and hence neither taxable not collectable.
PPIB has requested FBR to resolve the tax related matters of IPPs as developers of the projects are agitating the issues at various fora.
