IPPs upset over mode of output tax collection

Independent Power Producers (IPPs) have reportedly agitated at the General Sales Tax (GST) output tax collection at the federal and provincial levels as it will increase end consumers’ electricity price, well informed sources told Business Recorder.

IPPs have approached the Ministry of Water and Power against Finance Bill 2016 proposing certain amendments including amendments in the Sales Tax Act, 1990 (STA).

According to sources, an IPP pays sales tax (GST output tax) in accordance with the provisions of the STA after adjusting the sales tax which it has already paid to its suppliers (“CST-Input Tax”).

This is allowed under section 7 of the STA, which reads as follows “Subject to the provisions of [section 8 and}, for the purpose of determining his lax liability in respect of taxable supplies made during a tax period a registered person shall, [subject to the provisions of section 73,] be entitled to deduct input tax [paid or payable] during the tax period for the purpose of taxable supplies made or to be made, by him from the output tax excluding the amount of further tax under sub-section (1A) of section 3 that is due from him in respect of that tax period and to make such other adjustments as are specified in Section 9”.

According to the IPPs, term input tax has been defined under section 2 (14) of the STA as follows- (14) “input tax”, in relation to a registered person, means- (a) tax levied under this Act on supply of goods to the person; (b) tax levied under this Act on the import of goods by the person; (c) in relation to goods or services acquired by the person, tax levied under the Federal Excise Act, 2005 in sales tax mode as a duty of excise on the manufacture or production of the goods, or the rendering or provision of services; (d) Provincial sales tax levied on services rendered or provided to the person; and (e) levied under the Sales Tax Act, 1990 as adopted in the State of Azad Jammu and Kashmir, on the supply of goods received by the person.

IPPs, therefore, argue that gas- and RFO-based IPPs are operating their plants in Punjab, Sindh and Balochistan. Thus under the STA law they are paying GST-Output Tax on the sale of electricity after adjusting GST-Input Tax paid on purchase of residual oil, provincial sales tax paid on services received such as Punjab Sales Tax, Sindh Sales Tax & Balochistan Sales Tax.

Now the Finance Bill 2016 vide its clause 3 (1) (iii) (b) seeks to delete section 2 (14) (d) of the STA ie deleting the term ‘Provincial sales tax levied on services rendered or provided to the person” from the purview of GST-Input Tax.

“Such change in the STA will result in the “change in tax” within the meaning assigned under the terms of the Power Purchase Agreement between Government of Pakistan and the IPPs.

Consequently any financial impact would become recoverable from NTDC/CPPA-G under the PPA. This will surely increase the debt servicing of NTDC/CPPA-G.

Moreover, such an abrupt change in law would also be taken as a negative signal for future investment in Pakistan in general and in the energy sector in particular, the sources quoted IPPs as arguing in their letter to the Secretary Water and Power. IPPs have requested Ministry of Water and Power to urgently intervene in the matter by asking the Ministry of Finance and the FBR to refrain from withdrawing section 2 (14) (d) of the STA so that before the Finance Bill is passed by the National Assembly, requisite changes have been made in the Finance Bill. –Business Recorder