Two hydropower projects of cumulative capacity of 1824.7MW being established in Azad Jammu and Kashmir (AJ&K) have raised serious concerns on proposed withdrawal of tax exemptions including imposition of 17 percent GST on import equipment and machinery.
Li Xiaotao, Chief Executive Officer, Azad Pattan Hydropower Project and Zhang Jun CEO/Team Leader Kohala Hydropower Project have written letters to Special Assistant to Prime Minister on CPEC Khalid Mansoor and conveyed their concerns over the proposed amendments through Finance Supplementary 2021-22.
The 1124MW Kohala Hydropower Project in AJ&K is the largest foreign direct investment of CPEC in AJ&K with estimated investment of $2.5 billion. All the principal documents of the project including GoP Implementation Agreement, AJK Implementation Agreement, Power Purchase Agreement and, Water Use Agreement have already been signed. Private Power Infrastructure Board (PPIB) has extended the LoS which is valid till Sept 30, 2022, and the Company is making efforts to arrange financing for the project in a timely manner.
According to CEO of the company, GOAJK has not yet adopted the ECC decision of 1% final and fixed tax on the offshore procurement contract for Kohala HPP. The issue was; however, recently discussed in the company’s Board meeting. The Board desired that issue of adoption by GOAJK of the ECC decision related to 1% fixed and final withholding tax on the offshore procurement contract for Kohala be resolved without any further delay so that project can move forward.
According to him, the Finance (Supplementary) Bill, 2021, was presented in the National Assembly on December 30, 2021 for approval. The Bill has not yet been passed by the National Assembly but is likely to be passed after second week of this month. Some major changes have been proposed in the sales tax laws which will affect the Kohala HPP.
CEO, Kohala maintained that the proposed withdrawal of exemptions will result in imposition of 17% sales tax on all imports, resulting in not only cash flow impact, but will also increase tax and financing cost as it will not be possible to get it adjusted as input tax post-COD. The 17 per cent tax on imports will adversely impact Kohala HPP as the Bill is likely to be adopted as such by AJ&K.
“For Kohala HPP, it is extremely difficult to arrange financing as project is located in AJK; further more due to rising circular debt and negative outlook of Pakistan power sector lenders are shy in providing financing for power projects in Pakistan/ AJK. Any increase in tax will result in an increase in financing which will be difficult to arrange at this juncture,” he said, requesting CPEC Authority to urgently resolve the issue of the adoption by GOAJK of the ECC decision of 1% fixed and final tax on offshore procurement contract for Kohala HPP.
SAPM on CPEC has been requested to use his good offices to prevent imposition of 17% sales tax on all imports as proposed in the Finance (Supplementary) Bill 2021 as it will adversely impact in further processing of Kohala HPP which is under the CPEC.
CEO, Azad Pattan HPP, in his letter has stated that the GoP has presented a Finance (Supplementary) Bill 2021 (the Finance Bill) proposing amendments to Pakistan tax laws including withdrawal of Sales Tax exemption on import of machinery, equipment and spares for initial installation in hydel power generation projects, which will become effective on the next day of the assent given by the President of Pakistan.
The 700.7MW Azad Pattan (CPEC) Hydropower Project located on the River Jhelum in the AJ&K being developed under the GoP’s Policy for Power Generation Projects 2002 is due to achieve financial closing/construction start on or before December 31, 2022 and achieve commercial operations in 2027 to meet Pakistan’s demand for energy as planned under IGCEP 2030.
Azad Pattan Power (Pvt) Ltd is being developed under the power policies which allow exemption from Sales Tax for importation of machinery, equipment and spares for power generation projects. The Company has already executed all the concession documents, including the GoP Implementation Agreement (the GoPIA), which under Section 9.3 (a), extends the Power Policy exemption from Sales Tax on import of machinery and equipment for production of electricity.
According to Li Xiaotao, financial closing of the project is well advanced and, other than Sinosure coverage which has been impacted by state of Pakistan’s power sector, project financing of $ 1.540 billion is already locked-in with the Finance Facility Agreement executed with the consortium lenders on December 31, 2021.
The proposed change to levy sales tax on imported machinery, equipment and spares will cause a default under the GoP IA, and lead to an immediate funding shortfall, abort and disrupt the financial closing process and create a mismatch in the NEPRA determined tariff. Thus, the whole financing structure and risk profile of the sponsors will be disturbed and could lead to failure of the project, he added.
Azad Pattan CEO maintained that not questioning the right of the GoP to initiate legislative changes, the effective date for such amendments in tax laws needs to be carefully considered to synchronize with project development fundamentals, GoP obligations and timelines to ensure that such changes do not cause GoP default or project failure.
He has requested relevant authorities to continue such concession for power generation projects that have issued Letter of Support (LoS) on or before June 30, 2021.