ISLAMABAD: The government has waived 12.5% tax on the income of a Chinese company laying a power transmission line by overruling the tax authorities that are already reeling from the impact of massive tax exemptions offered under the China-Pakistan Economic Corridor (CPEC) programme.
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The Economic Coordination Committee (ECC) of the cabinet approved on Wednesday a proposal, seeking exemption from withholding tax on dividends from the $1.76 billion Matiari-Lahore transmission line project, said the Ministry of Finance.
The decision was in line with the government’s policy of treating Chinese investors in the most favourable manner, but it carried grave consequences for the country’s weak fiscal position.
Special Assistant to Prime Minister on Revenue Haroon Akhtar Khan and Federal Board of Revenue (FBR) Chairman Dr Mohammad Irshad opposed the waiving of 12.5% withholding tax on the dividend income of State Grid Corporation of China (SGCC), which was building the transmission line, said sources after the ECC meeting. They were simply overruled.
A summary prepared by the Ministry of Water and Power was silent on exact impact of the tax exemption on FBR revenues, but sources said it would be in billions of rupees.
It was the second time in the past 10 days that the government took the tax exemption summary to the ECC, showing its desperation to provide preferable treatment for the Chinese company.
Sources insisted that the ECC’s seal of approval was simply a procedural formality as the decision to give tax exemption had already been taken in Beijing in December last year.
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A special meeting for CPEC energy projects, held in December in Beijing, decided that preferential policies covering the CPEC energy projects would also be applied to the Matiari transmission line project. Secretary to Prime Minister Fawad Hasan Fawad and Water and Power Secretary Younus Dagha had attended the meeting.
Rough estimates suggest so far over Rs160 billion or $1.5 billion worth of tax exemptions have been given to CPEC-related projects, according to FBR sources.
These include tax exemptions of Rs80 billion for four mass transit projects. Pakistan’s tax-to-GDP ratio would further go down once CPEC projects became fully operational, said FBR sources.
They said the FBR was facing criticism due to wrong fiscal policies of the government.
The Matiari transmission line is being laid as part of CPEC and was originally part of the actively promoted projects. The tax on dividend income has been waived to ensure minimum 17% internal rate of return (IRR) on Chinese investment in the transmission line project.
“The impact of 12.5% withholding tax on dividend for CET (China Electric Power Equipment and Technology Company), which is a subsidiary of State Grid Corporation of China, in its IRR is around 1.6%,” said the Ministry of Water and Power.
To facilitate the Chinese company, the ECC last year issued guidelines to the National Electric Power Regulatory Authority (Nepra), asking it to allow recovery of the tax from consumers directly or set the IRR at 17% by adjusting the impact of the tax.
The ECC also asked Nepra to allow return on equity during construction phase from the start of construction to project commissioning, which experts said was a highly controversial decision.
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Nepra subsequently allowed payment of profit to the Chinese company during project construction, but it did not accept the guidelines on recovering the tax from consumers. The Ministry of Water and Power contested Nepra’s stance, saying the regulator had already treated coal-fired power plants in a similar way. In its summary, the ministry argued that the CPEC agreement offered the “most preferable conditions to Chinese Investors and such conditions will not be inferior to any third country”.
The ECC approved allocation of $25 million for the National Disaster Risk Management Fund.
The Economic Affairs Division (EAD) has set up the fund to support disaster risk financing instruments that can enhance country’s resilience to natural calamities.
Published in The Express Tribune, February 23rd, 2017.
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