Disruptive measures: Diesel-run IPPs face cash-flow problems after tax hike
Unable to pass on increase in cost to consumers; four plants suffer losses.
Every day, millions of rupees are draining out of the four independent power producers (IPPs) as they are paying higher sales tax on HSD but are not allowed to include it in power tariff. STOCK IMAGE
KARACHI:
The government’s decision to increase sales tax on high speed diesel (HSD) without considering its repercussions has created a cash-flow crisis for power plants which use the fuel, officials told The Express Tribune.
Every day, millions of rupees are draining out of the four independent power producers (IPPs) – Halmore Power, Orient Power, Saif Power and Sapphire Electric – as they are paying higher sales tax on HSD but are not allowed to include it in power tariff.
“I don’t understand the logic behind this decision,” said an official. “There are already so many issues and yet government officials take decisions without giving any thought to the consequences.”
These four IPPs are primarily designed to run on gas. But due to its severe shortage, they have been running on HSD, a secondary fuel, for almost two years. The fuel is primarily meant for the transport sector.
Effective from January 1 this year, the government, through the Federal Board of Revenue (FBR), increased sales tax on HSD to 22% from 17%, and then in subsequent days it was further increased up to 37%.
This should not have been a problem since under airtight power purchase agreements, all such costs are passed on to power consumers.
But in this case the sales tax on electricity generation was retained at 17%, leaving a 20% cash gap for the IPPs.
“Our invoices for this higher sales tax are not being accepted by the power purchaser (National Transmission and Distribution Company),” said the official.
The matter of tax and power tariff is defined under the law. While the FBR can easily change tax on HSD through an SRO, its impact on power tariff could only be adjusted through a decision of the cabinet’s Economic Coordination Committee (ECC).
“I don’t know what is taking them so long,” lamented the official. Interestingly, the government had not increased sales tax on furnace oil, saying it is being used for power generation.
The retail price of HSD has been cut a couple of times in the last few months following a crash in oil prices around the world.
Sales tax, which is collected as a percentage of retail price, was increased to make up for the loss in the FBR’s revenues.
While the four IPPs will ultimately be compensated, it is the opportunity cost and the long wait that hurt them the most.
Businesses tend to avoid getting bogged down in the hassle to get sales tax refunds. Refunds of the electricity sector alone are close to Rs100 billion.
“They are stuck with the FBR for many years and are not expected to be released anytime in the near future because of a shortfall in collection targets.”
Industry people say the Ministry of Water and Power has drafted a summary in this regard for the ECC’s approval. Its secretary, Younus Dagha, confirmed that the summary has been submitted and the ECC will probably take a decision in the next 15 days.
Published in The Express Tribune, April 3rd, 2015.
The government’s decision to increase sales tax on high speed diesel (HSD) without considering its repercussions has created a cash-flow crisis for power plants which use the fuel, officials told The Express Tribune.
Every day, millions of rupees are draining out of the four independent power producers (IPPs) – Halmore Power, Orient Power, Saif Power and Sapphire Electric – as they are paying higher sales tax on HSD but are not allowed to include it in power tariff.
“I don’t understand the logic behind this decision,” said an official. “There are already so many issues and yet government officials take decisions without giving any thought to the consequences.”
These four IPPs are primarily designed to run on gas. But due to its severe shortage, they have been running on HSD, a secondary fuel, for almost two years. The fuel is primarily meant for the transport sector.
Effective from January 1 this year, the government, through the Federal Board of Revenue (FBR), increased sales tax on HSD to 22% from 17%, and then in subsequent days it was further increased up to 37%.
This should not have been a problem since under airtight power purchase agreements, all such costs are passed on to power consumers.
But in this case the sales tax on electricity generation was retained at 17%, leaving a 20% cash gap for the IPPs.
“Our invoices for this higher sales tax are not being accepted by the power purchaser (National Transmission and Distribution Company),” said the official.
The matter of tax and power tariff is defined under the law. While the FBR can easily change tax on HSD through an SRO, its impact on power tariff could only be adjusted through a decision of the cabinet’s Economic Coordination Committee (ECC).
“I don’t know what is taking them so long,” lamented the official. Interestingly, the government had not increased sales tax on furnace oil, saying it is being used for power generation.
The retail price of HSD has been cut a couple of times in the last few months following a crash in oil prices around the world.
Sales tax, which is collected as a percentage of retail price, was increased to make up for the loss in the FBR’s revenues.
While the four IPPs will ultimately be compensated, it is the opportunity cost and the long wait that hurt them the most.
Businesses tend to avoid getting bogged down in the hassle to get sales tax refunds. Refunds of the electricity sector alone are close to Rs100 billion.
“They are stuck with the FBR for many years and are not expected to be released anytime in the near future because of a shortfall in collection targets.”
Industry people say the Ministry of Water and Power has drafted a summary in this regard for the ECC’s approval. Its secretary, Younus Dagha, confirmed that the summary has been submitted and the ECC will probably take a decision in the next 15 days.
Published in The Express Tribune, April 3rd, 2015.