IPPs get tax exemption of Rs168 billion: audit report

ISLAMABAD: Official documents revealed that the owners of IPPs get tax exemption of Rs168 billion from the federal government.

In its latest annual report, the Auditor General of Pakistan revealed that the tax exemptions granted to the 224 owners of Independent Power Producers (IPPs) were not properly monitored. This lack of oversight has exposed weaknesses in the Federal Board of Revenue’s (FBR) control over these IPPs.

Section 53 (a) read with clause (132) of the Second Schedule to the Income Tax Ordinance, 2001 provides an exemption from payment of income tax to the profits and gains derived by a taxpayer from an Electric Power Generation project set up in Pakistan on or after the 1st day of July 1988 with the following conditions: –

I) The project must be owned and managed by a company registered under the Companies Act, 2017 or having its registered office in Pakistan.

II) The project is not formed by the splitting up, or the reconstruction or reconstitution, of a business already in existence.

III) The 50 per cent shares and control is not with the Federal Government, Provincial Government or Local Government.

IV) The exemption does not apply to oil-fired power plants set up between 22nd October 2002 and 30th June 2006 but shall apply to Dual Fuel (Oil/Gas) power projects set up on or after the first September 2005.

The audit observed that the government allowed tax expenditure on the taxable profit earned by the electric generation projects amounting to Rs 167,896 million during the FY-2018 to 2022 to the two hundred and twenty (220) taxpayers being assessed as Independent Power Producers given the fulfilment of above-stated pre-conditions.

Audit, however, further observed that after the emergence of the self-assessment system through the promulgation of the Income Tax Ordinance, 2001 all the completed returns of income are deemed to be assessment orders, which can only be re-opened after obtaining definite information regarding concealment of taxable income as per the law.

The completed return can also be re-opened, if the deemed assessment is prejudicial to the interest of revenue, or if the case of a particular taxpayer is selected for audit as per prescribed conditions under the law.

Audit observed that the detailed scrutiny of the NPOs in respect of the above referred condition was not conducted by the department. Therefore, the cases remained unattended and the taxpayers may have gained the benefit of exemptions against the provisions of the law.

Further, profit earned on bank deposits, capacity charges received by the power producers and dividend income need to be scrutinized for taxation under the law. Audit has repeatedly pointed out in previous years that above mentioned conditions are not being fulfilled by the power producers.

The audit further observed that the power producers availed tax exemption for an amount of Rs 168 billion. Despite such a huge expenditure on account of exemptions to IPPs the issue of power sector persists.

Audit suggests that the above tax expenditure may be monitored under the relevant law. Moreover, tax expenditure policy in respect of IPPs needs to be reviewed and interlinked with the power policy. The tax expenditure in respect of IPPs be monitored under the relevant law.

Moreover, tax expenditure policy in respect of IPPs be reviewed and interlinked with the power policy. A mechanism to ensure the monitoring of tax expenditure on IPPs has evolved.

Such a mechanism may include a certificate on 100 per cent production capacity utilisation by the concerned IPP and a subsequent audit by the FBR.

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