ISLAMABAD: The Federal Board of Revenue (FBR) has protested against a waiver of withholding tax (WHT) on dividends allowed last week by the government to a Chinese company for setting up of $1.5 billion Matiari-Lahore Transmission Line Project.

Informed sources said another transmission line of the size and length of 878-kilometre Matiari-Lahore line was being envisaged by the power ministry to evacuate future power generation from Thar-based plants and the same tax breaks would need to be extended to that line, too.

Informed sources said the Ministry of Water and Power claimed last week at a meeting of the Economic Coordination Committee (ECC) of the Cabinet that a three-member committee comprising secretaries of water and power, finance, and FBR chairman reached a consensus to allow exemption from WHT on dividends to the transmission line project.

In a record two-page summary to the ECC, the power ministry said Finance Minister Ishaq Dar had directed the secretary water and power to examine the issue holistically, in consultation with secretary finance and the FBR chairman, and resubmit the case to the ECC for a policy decision.

The summary said the three stakeholders met on Feb 16 and recommended the ECC to allow exemption from WHT on dividends to transmission line projects under the Transmission Policy 2015.

However, FBR chairman Dr Irshad Ahmad raised his hands during the meeting and put on record that the FBR had not accepted the proposal. He said the FBR could not support the tax exemption because it would be a major loss to its revenue targets, an official told Dawn.

He was supported by prime minister’s adviser on revenue Haroon Akhtar Khan, who said it was unfair to put the burden of responsibility on the FBR when the key stakeholder — the National Electric Power Regulatory Authority (Nepra) — had declined to allow WHT on dividends in transmission line tariff.

On this, Mr Dar deplored that the matter was being made controversial which could delay the project implementation which was crucial for transfer of electricity from the south of the country to Punjab.

An official privy to the developments explained that Nepra had also put on record that it had now recommended exemption of WHT as claimed by the power ministry in its summary and had in fact refused to allow it to be made part of the tariff.

These sources said the Chinese company had already accepted the tariff approved by the regulator. They said a previous meeting of the ECC had directed that the contract should only be given to the Chinese company if it unconditionally agreed to the Nepra determined tariff.

These sources pointed out the contract did not fell in the definition of government-to-government agreement that could provide the ground for negotiated agreement as required under the rule 5 of the procurement rules. The China Electric Power Equipment Technology was a commercial organisation and did not fall under the definition of government-to-government contract.

The sources said the ECC issued policy guidelines to Nepra on Dec 20, 2016 to allow withholding tax on dividends as a pass-through item in the tariff to gross up net internal rate of return (IRR) at 17 per cent on equity and also return on equity (RoE) during construction, from the actual date when construction starts to the beginning of commercial operations.

Nepra accepted the directive related to the RoE during construction, but it neither allowed withholding tax on dividends as a pass-through item nor did it increase RoE to provide 17 per cent net of tax IRR for the upfront tariffs for coal.

However, since the government had allowed WHT exemption to the shareholders of coal projects in Sindh, as per clause 78 of part IV (schedule II) of the Income Tax Ordinance of 2001, which could be extended to the transmission line for evacuation of power from those projects.

Therefore, the government allowed tax exemption on dividends because the project was considered critical due to tight timelines and vital importance to evacuate power from the projects already under construction.

Published in Dawn, March 1st, 2017