The PML-N government has taken credit for withdrawing the major part of a purported Rs477bn worth of tax exemptions under the recent IMF programme. But tax exemptions now appear to be creeping in again, to support the CPEC Programme.

Under a systematic scheme, tax exemptions were first introduced in road projects and then extended to Thar-based power projects.

This was followed by similar facilitations to the metro-train project for Lahore. The journey of tax exemptions now seems to be reaching major hydropower projects, although a formal approval is awaited.

The total impact of these exemptions is estimated at around Rs180-200bn when compared to about Rs330bn, mostly of a discretionary nature, withdrawn over the 36 months of the IMF programme. For example, the relief to the metro-train projects is estimated between Rs76-80bn and that to hydropower projects at Rs50bn.

The difference, however, is that past exemptions had a recurring impact on the country’s revenue stream while the CPEC-related exemptions will expire with the completion of the specific projects.

Early this month, the government allowed a Rs20bn tax relief to the Lahore Orange Line Metro Train Project (LOLMTP). To avoid political controversies and ensure fairness, the government announced the same benefits would also be available to three future projects of similar nature in Karachi, Quetta and Peshawar.

Relevant quarters are now working to allow Chinese companies exemptions from general sales tax on the construction of CPEC-related hydropower projects

The announcement said the ECC granted exemptions from withholding tax beyond 6pc of the E&M (electrical and mechanical) contract price, and from tax/duties on LOLMTP equipment import.

The LOLMTP commercial contract envisaged a withholding income tax at the rate of 6pc, applicable at the time of bidding, in the bid price for E&M works and contract price. The contract required the employer to be responsible for payment of balance due to increase in income tax/withholding rate in accordance with the regulations of Pakistan.

“Unless otherwise stated, the contractor would be exempted from all obligations or responsibilities for the payment of all the other Pakistani taxes arising out of the contract, such as sales tax and contract tax,” the contract read.

Based on this contract requirement, the Punjab government reported to the federal government that it was required to pay about Rs20bn to the contractors in the form of taxes and duties on the import of equipment for the train project. The provincial government said that unless waived, the liability would have to be borne by the provincial government as a charge on the Provincial Consolidated Fund.

It stretched its arguments from tax exemptions being allowed in case of road projects of the National Highway Authority under the CPEC and demanded similar benefits also be extended to the LOLMTP contractor by extending exemptions from withholding income tax beyond 6pc of the E&M contract price. Hence, exemption from all tax amounts including, but not limited to, income taxes, withholding taxes, sales taxes, custom duties and taxes on import of equipment.

Encouraged by this, relevant quarters are now working to allow Chinese companies exemptions from general sales tax (GST) on construction of hydropower projects being developed by them under the CPEC.

The case is being prepared for at least three major hydropower projects with a cumulative generation capacity of over 2,700MW from among the CPEC priority list. The cumulative impact of GST waiver on these three projects is estimated to be around Rs50bn and is aimed to facilitate their implementation, which is currently at very early stage.

The move would improve cash flows of major investors like the China Gazhouba Group and China Three Gorges Corporation, they said.

Proponents lean on Clause 4 of the CPEC framework agreement under which Pakistan promised it would ensure all preferential conditions to China that it may have extended to any other investor.

This meant that hydropower projects being developed by Chinese firms also qualify for the same tax benefits that have been extended to Thar coal, mass transit projects in four major cities and the infrastructure projects of the National Highway Authority.

The hydropower projects to qualify for these GST exemptions at this stage have been identified as $1.9bn worth of 720MW Karot Hydropower Project on the Jhelum river on the boundary of Azad Kashmir and Punjab; Khyber Pakhtunkhwa’s 870MW Suki Kinari Hydropower Project on the Kunhar river, a tributary of Jhelum; and more than $2.5bn of 1,100MW Kohala Hydropower Project on the Jhelum river in Azad Kashmir.

Published in Dawn, Business & Finance weekly, January 23rd, 2017