Income tax exemption for gas-fired power plant sought

ISLAMABAD (January 10 2005): The Private Power Infrastructure Board (PPIB) has recommended to the government that income tax exemption may be extended to those gas fired power plants, which intend to use dual-fuel option (furnace oil + gas) due to non-availability or less availability of gas, reliable sources in the Petroleum Ministry have indicated.

“Government should extend income tax exemption to those gas-based power plants, which also want to operate on oil due to non-availability or limited availability of gas,” sources quoted a document of the PPIB.

The PPIB in its document said that 'power policy' of 2002 provides a set of fiscal incentives to the power projects. One of these incentives was the exemption from income tax, including turnover rate tax and withholding tax on imports.

However, in order to encourage the power projects based on indigenous resources, the oil-fired power plants have been excluded from the income tax exemption. The said exemption has already been incorporated in the Income Tax Ordinance 2001, Second Schedule, and Section 132.

The Ministry of Petroleum has indicated that the availability of gas to power generation projects can be ensured only up to 2011, and that too, in extremely limited quantities. In the SNGPL system, gas would be available to the new IPPs on a nine-month basis. Likewise, the SSGC would be able to supply only 80 MMCFD of gas to the new IPPs, from 2007-2011.

In the light of limited availability of gas for thermal power generation and the sharp increase in electricity demand in central Punjab and Karachi, it was imperative to find a practical solution to address the power needs of the country in a timely manner.

The PPIB has suggested that one way to deal with this problem would be to set up power plants that were capable to operate on dual-fuel, ie gas and liquid fuel (furnace oil, HSD, etc).

Unfortunately, this was not the ideal solution as it reduces the efficiency of the plants and increases the cost of generation. However, the lenders and investors would not finance the project unless the fuel supply is secured on long-term basis (15-20) years.

Under these circumstances, the dual-fuel option appears to be the only pragmatic solution to make the IPPs financeable on long-term basis, the board argued.

However, the board said that as it was mentioned earlier, the income generated by IPPs through oil-based generation would become taxable, which would have two distinct disadvantages:

(i) There would be complications in the computation of taxable income that belongs to the oil-based power generation, and

(ii) The impact of income tax would be passed on to the consumers in the form of higher generation cost/tariff.

The board said that it appears logical that tax exemption be extended to include the dual-fuel power plants that are forced to operate on oil, due to the non-availability or limited availability of gas.

The summary is likely to be submitted to the Economic Co-ordination Committee of the Cabinet (ECC) very shortly.

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