Alternative energy tax incentives for investors
Pakistan has an abundance of natural resources that are yet to be tapped. With its growing population and rising demands for electricity, Pakistan currently faces a shortage in power supplies. As most electricity is produced from fossil fuels, the population bears high tariffs for the purchase of electricity.
Given these difficulties, Pakistan urgently needs investment in its alternate energy sector, including power from wind, hydro and solar sources. Pakistan’s location, abundant natural resources, and high electricity demands make the country a potential goldmine for investors in the sector. Further, Pakistan’s government has adopted numerous measures to attract foreign investors and protect them from risk.
Pakistan offers generous tax incentives to investors in the power sector:
- Indirect tax relief – Sales tax (VAT) and customs duty are reduced to zero for machinery, equipment and spares (including construction machinery, equipment and specialized vehicles imported on a temporary basis) meant for the initial installation or for balancing, modernizing, maintaining, replacing or expanding projects for power generation using renewable energy resources (i.e. small hydro, wind and solar), subject to conditions.
- Tax relief for start-ups – For income tax purposes, where a company sets up an industrial undertaking for installation of any plant machinery or equipment to be used to generate alternate energy, accelerated depreciation of 90 percent is allowed for the first year of operations. Further, a 100 percent income tax credit is allowed to a newly established industrial undertaking for the first five years of its operations. These incentives are allowed in addition to a general income tax exemption on profits and gains for taxpayers engaged in the electric power generation and exemption from minimum tax on turnover.
- Other incentives – The 10 percent income tax on dividends is reduced to 7.5 percent for dividends distributed by a company set up for power generation. Power generating companies also are exempt from the advance income tax that otherwise applies to imports. Further, foreign investors are allowed repatriation of equity along with dividends as per rules, regulation and procedures prescribed by the State Bank of Pakistan (SBP). The SBP also allows the power producers to maintain special foreign currency account for purposes of payment to foreign vendors against insurance, debt payments, dividend payments etc.
- Risk cover – Pakistan’s government guarantees payment obligations under energy purchase agreements (EPA) and provides additional safeguards in the event of privatization of any power purchaser or other public sector entity. The energy purchase price tariff allows investors to recover their investment along with profit during the life of the contract. As a matter of policy, Pakistan also provides protection against imposition of taxes and duties.
Shift toward tax compliance culture
For the first time, in February 2014, the government of Pakistan made public the names of the country’s top 100 taxpayers of the country in four categories: salaried individuals, non-salaried professionals, partnership firms and companies. Winners (including CEOs of the corporate entities) will be issued privilege and honor cards, and the move is expected to contribute to voluntary tax compliance.
In addition, the government increased the period of amnesty from audit, additional tax and penalties where tax returns were not filed for the preceding years. Taxpayers can take advantage of the amnesty by paying a certain amount of tax for each preceding year and filing a return by 30 April 2014.