Islamabad – While taxpayers are feeling the burden of high tax rates, it has come to light that Independent Power Producers (IPPs) have enjoyed significant tax breaks totaling Rs1.217 trillion from the mid-1990s to the fiscal year 2023-24.
These tax exemptions for IPPs are in addition to capacity payments, which are projected to reach Rs2.091 trillion this year. The IPPs, owned by 40 influential families connected to the power corridors, have benefitted from these exemptions, whether they are domestic or foreign companies. These companies have been exempted from corporate taxes on profits earned from electric power plants established after July 1, 1988.
Since then, both democratic and autocratic governments have rolled out around five power policies, resulting in the establishment of 106 IPPs, all granted lifetime tax exemptions.
Capacity Payments on the Rise
In the current fiscal year, capacity payments are expected to exceed Rs2 trillion, and official records show that the government used to disclose the value of tax exemptions for IPPs in economic surveys until 2018-19. However, once the exemption amounts increased, the government began concealing this information by lumping it together with other sectors.
Impact of Tax Exemptions
Renowned economist Dr. Hafeez Pasha estimated that the tax exemptions for IPPs from the mid-1990s to 2017-18 were worth around Rs1 trillion. He highlighted that IPPs benefited from a favorable pricing mechanism where the government covered their capacity charges and fuel costs, reducing market risks. This led to the rapid establishment of IPPs, with some enjoying a 25-30% return on equity.
Growth of IPPs Over the Years
Between 1988 and 2002, five major IPPs were established, with only one, Hub Power Company, still operating under the same concessions. During General Pervez Musharraf’s rule, 10 more IPPs were set up between 2002 and 2008. The PPP government (2008-2013) added another 10, and the PML-N government (2013-2018) significantly increased the number to 55. From 2018 to 2023, 40 more IPPs were established under the PTI and PDM governments.
Fluctuating Exemption Values
According to data from economic surveys, the tax exemption for IPPs was around Rs51.5 billion from 2014 to 2016, but it dropped to Rs18 billion from 2017 to 2019. The government did not explain this decrease. In FY20, the exemptions rose to Rs26.88 billion and further increased to Rs47.528 billion in FY21. The spike in exemptions was linked to the establishment of more power plants. In FY22, the exemptions decreased to Rs37.45 billion following renegotiation of IPP contracts by the PTI government. The exemptions climbed again to Rs56.02 billion in FY23 but dropped to Rs30.23 billion in FY24.