Independent Power Producers, including Chinese backed projects under the China Pakistan Economic Corridor, have raised concerns over a reinterpretation of Pakistan’s Income Tax Ordinance that could expose power companies to large retrospective tax liabilities and unsettle long established fiscal frameworks.
China Power Hub Generation Company has warned of a potential tax exposure of Rs 42.145 billion after receiving show cause notices for several tax years, following a ruling by the Appellate Tribunal Inland Revenue in the case involving Lucky Electric Power Company.
The notices, issued under Sections 122(9) and 122(5A) of the Income Tax Ordinance 2001, challenge the long standing treatment of Capacity Purchase Price and Delayed Payment Interest as tax exempt. The Federal Board of Revenue has reportedly concluded that CPP is not exempt under Clause 132 of Part I of the Second Schedule to the ordinance, while DPI has also been classified as taxable.
In correspondence with the Private Power and Infrastructure Board, CPHGC Chief Executive Officer Shi Zhenxing urged intervention, arguing that the reinterpretation reverses an established understanding under the IPP regime and constitutes a change in tax under the contractual framework governing power projects.
The company said CPP, DPI and Energy Purchase Price had consistently been treated as exempt since the inception of the IPP framework, and tax returns were filed without objection until the tribunal ruling in ITA No. 1064 KB 2025 triggered reassessment actions.
CPHGC traced its investment structure to the 2015 Power Policy, which sought to bridge Pakistan’s electricity supply gap and attract foreign capital through government guarantees and tax exemptions. Nepra issued an upfront tariff for coal based power projects in June 2014, followed by a Letter of Intent from PPIB in June 2015, a reference tariff in February 2016 and a Letter of Support in April 2016.
The company signed a Power Purchase Agreement with CPPA G and an Implementation Agreement with the President of Pakistan in January 2017, locking in the tariff framework for 30 years with indexation adjustments. The plant achieved commercial operations in August 2019 and has been supplying electricity to the national grid since.
CPHGC warned that the tax reinterpretation could erode protected Return on Equity and trigger contractual pass through claims under the change in tax provisions of the PPA. It said the development raises concerns about contract sanctity and policy predictability.
The company argued that any additional tax burden would ultimately be reimbursed by CPPA G under contractual mechanisms, meaning there would be no net fiscal gain for the government. However, it cautioned that the episode could send a negative signal to domestic and international investors.
CPHGC has asked PPIB to engage the Federal Board of Revenue, CPPA G and the Ministry of Energy to halt what it described as contradictory assessments and reaffirm the fiscal and contractual framework governing IPP investments, warning that failure to address the issue could trigger disputes and widespread claims across the power sector.
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