Taxes on renewable energy

Promoting clean energy sources

Huzaima Bukhari & Dr. Ikramul Haq

Our rulers blindly follow United States of America in most of those
matters, where their personal interests are involved, but not in areas
where public welfare can be achieved. In the wake of American Recovery and
Reinvestment Act of 2009, the US government achieved remarkable strides in
clean energy economy through favourable taxation and subsidies. The result
is dawn of a day when wind and solar energy is being produced at cost equal
to conventional sources like coal and natural gas. According to a report in
The New York Times, "the cost of providing electricity from wind and solar
power plants has plummeted over the last five years, so much so that in
some markets, renewable generation is now cheaper than coal or natural
gas." It is an extraordinary achievement is made possible through generous
subsidies and tax credits. The report says that "recent analyses show that
even without those subsidies, alternative energies can often compete with
traditional sources". This holds a bright future for renewable energy
sources.

While the US government has been showing to the rest of world the path to
clean energy solutions at compatible rates, the present government that
makes tall claim about solving energy crisis imposed exorbitant 32.5
percent taxes on import of solar panels with effect from July 1, 2014. In
the budget 2014-15, under the able (sic) guidance of Ishaq Dar, import of
solar panels were subjected to 17 percent sales tax, five percent import
duty, three percent value-added tax on commercial imports, and 5.5 percent
income tax (full and final liability) on landed value plus taxes—a
cumulative impact of 32.5 percent!

This move of our economic wizards surprised all, including the Alternate
Energy Development Board (AEDB) that has been stressing incentives for
solar and wind energy providers to overcome energy crisis in the country.
The government claimed that these taxes were imposed on the recommendations
of the Engineering Development Board (EDB) "to protect the local
manufacturers." This was a lame excuse—in July 2014 Pakistan had only two
manufacturers of solar panels and they were meeting hardly 5 percent of the
total demand for photovoltaic panels in the country. Even today, we do not
have a single solar panel manufacturing unit that can produce high-grade
panels required for solar tube-wells. Our worthy Finance Minister failed to
realise that the agriculture sector would be the worst hit with such heavy
taxation. Somebody imported at zero tax before the budget wanted to mint
money knowing many farmers were rapidly installing solar panels for pumping
out underground water for irrigation in the wake of 16-18 hours load-
shedding! They imported before imposition of taxes but supplied including
taxes!!

As usual, the Federal Board of Revenue (FBR) came up with a novel
explanation. In a statement issued on 26 July 2014, it said that: "The
customs duty and sales tax would be charged at statutory rate on the import
of some specific parts of solar panel which are identifiable as being
manufactured locally in view of the request of the indigenous engineering
industry. In order to rectify the impression that new duties/taxes have
been imposed on import of solar panels, it is clarified that this is not
the case. The fact of the matter is that a few importers were facing
problem in case of the exemption from payment of duties/taxes on import of
solar panel since the instant item is being manufactured locally. Under the
previous SRO 575(I)/2006, the condition of locally manufactured goods was
not applicable on import of Solar Panels and allied equipment. However,
this condition is now applicable in terms of Fifth Schedule of Customs Act,
1969 and Sixth Schedule of Sales Tax Act, 1990" ['No new duties imposed on
import of solar panels', Business Recorder, July 27, 2014].

FBR conveniently ignored and understandably concealed that "discretion"
under SRO was a lethal tool to mint money—a known mafia working in
collaboration with unscrupulous officers utilised it skilfully. They
furnished bank guarantees, passed on the tax burden on the consumers and
then paid nothing to FBR that released guarantees on "production of
certificates"! Mr. Dar and FBR stalwarts are fully aware of the fact that
on the imposition of taxes, the telecom industry expressed serious concerns
as their network deployment equipment, installed with solar panels became
expensive, affecting future roll out plans, and putting their investment in
the next generation spectrum for 3G/4G into snags. They were left with no
other option but to pass on 'extra burden' on their subscribers!

In 2006, the government announced tax breaks for the renewable energy
sector as part of a drive to supply off-grid parts of Pakistan with solar
energy. According to a 2011 report published by the International Energy
Agency, 38 percent of Pakistan's population lacks access to electricity
while the remaining 62 percent are forced to enjoy limited supply. We
import solar equipment from the United States, Germany, Japan, Britain and
China, among other countries. In the wake of imposition of taxes on these
imports, all independent solar power plants became expensive as they were
forced to increase their tariff to absorb tax and duties.

While our so-called "business-friendly" government was imposing irrational
taxes, Indian government decided not to impose antidumping duties on solar
cells imported from the US, China, Taiwan and Malaysia. India's Ministry of
Finance rejected a recommendation from the Directorate General of Anti-
Dumping and Allied Duties to impose antidumping duties on foreign-made
solar cells. The Directorate General had argued that imported PV equipment
was being sold in India far below the cost of production and was harming
local manufacturers. However, the Ministry of Finance determined that
antidumping duties would hurt the country's solar ambitions by making the
cost of solar power prohibitively expensive.

India, which has experienced severe power shortages in recent years and
whose imports of oil, natural gas and coal have ballooned, aims to have 20
GW of installed solar generation capacity by 2022. In June 2014, India's
Ministry of New and Renewable Energy (MNRE) published the results of a
market survey aimed at assessing the country's solar cell and module
production capacity and volume. The survey showed that Indian solar
producers "have a combined annual solar cell production capacity of 1,386
MW and a module production capacity of 2,756 MW." The MNRE has plans to
increase India's solar target many a times that include helping local
producers restart idled capacity.

Our wizards lack vision to develop renewable energy economy the way others
are doing. The National Electric Power Regulatory Authority (NEPRA) has yet
not granted permission to electricity consumers to set up solar or wind
power generation facility that can be bought by the distribution companies.
Draft rules, 'NEPRA Alternative and Renewable Energy Distributed
Generation/Net Metering Rules' are still under review. These will allow the
customers of any distribution company (DISCO) to establish renewable power
generating facilities that can be interconnected with the distribution
facilities. This would be done by either using a standard meter capable of
registering the flow of electricity in two directions, or two separate
meters, one for selling electricity to the DISCO and the other for
purchasing electricity from DISCO. These rules, if implemented, will
certainly promote and facilitate small and medium sized renewable energy
projects.

Our planners, struggling to revitalize ailing national grid, are not even
aware of the fact that in India, non-profit projects like Barefoot College
and Tata's Solar have already provided off-grid solutions to thousands of
remote villages. Our wizards have never bothered to study such innovative
models. They keep on talking about ambitious plans of adding 25,000-
30,000MW in the coming five years but lack funds for even one large hydel
project—Diamer-Bhasha. Our rulers are not interested in resource
mobilisation to make Pakistan a self-reliant country. They have nothing at
stake here—their enormous assets and economic interests are located abroad.
Our energy woes will continue unabated unless we make fundamental reforms
and structural changes to get rid of obsolete bureaucratic apparatus and
bad governance.

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The writers, partners in law firm, Huzaima & Ikram, are Adjunct Faculty at
Lahore University of Management Sciences (LUMS).