IPP Tax Ruling Sparks Alarm in Power Sector

Independent Power Producers warn that a tribunal’s reinterpretation of tax exemptions on capacity payments could increase electricity tariffs and expose Pakistan’s power sector to new financial risks.

Independent Power Producers in Pakistan are raising concerns over a recent reinterpretation of the Income Tax Ordinance that could significantly alter the financial framework governing the power sector. 

Companies including Saif Power Limited have approached government authorities seeking urgent intervention after a tribunal ruling challenged the long-standing tax treatment applied to capacity payments under existing power purchase agreements.

Saif Power Limited said the reinterpretation could materially change the taxation regime applicable to Independent Power Producers operating in Pakistan’s power market. 

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The company warned that the revised interpretation may also disrupt the fiscal assumptions underlying its Power Purchase Agreement signed on April 30, 2007, and the Master Agreement dated February 11, 2021.

In a letter addressed to the government and relevant regulators, the company referred to its earlier correspondence dated February 17, 2026. In that communication, Saif Power Limited had highlighted delays in receiving sales tax refunds and requested expedited processing to maintain adequate cash flows ahead of the summer demand season.

The latest concern stems from a ruling issued by the Appellate Tribunal Inland Revenue in the case of Lucky Electric Power Company versus Commissioner Inland Revenue. The tribunal’s decision reinterpreted Clause 132 of Part I of the Second Schedule to the Income Tax Ordinance, 2001. According to the ruling, the long-standing income tax exemption historically applied to capacity payments may no longer be valid.

Capacity payments form a core component of Pakistan’s power purchase structure. These payments compensate power plants for maintaining generation availability regardless of electricity dispatch levels. According to the Ministry of Energy’s Power Division data, capacity payments accounted for more than Rs1.9 trillion in fiscal year 2024, reflecting rising installed generation capacity across the system.

The exemption from income tax on capacity payments has been consistently applied since the early 1990s when Pakistan introduced the Independent Power Producer model to address severe electricity shortages. That policy framework attracted billions of dollars in foreign investment under long-term contracts backed by sovereign guarantees.

Saif Power Limited’s chief financial officer said the tribunal’s reinterpretation effectively denies the tax treatment historically recognized across the entire IPP sector. The company added that such a shift could trigger significant contractual implications under existing agreements signed with the government.

Following the tribunal decision, Saif Power Limited said it received a notice dated February 23, 2026 under Section 122(9) of the Income Tax Ordinance for tax year 2024. The notice proposes to amend previously completed assessments by imposing minimum tax on the company’s annual turnover.

The company rejected the proposed interpretation and said it intends to challenge the notices before appropriate statutory and judicial forums. The CFO stated that the revised treatment conflicts with sovereign commitments reflected in the Implementation Agreement dated July 13, 2007 and the Power Purchase Agreement that formed the basis of the project’s investment decision.

The company argued that the reinterpretation constitutes a “Change in Tax” under Article 1 of the Power Purchase Agreement. Under the agreement’s provisions, any reinterpretation or modification of tax laws by a public sector entity after the agreement date qualifies as a change in tax event.

If such a change occurs, the agreement entitles the company to financial relief under Article 14 of the PPA. Any additional tax burden arising from the reinterpretation would therefore be treated as a pass-through cost recoverable from the Central Power Purchasing Agency Guarantee Limited, which purchases electricity on behalf of distribution companies.

Industry analysts say this mechanism means the federal government would gain little fiscal benefit from collecting additional taxes from IPPs. Instead, the increased tax burden could be passed through to electricity consumers through higher tariffs.

Pakistan’s power sector already faces severe financial pressure due to rising capacity payments and the accumulation of circular debt. According to the Ministry of Energy, circular debt in the power sector exceeded Rs2.6 trillion by late 2025 despite several reform initiatives and tariff adjustments.

Higher taxation on power producers could further increase electricity tariffs and potentially weaken electricity demand in an economy already grappling with high energy costs. Analysts note that industrial electricity tariffs in Pakistan are among the highest in South Asia, affecting export competitiveness and manufacturing growth.

Saif Power Limited has urged the Private Power and Infrastructure Board to intervene and facilitate dialogue between the Federal Board of Revenue, the Central Power Purchasing Agency, and the Ministry of Energy. The company said timely intervention is necessary to prevent financial uncertainty and protect investor confidence, particularly among foreign investors who financed several power projects.

The development comes as Pakistan continues efforts to restructure its power sector under reforms encouraged by international lenders. The government has recently renegotiated several power purchase agreements with Independent Power Producers to reduce capacity charges and contain the growth of circular debt.

Industry stakeholders warn that unexpected changes in the tax treatment of power contracts could undermine those reform efforts by raising concerns about contractual stability and policy consistency.

Saif Power Limited reiterated that it remains committed to resolving the matter through constructive engagement with authorities. The company emphasized that preserving contractual sanctity and maintaining investor confidence remain essential for sustaining investment in Pakistan’s electricity infrastructure and ensuring long-term stability in the country’s power sector.