IPPs raise concerns over tax law reinterpretation affecting capacity payments

Independent Power Producers (IPPs) have raised concerns over a revised interpretation of the Income Tax Ordinance (ITO), saying the change could affect the tax treatment of capacity payments and expose the power sector to additional financial obligations, Business Recorder reported. 

Saif Power Limited has approached authorities seeking clarification and resolution of the issue, following similar concerns expressed by other producers, including China Power Hub Generation Company and Engro Powergen.

In a letter to the government, Saif Power referred to its earlier communication dated February 17, 2026, which highlighted pending sales tax refunds and requested expedited processing to maintain liquidity ahead of the summer demand season.

The company said the revised interpretation could alter the tax framework governing IPPs and affect the fiscal structure underlying its Power Purchase Agreement signed on April 30, 2007, and the Master Agreement dated February 11, 2021.

The issue arises from a recent decision by the Appellate Tribunal Inland Revenue in the case of Lucky Electric Power Company versus Commissioner Inland Revenue (ITA No. 1064/KB/2025). The tribunal reinterpreted Clause 132 of Part I of the Second Schedule to the Income Tax Ordinance, 2001.

According to Saif Power, the ruling challenges the long-standing tax treatment under which capacity payments received by IPPs were exempt from income tax.

Following the decision, the company said it received a notice on February 23, 2026, under Section 122(9) of the Income Tax Ordinance for Tax Year 2024, proposing amendments to completed assessments by applying minimum tax on the company’s annual turnover.

Saif Power said it disagrees with the interpretation and intends to challenge the notices through the relevant legal forums.

The company argued that the proposed tax treatment contradicts commitments outlined in its Implementation Agreement of July 13, 2007, and its Power Purchase Agreement, which formed the basis for its investment.

Under the PPA, any reinterpretation or change in the application of tax laws by a public sector entity after the signing of the agreement is considered a “Change in Tax”. In such cases, producers are entitled to relief under Article 14 of the agreement.

Saif Power noted that if the reinterpretation is implemented, any additional tax liability on capacity payments or minimum tax on turnover would qualify as a change in tax event and could be passed through to the Central Power Purchasing Agency (CPPA-G).

The company stated that such a mechanism would mean that additional taxes collected by the Federal Board of Revenue would ultimately be reflected in electricity tariffs, increasing costs for consumers and potentially affecting grid demand.

It also warned that higher tariffs could add pressure to the power sector’s circular debt and undermine recent efforts to stabilise the sector’s finances.

Saif Power has urged the Private Power and Infrastructure Board to engage with the Federal Board of Revenue, CPPA-G and the Ministry of Energy (Power Division) to address the issue.

The company said it remained committed to resolving the matter through consultation while maintaining contractual commitments and investor confidence in the power sector.