Investors in the energy sector enjoy various incentives including a zero rate of import duty and value-added tax (VAT) exemption on renewable energy equipment; exemption from tax on interest paid on loans from foreign sources; exemption from payment of stamp duty in respect of certain instruments; and exemption from withholding tax on payments made to a non-resident for specific services rendered under a power purchase agreement.
Surprisingly, in addition to the tax reliefs which had earlier been announced by the government, the Bill also contained tax measures unrelated to Covid-19 which were geared towards reversing tax exemptions, including some specific to the energy sector.
The exemption had enabled investors in the power sector to extract profits without incurring a penalizing tax which effectively claws back the tax savings generated from the other incentives granted.
Ironically, for existing energy producers who have robust ‘change in tax’ provisions in their contracts, they may come out of this with a whole skin as the government or off-taker would be required to cushion them from the additional tax costs.
The removal of the tax incentives has been greeted with disappointment by energy investors and it is to be hoped that they seized the opportunity to voice their concerns during the public participation consultations on the Finance Bill.
