Government to refund Rs 1m/MW VAT to power projects

The Finance Ministry decided to refund Rs 1 million — from the VAT the power producers pay — on every megawatt (MW) of power generation to encourage the private power developers but they said it as a ‘token’ only.
“Independent power producers have been asking for a complete VAT exemption on the materials they use for civil works,” said president of Power Producers’ Association, Nepal (IPPAN) Subarna Das Shrestha.
“The government has, however, decided to refund only Rs 1 million of the VAT paid,” he said, adding that a megawatt power generation generally costs Rs 150 million. Out of the total cost, some 60 per cent goes on civil works that uses materials like cement attracting VAT.
“If the government exempts complete VAT on materials, it will come to around Rs 11.9 million roughly,” he said, adding that the Finance Ministry decision is just one tenth of what the private power producers have been asking for.
If there is no guarantee on return, why should the private sector invest on any project, he asked, adding that the exemption will not ensure the rate of return that could attract more investors.
“Increasing cost of materials and high interest rates have already made the projects less viable,” Shrestha added.
The Finance Ministry is also under pressure to meet its revenue target as in the last fiscal year, it could not meet its target by over Rs 16 billion.
Value Added Tax (VAT) is the largest contributor to the government coffer.
However, Shrestha said that the Finance Ministry is more conscious over revenue mobilisation instead of economic development by boosting hydropower development. “If the Finance Ministry encourages private sector by exempting VAT, more power projects will come into operations in another five years time giving boost to the economic activities, which naturally results in more revenue mobilisation in the country,” according to him.
“However, the current decision will not have any impact on projects financial indicators.”
Earlier, declaring the Energy Crisis, the government had promised to give some incentives for the hydropower projects that could encourage them to invest on more hydropower projects.
The government had also increased the tax holiday period upto 10 years from seven years and half tax exemption for another five years.
The budget for the current fiscal year had spelled out the tax holiday extension but was silent on VAT exemption — the key demand of the private power producers.
The private sector will be encouraged t invest on hydropower if the government could ensure some 15 per cent return by either increasing power purchase agreement (PPA) rate or exempting VAT, according to power producers.
But Nepal Electricity Authority (NEA) has increased power purchase agreement (PPA) rate for only new projects not for the projects under construction.
“If the government cannot increase PPA rate, then it could encourage the private sector by exempting VAT,” Shrestha added.
In absence of regular power, the industrial sector has been suffering and its contribution to the national economy is decreasing every year.