FBR rejects $50m tax break for TAPI gas project due to IMF conditions

• TAPI remains delayed for 7 years due to failure in financial closures.
• The Petroleum Directorate sent a relevant draft summary to the ECC in October 2023.
• The ECC told the Petroleum Directorate to take up the matter with the FBR, the Finance Directorate.

ISLAMABAD: The Federal Board of Revenue (FBR) is avoiding the inclusion of the Turkmenistan-Afghanistan-Pakistan-India (TAPI) gas pipeline project in the Foreign Investment Promotion and Protection Act (FIPPA) 2022 as it may cost a tax break of 40 to 50 million dollars, which is impossible because Pakistan is currently under the supervision of the International Monetary Fund, The news he said on Tuesday, citing senior energy ministry officials.

According to the officials, the tax collection agency has “already refused to give tax exemptions to the local refiners for the amount of incentives from the ESCROW account that the government will give to the refiners under the refinery upgrade policy.”

They added that the outline draft to the Economic Coordination Committee (ECC) was released by the Petroleum Directorate on October 3, 2023, for inclusion of the TAPI natural gas pipeline project in FIPPA.

The ECC, in its meeting on December 28 last year, discussed the said matter and directed the Petroleum Department officials to discuss the matter in close loop with FBR officials and Finance Directorate.

It is perhaps needless to say that FIPPA was passed by Parliament to provide legal cover for the Reko Diq project, a copper and gold mine in Balochistan province, which is being developed by a consortium of foreign companies.

Turkmenistan had earlier requested the Pakistani authorities, seeking to include the TAPI gas pipeline project under FIPPA, as the authorities believe that Pakistan has already ensured the protection of Turkmenistan’s investments with a state guarantee under the Host Government Agreement (HGA). .

However, FIPPA will extend nothing more than the added benefit to Turkmen Gas Company of having the legislative coverage of the protection it has guaranteed to protect foreign investment in relation to the Reko Diq project.

Officials said FIPPA can also increase the credibility of Turkmenistan’s natural gas companies before banks for bankability and loans as well.

However, experts are of the view that Pakistan should also ensure that FIPPA-like treatment to the TAPI project is provided by other gas-buying countries — Afghanistan and India — and if not, then Pakistan should not extend the FIPPA regime in the project.

The project has been delayed for about seven years, mainly due to a failure to close finance and, in the latest scenario since the Taliban took power in Afghanistan, the Asian Development Bank (ADB) suspended due diligence and processing activities on the TAPI project until The Taliban regime is legitimized by the United Nations and the major economies of the world. Therefore, the implementation of the project is not in sight and the government of Pakistan should not extend the FIPPA regime to the TAPI gas pipeline project, the officials said.

“Pakistan has already ensured the protection of Turkmenistan’s investments with a state guarantee under the Host Government Agreement (HGA), which was signed in 2016 along with the Gas Pipeline Framework Agreement (GPFA),” the officials said.

The natural gas pipeline project will be constructed and commissioned with a 30%:70% equity and loan business plan. Of the 30% equity, Turkmenistan has a share of 85% and Afghanistan, Pakistan and India each have a share of 5%. The share capital of Pakistan is 200 million dollars.

The remaining 70% of the funding will be based on loans organized by the TAPI consortium from international financial institutions.

Turkmenistan and Pakistan on June 9, 2023 signed a Joint Implementation Plan (JIP) to accelerate work on the TAPI gas pipeline project in Islamabad. Pakistan has proposed that Turkmenistan install part of the gas line to Herat in Afghanistan to secure ownership from the Taliban, which will also help move the project forward.

The TAPI gas pipeline project aims to transport natural gas from the Galkynysh gas field in Turkmenistan to Pakistan via Afghanistan through a 56-inch diameter pipeline. The Galkynysh gas field is located in the eastern region of Turkmenistan.

The proposed feeder route is Herat, Kandahar, Chaman, Zhob, DG Khan, Multan and Fazilika, with a pipeline length of 1,849 km. It will carry up to 33 billion cubic meters (bcm) (average 3.2 BCFD) of natural gas per year over a period of 30 years, where Pakistan’s absorption will be 1.35 BCFD.