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Harmonics created by nonlinear loads such as arc furnaces, cycloconverters and motor drives destroys the power quality in the system. They not only affect the working of adjacent loads but also shorten the life of power equipment by creating excessive losses. ‘Shunt Active Power Filter’ is a modern addition to family of compensating devices. It has superior qualities over its contemporaries namely SVCs and STATCOMs. It not only mitigates harmonics within the allowable limits defined by IEEE Std 519-1992, but also compensates unbalancing and reactive power in the system. Consequently, only active power is supplied by the source thus power factor approaches unity. A fully functional Simulink model of Shunt Active Power Filter has been designed based on ‘Instantaneous Power Theory’ or ‘p-q Theory’. The results of simulation comply with all the features described by the theory, justifying employment of SAPF in the industry.