The Federal Board of Revenue has started a countrywide sales tax audit of power distribution companies for the recovery of illegal adjustments of sales tax collected from steel sector including steel melters and re-rollers. Sources told Business Recorder on Tuesday that the FBR has issued instructions to the Chief Commissioners of the Large Taxpayers Units (LTUs) and Regional Tax Offices (RTOs) for audit of the power distribution companies. Under relevant provisions of the Sales Tax Act 1990, the power distribution companies cannot adjust their input tax against the final tax paid through electricity bill by steel melters and re-rollers. Any such adjustment made by power distribution companies is unlawful and contrary to the legal provisions. According to the FBR instructions to the field formations, Chief Commissioner, RTO, Gujranwala has informed the Board that Lahore High Court vide writ petition No 1835/2011 has decided the matter of illegal adjustment of input tax, collected under special procedure from steel melters and re-rollers, by power distribution companies against their output tax in favour of the tax department. The FBR has, therefore, directed that necessary action may be taken in respective jurisdictions of the LTUs/RTOs and Board be apprised of the progress on audit and recovery made so far on the issue. The field formations should provide details including name of registered person (Power Distribution Company), amount of illegal adjustment of sales tax and amount recovered from the registered person, the FBR instructions added. Sources said that all steel melters and re-rollers, except those opting to pay sales tax on ad valorem basis, are required to pay sales tax at the rate of six rupees per unit of electricity consumed for the production of steel billets, ingots and mild steel (MS) products which is considered as their final discharge of sales tax liability as provided in chapter XI of the Sales Tax Special Procedures Rules, 2007. This payment of sales tax by steel melters and re-rollers is made through electricity bills along with electricity charges and sales tax which is payable by all consumers of electricity including melters and re-rollers. Thus sales tax collected by Power Distribution Companies from steel sector through electricity bill consists of the following two components: Firstly, sales tax at the standard rate of the value of electricity supplied by power distribution companies and secondly sales tax @ six rupees per unit of electricity consumed by the steel units against production and supply of steel billets, ingots and mild steel (MS) products. On receipt of a reference from RTO, Gujranwala regarding admissibility of adjustment of sales tax paid by steel sector under chapter-XI ibid by power distribution companies, a meeting attended by members was held at the Board in the past to discuss the issue. After threadbare discussions it was unanimously decided that component of sales tax (sales tax at the standard rate of the value of electricity supplied by power distribution companies) is the output tax of power distribution companies against supply of electricity and it is adjustable against their input tax on taxable purchases. The component of the sales tax mentioned (sales tax @ six rupees per unit of electricity) ante is not the output tax of power distribution companies. This tax is merely being collected by them on behalf of FBR as the final and net discharge of tax liability by steel melters and re-rollers. Thus as per section 2(20)(a), section 7, section 8 and section 8B of the Sales Tax Act 1990 Power Distribution Companies cannot adjust their input tax against the final tax paid through electricity bill by steel melters and re-rollers. Any such adjustment made by Power Distribution Companies is unlawful and contrary to the legal provisions. It has, therefore, been decided with the approval of the Chairman, FBR, Islamabad that all concerned field formations of the Board will "conduct desk audit of the Power Distribution Companies and take steps for the recovery of the illegally adjusted amounts as per relevant provisions of the law". It is, therefore, directed that the requisite single point desk audit of the power distribution companies located in your jurisdiction may be conducted immediately and the illegally adjusted amount of sales tax, if any, may be recovered from them as per law, besides taking steps to ensure that these companies do not make such adjustments henceforth, sources added.