Minimum tax payment: KE’s fuel cost, subsidy recoveries should be treated as turnover: SHC

ISLAMABAD: Sindh High Court (SHC) Monday ruled that the subsidy and fuel cost recovered by Karachi Electric Supply Corporation Limited (K-Electric Limited) from consumers has to be treated as turnover for the purpose of minimum tax payment under Section 113 of the Income Tax Ordinance 2001.

The SHC has issued a judgement in the matter of taxation of K-Electric against Large Taxpayer Office (LTO), Karachi.

“Accordingly, the first question for a determination of whether the subsidy/tariff adjustment as receivable from the government of Pakistan is to be excluded from the scope of turnover to charge of minimum tax under Section 113 of ITO, 2001 is answered in the negative, in favor of the Revenue Department and against K-Electric in all four references,” SHC maintained.

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Through these four Income Tax Reference Applications (ITRAs), the Applicant, (Revenue Department) has impugned orders passed in Income Tax Appeals by Appellate Tribunal Inland Revenue. All appeals essentially concerned the Taxation Officer’s decision, inter cilia, on whether or not the receipt of tariff adjustment subsidy from the federal government availed by K-Electric for the concerned tax year constituted a part of K-Electric’s turnover from the sale of electricity, which could be subject to levy of minimum tax on K-Electric under section 113 of the Income Tax Ordinance (’ITO.), 2001.

The section 113 of the ITO, 2001 imposes a minimum tax on the income of certain individuals and entities, including resident companies, permanent establishments of non-resident companies, and individuals. All four references under consideration involve K-Electric being levied a minimum tax on its income.

The issue of whether a subsidy granted by the Federal Government to an electricity distribution company (“DISCO”) whereby such DISCO’s consumers benefit from the supply/sales of the DISCO and is liable to be added to the turnover for the purpose of charging of tax under Section 113 of ITO, 2001.

The FBR is of the view that the tribunal has seriously erred in law and facts, while passing the orders, which are against the judgments of the High Courts.

In the present case, it is an admitted position as recorded in the Annual Audited Accounts of K-Electric submitted by Counsels of K-Electric that the National Electric Power Regulatory Authority (NEPRA) during the concerned year notified the monthly fuel cost and power purchase cost variation, which was adjustable against the consumers’ monthly bills as Fuel Surcharge Adjustment (FSA) to the extent of a certain amount. In the year 2010, from the sum of Rs.6,388 million, a sum of Rs.4,348 million was adjustable against consumers’ monthly bills.

According to the Financial Statements for the year ended June 30, 2010, the Federal Government securitized Rs. 4,348 million as a claimable amount against government subsidy. Thus, the Federal Government would reimburse the said amount into the accounts of K-Electric.

Additionally, K-Electric itself, in its Profit and Loss Account under the heading “Revenue”, showed a tariff adjustment of Rs3,766 million as a revenue item. According to Note 35.2 of the Notes to the Financial Statements for the year ended June 30, 2010, this amount of Rs3,766 million recorded as a revenue represented the FSA receivable determined on the billing history of comparative months of 2009.

Thus, this part amount of Rs3,766 million out of Rs.4,348 million was shown as revenue receipt in the audited accounts, also. Undoubtedly, this amount also forms part of the gross receipts of K-Electric derived from the sale of goods, it said.

The SHC agreed with the observation of the learned Division Bench in the Gujranwala Electric Power Co. case and that K-Electric is, in fact, recompensed fully on account of the tariff determined by NEPRA.

Accordingly, this suggested that, ultimately, K-Electric would not suffer a loss of income, as the Federal Government would make up for any shortfall of tariff adjustment.

The second question whether the Appellate Tribunal in ITRA Nos.85 and 87 of 2019 correctly relied upon the earlier in-time decisions of the Appellate Tribunal in holding that subsidy/tariff is not part of turnover for the purpose of section 113 of ITO, 2001 is answered in the negative in favour of the Revenue Department and against K-Electric.

The upshot is that the Revenue Division has made out a case to set aside the impugned orders in all four references. Consequently, all four references are allowed in the said terms, the SHC judgment added.

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