Power sector taxation issues: FBR likely to take policy decision on February 21

The Federal Board of Revenue (FBR) is expected to take policy decisions on non-chargeability of sales tax on the supply of electricity to Azad Jammu & Kashmir (AJ&K) and other major tax-related issues of power sector. Sources told Business Recorder here on Saturday that the FBR, Ministry of Finance and Ministry of Water and Power will convene a meeting on February 21 (Tuesday) at the FBR Headquarters to discuss these taxation related issues.
The meeting would deliberate on and find amicable solution either through mutual agreement or through required amendments in the applicable law to the taxation issue with power sector. The stakeholders decided on Saturday to convene the next meeting on Tuesday coming week at the FBR to develop consensus on these issues, sources said.
According to the sources, a mutual consensus is required among stakeholders to deal with the issue of sales tax on power supply to AJ&K. The main question arises if FBR gives exemption of sales tax on electricity supply to the AJK, how the issue of input tax adjustment would be resolved. In case of exemption, input would not be allowed. Thus, how the issue of input adjustment would be resolved in this issue is the main question.
On the other hand, in case zero-rating of sales tax has been extended to the supply of electricity to the AJ&K, input adjustment would be available. In the past, President/ Chief Executive of Pakistan decided during the presentation of Mangla Raising Dam Project that FBR will not levy general sales tax (GST) on electricity generated and supplied to the AJK. It is also pointed out that copy of the minutes of the subject presentation was also provided to the then chairman FBR at that time. The chairman FBR did neither object on these minutes nor did issue any contrary instructions, which means he principally accepted the subject decision. At present bulk supply tariff is being applied for AJ&K and sales tax is not being charged as per aforesaid decision. Under Para-C of the said tariff, it was mentioned that FBR will not charge GST on electricity generated and supplied to the AJ&K. Consequently, GST is not being charged by power distribution companies on electricity supplied to AJK. Instead of issuance of notification from FBR, litigation has been started due to non-levy of GST on power supplied to the AJK with some companies. ATIR Islamabad agreed in case of IESCO that sales tax is not applicable on power supply to the AJK being an independent state. The FBR appealed to Islamabad High Court that was accepted and ATIR decision was set aside. Now the IESCO has filed appeal in Supreme Court. Principally decision taken with the AJK regarding non-levy of sales tax needs to be implemented. Law and Justice Division is also analysing the aforesaid issues and guides the ministry to avoid litigation among the DISCOs, FBR, and Ministry of Water and Power.
According to sources, there are conflicting judgements involved in the issue of payment of sales tax on subsidy provided by the federal government. Resultantly, different interpretation of laws is involved due to different judgements on the issue. Some judgements are in favour of the FBR whereas the other in favour of IPPs, etc. The upcoming meeting at the FBR will also discuss the said issue of payment of sales tax on subsidy provided by the federal government, the sources said.
It has been argued that the tax authorities are creating tax demands, pressing and initiating litigation on the grounds that Sales Tax at the rate of 17 percent is to be paid on the tariff differential subsidy (TDS) being provided by the GOP under its socio-political policy decisions. Tariff subsidy is actually being provided to electricity consumers and is not part of the total sales. Sales tax is levied on the sale and purchase activities under Sec-2(46) of Sales Tax Act 1990 where transfer of goods takes place. ATIR, Islamabad, accepted the appeal of PESCO on levy of GST on TDS and decided in favour of the company vide STA 96/PB/2013 and STA 170/PB/2011 by staling that "sales tax is not payable on the subsidy received by PESCO from the government of Pakistan."
The issue relating to the Federally Administered Tribal Areas (FATA) revealed that since 2004-05, the GoP has been paying the electricity bills of domestic consumers only in FATA. For this purpose budgetary allocation is made in the budget as FATA Receivable Subsidy. The subsidy provided to FATA includes various taxes such as GST, surcharges and PTV fees etc. Ministry of Water and Power was requested to provide confirmation of remittance of taxes paid through this subsidy to FBR. In this regard, the M/o Water and Power intimated that CPPA has already paid GST of Rs 1,692 billion to FBR during the period from 2004-05 to 2015-16 (up to December). The detail of taxes/surcharges included in FATA receivables during the period from 2004-05 to 2015-16. It may be noted that MoF released said subsidy of Rs 150,982 million till 2015-16 against claims of Rs 168,751.972 million (including taxes/surcharges) for the same period.
Finance Division is of the view that subsidy should not be utilised for payment of government taxes and duties. Such taxes should be ideally received from consumers or exemption from tax payment may be sought from the FBR accordingly. Another issue is the sales tax on cash collection basis. Electricity was subjected to sales tax w.e.f. January 2000 and as per act, sales tax was required to be deposited on cash collection basis.
Clause 5, Para-1 of Electric Power Rules of 2000.Later on through amendment vide SRO No 560(I)/2006 dated 5.6.2006 w.e.f. 1.7.2006. Para-1 of Clause-39 was amended and words "cash collection basis" were replaced by accrual basis. In the wake of such amendment, power sector companies are liable to pay sales tax even on behalf of even those consumers who do not pay their electricity bills, resulting accumulation of GST receivables of Rs 75 billion from DISCOs as on 29.2.2016. However, the subject issue was submitted to ECC for providing relief to power sector companies by reverting to deposit of sales tax on cash collection basis instead of accrual basis. The cabinet, in its meeting held on 12th October, 2011, while taking the briefing from Committee on Energy, inter-alia, decided that payment of GST by receiving agencies on non-paid bills shall be exempted.
The FBR was of the view that word exemption used in the cabinet decision would result in restricting input sales tax adjustment to WAPDA (DISCOs) and KESC due to the legal bar on adjustment of input sales tax in case of exempt supplies and thus intension behind the decision will remain unfulfilled. In response, the Ministry of Water & Power is of the view that zero rated sales tax will further escalate problem of GST refund and cabinet decision vide Case No.211/12/2011 dated 12th October, 2011 is required to be amended: In case of WAPDA (DISCOs) sales tax shall be collected during a tax period 'cash collection basis'.
Adjustment of Input tax relating to Transmission and Distribution Losses: Tax authorities are of the view that losses of distribution system are not to be deducted in calculating sales. Resultantly, input tax adjustments are not being allowed in case of distribution losses, whereas in all processing industries and CNG stations, distribution losses are recognised and allowed by the tax authorities. Such losses are recognised all over the world. Even in some countries tax paid on goods destroyed is legible for tax adjustment. The fact is that power tariff is determined after taking into account losses factor resulting higher tariff. By this way there is no reduction in value of supply and amount of tax. Hence any further/artificial increase in sales volume by not allowing losses is nothing but over taxation, where losses are already part of sales price/ tariff. In spite of facts, tax distribution companies by tax authorities are being issued resulting involvement in litigations and attachments of bank accounts.