ISLAMABAD: A dispute between Federal Board of Revenue (FBR) and Power Division on levy of GST on the subsidy given to power Distribution Companies (Discos) by the federal and provincial governments will again land in the Economic Coordination Committee (ECC) of the Cabinet for final decision.
Discos, being licencees of Nepra, are bound to charge the tariff determined by the latter and notified by Federal Government. Nepra determines tariff for Discos on “cost of service” basis and GoP further subsidizes the tariff determined by the regulator.
This is the tariff which is finally charged to the end consumers and the difference is picked up by the GoP as TDS.
In this scenario, subsidy is not being given to the Discos instead this is provided for facilitation of consumers as GoP is granting subsidy to cover the cost incurred by Discos against purchase of units of electricity.
FBR tends to charge sales tax on TDS considering it as a payment received against supply of goods. Pursuant to the welfare policies of the GoP, subsidies are provided to the consumers. Government activity is neither taxable activity under the Act nor is the subsidy covered under the concept of taxable supplies. The subsidy is, therefore, not chargeable to sales tax under the law.
The ECC, in its meeting held on September 30, 2021 considered the summary of Power Division regarding “Levy of Sales Tax on Subsidy Granted by GoP to Discos” and deferred the decision with direction to the Power Division to seek specific legal opinion from the Law & Justice Division on the interpretation of applicability of Sales Tax on the subsidies to the electricity consumers.
GST dispute on power subsidy: ECC to give its decision on legality
In this regard, ECC further directed that the difference of opinion between the Power Division and the FBR may be explicitly conveyed to the Law & Justice Division. Pursuant to the ECC of the Cabinet decision, Law and Justice Division was requested to share its legal opinion on interpretation of provisions of Sales Tax Act 1990 Section 3(1), Section 246)(a), 2/46)6),2(46)0).
In response, Law and Justice Division opined that “since a Special Full Bench of the Appellate Tribunal Inland Revenue, Lahore Bench on March 04, 2021 has held that no sales tax is leviable on the amount of subsidy provided by the government to an Electric Supply Disco the Law Division does not figure in as an appellate, revisional or reference authority/court in the Sales Tax Act, 1990 so as to undo the order of Tribunal.”
PPMC (former PEPCO), in response, apprised that “although appeals have been filed by the FBR in respective forums but these are pending before the relevant forum. Therefore, decisions of the relevant appellate forums in favour of five Discos still hold grounds”.
According to the Power Division, it is evident that the sales tax can neither be charged to GoP, nor the end consumer. If the Discos remain liable to pay sales tax from their own funds, the liquidity of the Discos will seriously be affected.
The implications include adversely affecting the ability to invest in infrastructure, the circular debt amount keeps mounting and prospects of privatization are jeopardized. Currently, FBR has issued notices amounting to Rs 167 billion of GST to Discos over Tariff Differential Subsidy (TDS), which are being contested at different forums/courts of law.”
In view of the decision of Appellate Tribunal and opinion of Law and Justice Division, Power Division has requested ECC to consider the matter and issue necessary directions to FBR that subsidies provided to the electricity consumers by Federal or Provincial Governments are not liable to Sales Tax Pursuant to sections 2 (46) and 3 of Sales Tax 1990. FBR may issue necessary instructions to their field formations/offices, accordingly.
Copyright Business Recorder, 2021
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