Sales tax not payable on subsidy received by Discos: expert

Sales Tax is not payable on the subsidy received by the power distribution companies (DISCOs) from the government, said leading tax expert Hussain Ahmad Sherazi.

He said millions of consumers of electricity have been saved from a further hike in the price of electricity in the garb of levy of sales tax on subsidy paid by the government to the electricity distribution companies. A Full Bench of Appellate Tribunal Inland Revenue has recently held that sales tax is not payable on this subsidy, he added.

According to him, the subsidy is the amount which is paid by the government of Pakistan in this process of determination of uniform rates to be charged. However, he added, such payments which also relate to keeping the prices of electricity uniform all over Pakistan cannot be taxed. Sales tax is charged in the VAT mode and the ultimate burden of all taxation is borne by the end consumer, he said.

Sherazi said rates of subsidy are different for various DISCOs. If the subsidy is taxed, the same consumers of different DISCOs shall be liable to pay a different amount of sales tax on subsidy per unit of electricity. It is obvious that it will be unconstitutional and unlawful for the government to charge a different amount of sales tax per unit of electricity from similarly placed consumers in different parts of the country.

He said Sales tax is payable with reference to the value of supply defined in Section 2 (46) of the Act, which specifically provides that the value of supply shall mean the consideration in money which supplier received from the recipient of the supply. Similarly, Rule 13(2)(b) of the Sales Tax Special Procedure Rules, 2007 says that in the case of generation, transmission, distribution and supply of electric power by a public sector project like WAPDA a private-sector project including IPP, a Captive Power Unit or any other person, the responsibility to collect sales tax shall be of the person making the supply and the value shall be the price of electric power including all charges, surcharges excluding the amount of late payment surcharge, rents, commissions and all duties and taxes whether local, provincial or federal, but excluding the amount of sales tax, as provided in clause (46) of section 2 of the Act.

He said subsidy does not fall in the category of charge, surcharge, rent, commission, duty or taxes and hence not part of the value of supply. Rule 14 is applicable with full force which provides that sales tax collected by WAPDA shall be deposited on an accrual basis i.e. the amount of sales tax actually billed to the consumers or purchasers for the tax period.

He said the concept of the open market price is not applicable to the circumstances of the sale of electricity by the DISCOs. The open market price is only applicable under Section 2(46) if the consideration of supply is is partly in kind and partly in money, OR if the supplier and recipient are Associated Persons or supplies are made to the consumer from the general public on an installment basis or where it is difficult to ascertain the value of supply. It is evident that none of these conditions applies to the supply of electricity by different power distribution companies in Pakistan including DISCOs where a statutory body NEPRA determines the rate of electricity to be charged from different categories of domestic, commercial and industrial consumers. Again within the same category of domestic consumers, the rates are different for different consumers keeping in view the number of units consumed in a month. And thus, this concept is not applicable to the facts of the case.

Payment in kind is linked with the delivery of goods or rendering of services. The amount of subsidy is not paid to DISCOs in kind rather the actual amount in rupees is given to DISCOs.