Resolving circular debt: Wapda, MoF allowed to make direct payments to PSO

Under the government policy to resolve the issue of circular debt in power sector, the Federal Board of Revenue (FBR) has allowed payments made by M/s Wapda or Ministry of Finance (MoF) directly to M/s PSO on behalf of power producers by relaxing condition of section 73 of the Sales Tax Act under which proof of banking transactions would not be required as a special case.
Sources told Business Recorder here on Sunday that the FBR had issued a special order for compliance by all Large Taxpayer Units and Regional Tax Offices (RTOs) under section 7(3) of the Sales Tax Act 1990 read with section 55 and 74 ibid.
Through sales tax special order, the FBR had also allowed payments made by M/s Wapda or Ministry of Finance directly to M/s PSO on behalf of power producers for the purpose of input tax adjustment. The special arrangement of these payments had been permitted to resolve the issue of circular debt in power sector, they added.
Sources said that the issue came to the light when M/s Wapda or Ministry of Finance on behalf of M/s Wapda made direct payment to M/s PSO, instead of following the normal procedure of payment, to settle the circular debt liabilities involved in purchase of furnace oil and supply of electricity between M/s PSO, power producers and Wapda.
In such cases, the provision of section 73 of the Sales Tax Act 1990 has not been followed. Under section 73, payment of a transaction has to be made from business bank account of the buyer to the business bank account of the supplier. Thus, section 73 would not be required to be fulfilled as a special treatment under the above mentioned direct payments mode adopted by M/s Wapda to resolve circular debt issue.
According to the special sales tax order, whereas a registered person is allowed to deduct input tax from his output tax to determine the tax due from him for a tax period under section 7 of the Sales Tax Act, 1990 subject to the provisions of section 8B, 9 and 73 of the said Act.
Whereas M/s Pak State Oil (PSO) (STR No. 0206320801546) make supplies of furnace oil to power producers, to be used in production of electricity, which is supplied to M/s Wapda (now M/s PEPCO, STR No. 09022841407473) for onward distribution through Distribution Companies (DISCOs). M/s Wapda, in normal course of business, makes payment to power producers for the electricity supplied, while power producers make payments to M/s PSO for the furnace oil supplied by it, the FBR order says.
In some cases M/s Wapda or Ministry of Finance on behalf of M/s Wapda make a direct payment to M/s PSO, instead of following the normal procedure of payment, to settle the circular debt liabilities involved in purchase of furnace oil and supply of electricity between M/s PSO, power producers and Wapda, it says.
The FBR's special order further states that such direct payment by M/s Wapda or Ministry of Finance to M/s PSO does not fulfil the conditions of section 73(1) of the Sales Tax Act, 1990 where under payment of a transaction is to be made from business bank account of the buyer to the business bank account of the supplier, and resultantly M/s Wapda and power producers both cannot claim input tax against this payment.
Therefore, having been satisfied that there is no revenue loss or evasion involved in the matter, the FBR, in exercise of powers granted vide sections 7(3) and 55 of the Sales Tax Act, 1990, has directed that in such cases respective RTOs/ LTUs shall allow such payments made by M/s Wapda or Ministry of Finance directly to M/s PSO on behalf of power producers for the purpose of input tax adjustment. The permission as aforesaid shall be subject to verification through audit/scrutiny of the accounts of M/s PSO, M/s Wapda and power producers to determine the genuineness of the transaction, the actual amount of payment made and input tax involved. Any time limit found to be condonable in carrying out of this Special Order is also hereby condoned, under section 74 of the Sales Tax Act, 1990, it adds.