The federal government has finally relented to pressure and agreed to treat power transmission as a service from the beginning of the next fiscal year, instead of a good, but this realisation has not come on its own.

International practice treats electricity as a good, but the supply of electricity, carried out through transmission, is considered a service. And, importantly, taxed as such.

According to reports, this decision was taken during the 6th meeting of the National Tax Council (NTC), which was chaired by Finance Minister Ishaq Dar. Now, the Sales Tax Act would have to be amended through the next Finance Bill.

It needs to be noted that the federal government acted very unfairly for the longest time by refusing to accept what is clearly an internationally recognised practice – for tax collection reasons no doubt – and it wouldn’t have yielded if this weren’t a prior action for the World Bank funded RISE (Resilient Institutions for Sustainable Energy) program; meant to strengthen fiscal management, promote transparency and private sector growth, and undertake foundational reforms in the energy sector to transition to low-carbon energy.

It’s also been decided by NTC that the Place of Provision of Service Rules will take effect from 1 May 2023, after approval from respective provincial cabinets, but the exclusion of electric power transmission from the list of goods by FBR (Federal Board of Revenue) – for which the Sales Tax Act requires an amendment through the Finance Bill – will take effect from 1 July 2023.

And then the transmission of electricity through grids would be excluded from the purview of goods under sales tax and shall be treated as a service. This makes for another one of those instances where foreign institutional lenders must arm-twist the government into carrying out necessary reforms.

Saleem Chishti (Lahore)

Copyright Business Recorder, 2023