SUNDAY APRIL 07: Power sector: Ministry seeks Rs 41.072 billion sales tax refunds

ISLAMABAD: The Federal Board of Revenue has received a request from Ministry of Water and Power to release sales tax refunds amounting to Rs 41.072 billion payable to power sector units and issued notification to address sales tax related matters in power sector. Sources told Business Recorder here on Saturday that the finance officers of power distribution companies (Discos) have met senior FBR officials at the FBR House to resolve the issue of sales tax refund payments.
Ministry of Water and Power has asked the Board to issue notifications/SROs and address the grievances of distribution companies (Discos) on the matters such as sales tax on subsidy given by government; GST on transmission and distribution losses of electricity; GST on development activities under Public Sector Development Programme, Village electrification and provision of new connections; GST on supply of electricity to the government of Azad Kashmir and sales tax on capacity charges paid by generation companies (Gencos).
Sources said that the Sales Tax Department is withholding huge amount of refund amounting to Rs 41.072 billion payable to Power Sector Entities. The unlawful demands are created by resort to audit of Financial Statements of the companies instead of audit of the prescribed record under Section 22 & 23 of the Sales Tax Act, 1990. the tax demands have been raised just on the basis of unwarranted assumptions and presumptions. Such audits and assessments are contrary to the law as held by the Appellate Tribunal Inland Revenue in the judgement cited as 2011 PTD (Trib.) 808. The unlawful audits and assessments are burden the Power Sector Entities and aggravate their financial problems. A uniform policy is required to guide the Assessing Officers of Sales Tax to conduct audit of the record prescribed under the Sales Tax Law instead of fishing enquiries on the basis of financial statements and record prepared under the Company Law and for Income Tax matters. The Supreme Court of Pakistan, in the judgement cited as PLD 1998 Supreme Court 64, deprecated the practice of withholding of legal refunds of the taxpayers on various pretexts. To facilitate the Power Sector Companies and to alleviate their problems, the concerned authorities may be directed to issue the determined refunds of the Power Sector Entities expeditiously.
Sources said that in pursuance of decision made in a recent meeting in the Ministry of Water & Power to resolve the GST refund claim issue, Finance Directors of Discos visited the offices of Vice Chairman FBR and Member Inland Revenue to substantiate their claims/ present their point of view about super fabulous assessment orders of FBR field formation. They have presented all relevant and supporting documents even FBR portal generated documents. Both the senior officers of the FBR agreed with the stance of Discos and assured that the refund/payment of Rs 5 billion provisionally will be released to Discos in the first week of April 2013.
Secondly, the FBR will arrange notifications to address the grievances of Discos on sales tax related issue in power sector. Sources said that in view of the welfare policies of the government, subsidies are provided to the consumers. The government activity is not taxable activity under the Sales Tax Act nor subsidy be covered under the concept of taxable supply. The subsidy is, therefore, not chargeable to Sales Tax under the law. In case of PESCO, the Commissioner Appeal also agreed to the view point.
On the issue of sales tax on transmission and distribution losses, sources said that such losses are part of the business of the taxpayer. The input tax claimed against the overall generation of electricity, including TND losses (transmission and distribution losses) are meant for the taxable activity and admissible as input tax under the law. Disallowance of input against such losses is not only contrary to the provisions of the Sales Tax Act, but also undue burden on the Power Sector Entities.
In the light of Rule 14 & FBR letter No 1(22) STAS /2004 dated 07.12.2004, all Discos may be allowed the T& D losses. Moreover, the T & D losses have been allowed by FTO in case of Peshawar Electric Supply Company Limited Vs Secretary Revenue Division.
Sources said that the Sales Tax Department is creating demands on "deposit works" etc, for immovable infrastructure: Poles, Transmission Lines and Grids, etc, and services involved in the creation of such infrastructure and supply of electricity. Immovable property and services are not subjects of Sales Tax under the Federal Legislative List such demands only upset the smooth working of the Power Sector Companies and involve them in diversionary inconvenient and costly litigation. The matter has already been clinched by the ATIR in the judgement cited as 2011 PTD (Trib.) 808. It is, therefore, appropriate that proper directions are issued to the Sales Tax Authorities to avoid undue wastage of resources of both the Revenue and Power Sector Entities.
Ministry of Water and Power has further informed the FBR that at the time of signing of Mangla Raising Agreement in 2003, it was agreed between the President of AJ&K and President, (then Chief Executive Officer of Pakistan) that sales tax will not be charged on supply of electricity to AJK government & the same was agreed by ATIR - Islamabad vide order No 65/IB/2011. Further the input tax adjustment may also be allowed in respect of supply of electricity to government of AJ&K in the light of mutual understanding between two governments. It is understood that any tax charge or in put tax adjustment disallowed in case of Hydel generated electricity supply to government of AJ&K will cause undue financial burden to poor customers on both side.
About the issue of sales tax on capacity charges paid by Genco's, sources said that the GST on capacity payment to HUBCO, KAPCO, IPP's and Wapda Hydel is not being charged. Therefore, all the Gencos (Jamshoro Power Company Limited, Northern Power Generation Company Limited, Southern Power Generation Company Limited, Lakhra Power Generation Company Limited) should also be treated according to other.
It was also found that the field officers of FBR attached the accounts of Discos and recovered Rs 4961 million from Discos comprising Lesco with Rs 2335 million, Pesco with Rs 1455 million, Iesco with Rs 1057 million and Hesco with Rs 149 million.
The amount recovered forcibly by field officers of FBR should be refunded immediately along with the refund amount to the power sector to ensure smooth supply of electricity. In addition to above, Regional Tax Office (RTO) Faisalabad has sanctioned refund claim amounting to Rs 1460 million in respect of Fesco which may be released immediately, sources added.