The Competition Commission of Pakistan (CCP) has recommended the Federal Board of Revenue (FBR) that all units in the steel sector be charged sales tax on the same basis rather than differentiating on the source of power they use for production and remove discrimination in steel industry by levying same sales tax rate on all players.
In this regard, the CCP has issued a Policy Note to the FBR here on Tuesday to eliminate discrimination meted out to some market players of the steel industry by imposing different sales tax rate and has recommended that this discrimination be removed by levying same sales tax rate on all players.
CCP took notice of a complaint filed by Madina Enterprises Limited (Madina Steel), which is using alternative energy, and alleged that the mechanism of charging sales tax by the FBR was discriminatory vis-a-vis units operating on electricity supplied by DISCOs. Looking into the matter the Commission sought the views of all the stakeholders. It was found that Madina Steel was charged General Sales Tax (GST) at 17 percent of ad valorem production simply on account of producing its own electricity through the use of renewable energy sources ie, bagasse & rice husk, while those units acquiring electricity from DISCOs were charged GST at Rs 9 per unit of electricity consumed.
CCP is of the view that the practice of implementing a different rate of sales tax on the players of the same industry based on the source of electricity is discriminatory as it distorts a level playing field, discourages new firms to enter into the market and prevents those who intend to innovate and invest in improving the efficiency of the production process from doing so, sets perverse incentives, leads to market stagnation, and prevents any cost savings from being passed on to the end consumer.
Similarly, a different method of calculating sales tax on establishments producing their own energy from alternative/renewable sources is against the spirit of the Government's Policy wherein the production of electricity through these resources, on even a small scale, is to be encouraged by offering incentives to the producers. The issue raised by the association about the non-existence of a reliable metering mechanism for captive power plants does not justify implementation of a different method of calculating sales tax. The CCP did not find substance in the claim of PSMA that there is no mechanism to determine the electricity units consumed by Madina Steel. We have confirmed that an adequate metering mechanism is in place, whereby a representative of the Regional Tax Office (RTO) Faisalabad, verifies on monthly basis, by conducting on-site visit, the units of electricity consumed from the sealed meter installed at Madina Enterprises.
The Commission is of the view that the levy of dissimilar rate of sales tax on a production unit for being operationally efficient is against the spirit of the principles of competition. In fact, it is restrictive of a basic right of any undertaking to maximise profit by adopting methods to reduce its production cost. The current case of having two different methods of calculating sales tax on the steel plants operating on biomass depicts a scenario whereby the industry players are dis-incentivised to enhance efficiency through measures that reduce cost, ensure reliability, and reduce the burden on DISCOs coping with electricity demand-supply issues.
It is pertinent to mention here that Pakistan has been facing a persistent gap of about 6,500MW in the supply and demand of electricity over the past several years. The energy crisis is adversely affecting Pakistan's industry and the economy. According to some estimates, the loss to the industry is about 13 percent of total manufacturing sales or nearly Rs 130 billion annually. According to the energy policy, the government encourages the production of electricity through alternative resources and offers incentives to all producers of electricity, even at small scale.
Under the AEDB's Policy for Development of Renewable Energy for Power Generation, 2006, the government encourages the generation of power through the use of renewable energy sources to bring-in energy security and improve the energy mix of the country. The policy offers investment-friendly incentives, and facilitates renewable energy producers and envisages increasing per capita consumption of energy and reducing the cost of production. However, the current mechanism of implementing a different rate of tax on those who have taken steps to produce their power independently (such as Madina Enterprises) reflects the antithesis of this policy to encourage the generation of power through renewable energy sources.
The implementation of a higher sales tax discourages the firms to endeavour for energy self-sufficiency and help reduce the oil import bill. CCP has recommended that all units in the steel sector be charged sales tax on the same basis rather than differentiating on the source of power they use for production. The Policy Note has been issued under Section 29 of the Competition Act, 2010, which empowers CCP to review policy frameworks to foster competition in all spheres of economic and commercial activity and to recommend appropriate remedies to the federal and provincial governments.
In principle, all players should be charged at the same rate and no one should be penalised for attaining or trying to attain operational efficiency. To create a level playing field in the steel industry, any difference created in the tax rate through any other special/general orders or otherwise may be rationalised, CCP added.
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