GST on TDS: Power Division seeks legal opinion

ISLAMABAD: The Power Division has sought legal opinion from the Law Ministry on the interpretation of applicability of Sales Tax on Tariff Differential Subsidy (TDS) meant for electricity consumers as the FBR is unwilling to back out from recovery of GST on subsidies, well-informed sources told Business Recorder.

On September 30, 2021, the Economic Coordination Committee (ECC) of the Cabinet considered a summary of the Power Division on the dispute between FBR and Power Division.

According to the Power Division, FBR has collected Rs 90 billion as sales tax from Distribution Companies (Discos) on subsidies meant for consumers, which is completely illegal.

Discos, being licencees of Nepra, are bound to charge the tariff determined by the latter and notified by Federal Government.

Nepra determines tariff for Discos on "cost of service" basis and Government of Pakistan further subsidizes the tariff determined by Nepra. This is the tariff which is finally charged to the end consumers and the difference is picked up by the GoP as TDS.

ln this scenario, the subsidy is not being granted to the Discos, instead, this is provided for the facilitation of the end consumer as GoP is granting subsidy to cover the cost incurred by Discos against purchase of units of electricity.

However, the FBR wants to charge sales tax on TDS considering it as a payment received against supply of goods. Pursuant to the welfare policies of the GoP, subsidies are provided to the consumers. Government activity is neither taxable activity under the Act nor subsidy is covered under the concept of taxable supplies. The subsidy is, therefore, not chargeable to Sales Tax under the Law.

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The provisions of the Sales Tax Act, 1990 are clear with respect to the determination of the value of supply which is subject to the sales tax.

The relevant excerpts are as follows: (i) Section3 of the Sales Tax Act, l990 provides the framework of chargability of Sales Tax.

"Scope of tax, (1) Subject to the provisions of this Act, there shall be charged, levied and paid a tax known as Sales Tax at the rate of seventeen percent of the value of (a) taxable supplies made by a registered person in the course or furtherance of any taxable activity carried on by him; and (b) goods imported into Pakistan.

Perusal of Section 3 of the Sales Tax Act, 1990 confirms that in order to create charge of Sales Tax, two conditions must be fulfilled independently, ie, the transaction of sale must constitute a taxable activity and it should also to be a taxable supply, even if one condition is missing the charge of Sales Tax would not be leviable.

ln light of the definition of the term "Value of supply" as provided in clause 46 of Section 2-- Section 2(46) (a) "value of supply" means;(a) in respect of a taxable supply, the consideration in money including all federal and provincial duties and taxes, if any, which the supplier receives from the recipient for the supply but excluding the amount of tax.

Section2(46) (b)- in case of trade discounts, the discounted price excluding the amount of tax provided the tax invoice shows the discounted price and the related tax and the discount allowed is in conformity with the normal business practices.

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Section 2(46) (i) in case of supply of electric power and gas by a distribution company, the total amount billed including price of electricity and natural gas, as the case may be, charges, rents, commission's and all duties and taxes local, provincial and federal but excluding the amount of late payment surcharge and the amount of sales tax;

The provisions clearly provide that the Sales Tax to be charged to the consumers, shall be the amount billed the consumers. However, FBR is of the view that the value of subsidy provided by the Federal Government, is subject to GST and payable by the Discos. In case FBR's point of view is accepted following consequences arise: (i) charging and recovering Sales Tax on subsidy from the end consumer which will be illegal and a violation of Section 2 (46) of the Sales Tax Act and the tariff notification; (ii) charging and recovering Sales Tax from the GoP will be illegal because it will be violation of section 3 of the Sales Tax Act as there is no taxable activity/supply to the Federal Government. This will be an anomaly as the government will be taxed for a socio-economic obligation; and (iii) Recovery of uncharged sales tax from Discos would result in the circular debt.

A series of meetings were held from time to time between the Power Division and FBR in respect of sales tax, the FBR is of the opinion that the issue regarding Levy of Sales Tax on subsidy granted by GOP to Discos is to be placed before ECC for resolution.

Discos at their own level litigated the tax issues in Appellate Tribunals and got relief in various judgements of appellate forums that TDS is not chargeable to tax.

The sources said as specific opinion from Ministry of Law is received, the case would be resubmitted to the ECC for final approval.

Copyright Business Recorder, 2021