Power production, transmission and distribution: Centre’s powers of GST collection go to provinces

ISLAMABAD: In a significant move, the government has transferred the Centre’s powers of collection of sales tax on production, transmission, and distribution of electricity to the provinces in a step towards harmonisation of sales tax law in Pakistan. This has been made through the Finance Bill, 2023, issued on Friday.

Arshad Shehzad, a renowned tax expert explained that the sales tax structure and its compliance become complex after the 18th amendment where powers for collection of sales tax on services were extended to provinces and many of the issues went to litigation including sales tax on toll manufacturing service, sales tax on construction and restaurant, sales tax on point of termination and initiation of services, sales tax on shipping and terminal taxes, etc.

Internationally, electricity is classified as “good”, however, the supply of electricity is done through a transmission line which involves the component of services. For instance, independent power producers (IPPs) produce electricity and then supply electricity through the National Transmission and Dispatch Company (NTDC) to the consumers.

Centre-provinces declaration: Power transmission will be treated as ‘service’ from July 1

The government in the last many years were working on harmonisation of the sales tax and filing of single sales tax return as international donor agencies were also pushing the government to harmonise the law.

In this regard, several meetings at the forum of the National Tax Council chaired by the finance minister were held in the recent year in order to reconcile the disputes between the federal and provincial governments.

The government in this finance bill has proposed the exclusion of electric power from the definition of goods to accommodate the provinces’ demand to delegate their powers to collect sales tax on the generation, transmission, and distribution of electricity. In return we expect the province may accept the proposals of the federal government of introducing a single return for goods and services.

The change, however, would not be as simple as it appears, the issue relating to the electricity generated by the captive power companies to their self-consumption, levy, and collection of extra and further sales tax through electricity bills and refund/input tax adjustment on electricity may crop up and lead to new anomalies, Shehzad maintained.

Copyright Business Recorder, 2023