Discos likely to seek further tariff hike

ISLAMABAD: Power Distribution Companies (Discos) are likely to seek more raise in their tariffs owing to the recent decision of the Lahore High Court (LHC) in which Tariff Differential Subsidy (TDS) has been made part of the turnover, which is liable for minimum tax.

This is the crux of a letter written by the Chief Executive Officer (CEO), Lahore Electric Supply Company (LESCO), seeking Power Division’s help to sort out this issue with the support of Finance Ministry.

According to the CEO, he is raising a significant matter for Power Division’s attention concerning applicability of minimum tax on it under Section 113 of the Ordinance and seeks guidance and cooperation in resolving this matter within the Federal Board of Revenue. This issue has been raised multiple times earlier, as well, with the Ministry and has been discussed in the Economic coordination Committee (ECC). However, till date the matter remains unresolved.

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Minimum tax is levied on a company’s turnover (sales) when the company is not liable to pay normal income tax due to losses or reduced profits. Since, the LESCO has been incurring taxable losses over the years it is also exposed to the applicability of minimum taxes in absence of any exemption.

Currently, there is a disagreement between the Discos including LESCO and the FBR regarding the applicability and rate of minimum tax on the Discos. Therefore, the FBR has issued notices/ orders regarding minimum tax against LESCO for various tax years, pending at different appellate forums.

Section I13, if becomes applicable, imposes minimum tax at the applicable rate on the gloss turnover of the company. However, given financial constraints of Discos and other factors at the start of corporatisation, SRO 171(l)/2008 was issued by FBR on February 21, 2008, which allowed the Discos to deduct the purchase price of electricity from their turnover for the purpose of minimum tax. In presence of this SRO, the Discos were liable to pay minimum tax on their distribution margin instead of total amount of electricity sold. However, the SRO expired in 2013 and, despite many efforts by the Discos, was not extended subsequently exposing Discos to imposition of minimum tax on gross turnover.

At the same time there was another provision in the Income Tax Ordinance that allowed exemption to companies from charging of the minimum tax under section 113 in the presence of gross loss. Discos availed this exemption based on the position that when Tariff Differential Subsidy (TDS) is excluded from the turnover of the Discos, they resultantly declare gross losses. FBR had disputed this position and has contended that TDS is part of turnover and in absence of SRO 171, the FBR passed orders against Discos including LESCO to pay minimum tax on the gross turnover including TDS.

However, this exemption under section 1l3 itself was also removed under the Finance Act 2016, thereby exposing Discos to applicability of minimum tax on gross turnover from tax year 2017 and onwards despite incurring huge losses.

In the absence of above relief, LESCO has been exposed to many adverse orders and litigations involving huge tax demands even though the matter remains pending before ECC. At the same time, the Discos also filed petitions before the Lahore High Court (LHC), which granted stay against the operation of the notices issued by the FBR based on the representation by the FBR official that no adverse action shall be taken against the Discos on account of the minimum tax issue unless the matter is resolved between inter-ministerial committee of Power Division, Ministry of Finance and FBR.

However, the FBR has issued notices/ orders for payment of minimum tax at rate applicable from time to time, i.e., (l.25% to 1.5%) on total sale value of electricity to Discos including LESCO. These notices have been challenged by LESCO and these are being taken up at different forums of appeals.

LESCO is of the view that had SRO 171(I)/ 2008 been renewed/ extended by FBI Discos would have to pay minimum tax only on their distribution margin and not on total sales value of electricity.

LESCO has further stated that there is no specific provision in the Income Tax Ordinance regarding the minimum tax rate for Discos. Consequently, Discos are currently exposed to paying the minimum tax at the standard rate, currently set at 1.25% of the turnover, after the expiration of SRO 171(1) /2008. The financial circumstances that existed at the time of its original issuance of the said SRO still persist today.

Furthermore, a few days ago, LHC, has overturned a previous favourable decision by the Tribunal’s full bench regarding the exclusion of TDS from the turnover of the Discos. The LHC has held that TDS is part of turnover for the Discos.

The LHC decision has broad implications; turning the subsidy into a component of Discos’ turnover, thereby creating a substantial tax exposure from 2008 to the present. This tax exposure if recovered from Discos would obviously have potential impact on consumer tariffs, as the imposed taxes, if levied, will inevitably be passed on to consumers through tariff adjustments. Given the political sensitivity surrounding tariff increases, this presents a challenging situation that requires urgent attention.

LESCO, in its letter has requested Power Division that the matter be taken up with the Ministry of Finance for immediate resolution and steps be taken to reconsider and extend SRO 171(1) 2008 retrospectively from 2013 onwards. This extension would resultantly reduce the minimum tax liability under section 113 of Income Tax Ordinance, 2001 to be paid by Discos as it will be charged only on differential amount of turnover after deducting the purchase price of electricity. Additionally, LESCO has proposed the consideration of specific exemptions from minimum tax related to subsidies in order to alleviate the tax burden on Discos created by the recent legal interpretation.

“The urgency of this matter cannot be overstated. The prompt intervention of relevant authorities is crucial to prevent adverse consequences on Discos and the consumers who may bear the brunt of tariff adjustments resulting from increased taxes. We understand the challenges faced by the government in balancing fiscal responsibilities, but we believe that a fair and just resolution is crucial to maintaining the financial stability of Discos and avoiding any adverse impact on tariff,” said the CEO LESCO.

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