Curtailing tax losses in energy sector: FBR seeks amendments to ST laws in budget

The Federal Board of Revenue has proposed comprehensive amendments to the sales tax laws in Budget (2013-14) to check huge tax losses in energy sector by curtailing sales tax refunds to power sector entities. Sources told Business Recorder here on Monday that the FBR has proposed amendments to the Sales Tax Act 1990 and Sales Tax Special Procedure Rules in Budget (2013-14) in this regard.
Three major proposals to check tax losses in energy sector are: Firstly, the input tax adjustment will be proportionate to the output tax generated on the basis of regulated prices. Secondly, restriction of input tax adjustment on transmission and distribution losses by allowing T&D losses as per international standard. Thirdly, disallowing input tax adjustment against theft of electricity and gas.
According to the budget proposal of the FBR received in the Ministry of Finance, the issue is mainly related to the making up of tax losses in energy sector. The proposed amendments would tackle the issue of energy sector which rather than paying any sales tax is net refund claimant.
These refunds accrue for the reason that the price of electricity is required and fixed at less than actual price. The sales tax refunds in power sector also accrue due to huge transmission and distribution (T&D) losses and theft of electricity and gas. Another major reason for accumulation of refunds is due to allowing complete input tax adjustment irrespective whether corresponding output tax is generated or not.
The said position is posing huge loss of tax revenues which is resulting in negative collection of tax from energy sector, sources said. In order to tackle all key sales tax refund related issued in power sector, the FBR has proposed measures in coming budget. The input tax adjustment will be proportionate to the output tax generated on the basis of regulated prices.
There would be restriction of input tax adjustment on transmission and distribution losses by allowing T&D losses as per international standard and input tax adjustment would be disallowed against theft of electricity & gas, sources added. In the past, the Board had received a request from Ministry of Water and Power to release sales tax refunds payable to power sector units. It was brought to the notice of the FBR by the Ministry of Water and Power 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. 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.
On the issue of sales tax on transmission and distribution losses, Ministry of Water and Power had reportedly informed the FBR 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.