National Transmission and Dispatch Company (NTDC) and power distribution companies are now liable to pay minimum tax under Income Tax Ordinance, 2001 on the cost of electricity with effect from Tax Year 2014. Federal Board of Revenue (FBR) is estimating revenue generation to the tune of billions.
In this regard, the FBR has issued instructions to the field formations for imposition of the tax on power distribution companies/NTDC following withdrawal of exemption under 2nd Schedule to the Income Tax Ordinance available to the power distributing companies and NTDC from Tax Year 2014.
Through a new order, the FBR will charge minimum tax (section 113 of the Income Tax Ordinance) on power distribution companies and National Transmission and Dispatch Company (NTDC) by withdrawing facility of excluding cost of electricity from their total receipts/turnover from Tax Year 2014, estimating revenue generation to the tune of billions.
The FBR has estimated additional revenue during current fiscal year following imposition of the tax on power distribution companies/NTDC from Tax Year 2014.
According to the FBR, an order was passed by Additional Commissioner-IR, RTO, and Islamabad in respect of Islamabad Electric Supply Company (IESCO). The said order was communicated to the Chief Commissioners for utilising the information in case of power distributing company falling in the relevant jurisdiction. The crux of the matter is that the power distributing companies were given the facility of excluding the cost of electricity from the total receipts/turnover up to tax year 2013 under clause (5) of Part-III of the 2nd Schedule to the Income Tax Ordinance. The said clause is reproduced here under:-
"Where the corporatized entities of Pakistan Water and Power Development Authority (DISCOs) and National Transmission and Dispatch Company (NTDC), are required to pay minimum tax under section 113, the purchase price of electricity shall be excluded from the turnover liable to minimum tax up to the tax year 2013", Income Tax Ordinance said.
From tax year 2014 the entire receipts are to be offered for the taxation as the facility was available only up-till tax year 2013. By utilising this information RTO, Islamabad created a demand of Rs 951 million against which no appeal was filed by the IESCO. However, despite after the lapse of a month no RTO has reported back on this issue. Board circulates the information for the benefit of all RTOs in order to generate additional revenue. The Chief Commissioners have been further directed to take up this matter on priority, FBR added.
Meanwhile, the FBR has referred to the assessment order passed under section 122(5A) of the Income Tax Ordinance, 2001 in the case of IESCO for the tax year 2014 for further necessary action by the field formations.
The RTO Islamabad order said that the taxpayer is a public limited company, deriving income from purchase and sales of electricity. Return for the tax year under review was filed at a loss of Rs 43,294,686,261/-, with minimum tax liability under section 113 of the Income Tax Ordinance, 2001 (hereinafter called the Ordinance) at Rs 8,822,105/-. The return so filed was deemed to be an assessment order in terms of section 120 of the Ordinance.
However, on scrutinising the return and audited accounts it was noted that the taxpayer has deducted the cost of electricity from the turnover while paying Minimum Tax under section 113 of the Ordinance. Besides, it was observed that prima facie the taxpayer was required to pay Alternative Corporate Tax (ACT) under section 113C instead of Minimum Tax under section 113 (ie the Corporate Tax in terms of section 113C) for the reasons mentioned in the show cause notice.
Thus, having found the deemed assessment order under section 120 of the Ordinance, erroneous as well as pre-judicial to the interest of revenue, the taxpayer was confronted through show cause notice under section 122(9) of the Ordinance, vide No ADCIR /Audit/2014-15/1458, dated 20.04.2015, relevant portion of which is reproduced hereunder:
"i,) Minimum Tax under section 113 of the Income tax Ordinance has been paid at Rs 8,822,105/- on an amount of Rs 882,210,457/- (the balance amount), arrived at after excluding the purchase price of electricity at Rs 93,920,432,910/. This treatment is legally incorrect as the benefit of minimum tax on the balance amount, instead of Total Turnover, was available upto Tax year 2013 under clause (5,) of part-III of the 2nd Schedule to the Ordinance. It implies that w.e.f. Tax year 2014 the entire receipts from Sales of Electricity were to be offered for Minimum Tax. Besides, most of the constituents of other income, declared in note No 31 to the Audited Accounts, Business receipts in nature, fall in the definition of Turnover for the purpose of section 113. Thus, the Actual Tax liability under section 113 of the Ordinance comes to Rs 951,602,675. The order said without prejudice to the above, as per return, the declared Accounting Profit for the tax year 2014 is Rs 22,657,818,471/= , on which Alternative Corporate Tax (ACT) under section 113C comes to Rs 3,851,829,140. As the ACT is higher than the Corporate Tax, under section 113, the company is liable to pay ACT instead of Corporate Tax (Minimum Tax u/s 113).
In view of the above, it is evident that the order passed under section 120(1) of the Ordinance is erroneous as well as pre-judicial to the interest of revenue, therefore, please explain as to why the same is not amended under section 122(5A) of the Ordinance as mentioned in para(i) & (ii) above."
In response to the above show cause, the taxpayer filed a detailed reply vide No IT/1478/2015, dated 30.04.2015, both on the issues of Minimum Tax under section 113 as well as ACT under section 113C of the Ordinance.
Responding to the reply of taxpayer, RTO Islamabad order said that the taxpayer argued, that since by virtue of clause (102A) of part-I of the 2nd Schedule subsidy is exempt, the same is to be excluded from Accounting profit for the purpose of ACT, as required under sub section (8) of Section 113C of the Ordinance , and that once this amount was reduced from the Accounting Profit , there would be. Accounting Loss, on which ACT is not chargeable. Subsequently, the taxpayer was confronted that no doubt, being exempt, subsidy was not to be considered while working out accounting profit, but this treatment is to be extended only when it is utilised in the implementation of any orders of the Federal government. To this effect certain documents were sought from the taxpayer through notice No ADCIR/Audit/2014-15, dated 07.05.2015, which were produced vide letter No IT/1692/2015, dated 12.06.2015, and placed of file. After examining these documents it was noticed that the subsidy is being provided to the company by the Federal government for covering the Tariff Differential (difference between NEPRA rates and the rates charged to the consumer), non-charging of fuel price adjustment and settlement of circular debt. Thus, having been utilised in the implementation of orders of the Federal Government, subsidy is exempt in terms of the clause ibid, and is to be excluded from accounting profit for the purpose of ACT. And by doing so, the accounting profit is converted into Accounting loss, hence ACT not chargeable.
On the application of Section 113, RTO Islamabad order said that the taxpayer has argued that although it is categorically mentioned in clause (5) of part-III of the 2nd Schedule to the Ordinance that Minimum tax under section 113 is to be paid by the company on the Sales of Electricity after the exclusion of Electricity cost, up to tax year 2013, yet the benefit of this clause is available up to tax year 2014 because it was omitted by finance act, 2014. To augment its view point, the taxpayer further stated that the omission of this clause by Finance Act, 2014, shows that the legislative intent was to extend the benefit of this clause to tax year 2014 as well.
Before commenting upon the taxpayer's version, it would be worthwhile to reproduce the clause in question for ready reference as under:
"(5) Where the corporatized entities of Pakistan Water and Power Development Authority(DISCOs) and National Transmission and Dispatch Company (NTDC), are required to pay Minimum Tax under section 113, the purchase price of electricity shall be excluded from the turnover liable to minimum tax up to tax year 2013".
The above clause is unambiguously clear that the taxpayer was entitled to exclude the purchase price of electricity from the turnover upto tax year 2013 only, and not beyond that, for the purpose of Minimum Tax under section 113 of the Ordinance. The mere fact that the referred clause was omitted by Finance Act, 2014, does not imply that the legislative intent was to extend its application to tax year 2014 as well. Clause (5) of part-III of the 2nd Schedule to the Ordinance was inserted in the second schedule through SRO 171(1)/2008, dated 21.02.2008. Had the legislative intent been that the taxpayer claims, it would have been categorically incorporated in the SRO as well. Besides, if the legislature wanted to extend this benefit up to tax year 2014, why tax year 2014 was not mentioned in the clause ever since its insertion, or subsequently through an amendment. The fact that the clause remained in the Ordinance with the words "upto tax year 2013" for six years, the legislative intent clearly was not to extend the benefit of the clause ibid to tax year 2014. The taxpayer''s this stance is also negated by its own words when it says, "Furthermore that this matter is currently under consideration of Economic co-ordination committee of the Federal Cabinet and it is likely that this provision will be reinstated with retrospective effect." So, the fact that this issue is purportedly under consideration of the Economic co-ordination committee; it by itself is an indication of the fact that the benefit under the clause ibid is no more available. Therefore, being far-fetched, the taxpayer''s contention is highly unsatisfactory, hence rejected. As regards the inclusion of most of the constituents of "other income" in the Turnover for the purpose of Minimum Tax, the taxpayer has not raised any objection to the same, hence the inference is that the taxpayer agrees with this treatment, order said.
In view of the above discourse, the taxpayer''s deemed assessment order under section 120 of the Ordinance being erroneous as well as prejudicial to the interest of revenue, in that the Minimum Tax under section 113 has been worked out by excluding the purchase price of electricity from the Turnover and that it has not included most of the constituents of "other income in the Turnover, therefore, the same is amended under section 122(5A) of the Ordinance, RTO Islamabad", order added.
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