The Federal Board of Revenue (FBR) and Ministry of Water and Power have decided to discuss major tax related issues of power sector here on December 14 (Wednesday). Sources told Business Recorder here on Monday that subsequent to the meeting held on December 2, 2016 under the chairmanship of Secretary, Ministry of Law & Justice it was decided that a meeting between FBR and power sector's relevant agencies may be held on Wednesday (December 14, 2016) in FBR to deliberate and find amicable solution either through mutual agreement or through required amendments in the applicable law for the taxation issue with power sector.
According to the issues highlighted by the Ministry of Water and Power to the FBR, the financial position of the power sector is under pressure owing to non-availability of required cash flow to meet the energy requirements/generation. This situation is further complicated by the tax authorities by attachment of bank accounts of distribution companies on disputed issues. Appellate Tribunal Inland Revenue (ATIR) has even set aside FBR demands on many occasions.
In order to resolve tax disputes, a meeting was held in Ministry of Water & Power wherein Member (IR) FBR along with team participated. Issues were explained by distribution companies, distribution companies, which are 100 percent owned by the GoP, are following GOP policy; visualising that government-owned entities should avoid litigation and disputes to be resolved in an amicable way. In the meeting, it was also decided that following disputed issues may be referred to Law and Justice Division in order to get legal opinion so that both government departments may avoid litigation and act accordingly.
Payment of Sales Tax on Subsidy provided by federal government: Tax authorities are creating tax demands, pressing and initiating litigation on the grounds that Sales Tax @ 17 percent is to be paid on the tariff differential subsidy (TDS) being provided by the GOP under its socio-political policy decisions. Tariff subsidy is actually being provided to electricity consumers and is not part of the total sales. Sales Tax is levied on the sale and purchase activities under Sec-2(46) of Sales Tax Act 1990 where transfer of goods takes place. ATIR, Islamabad, accepted the appeal of PESCO on levy of GST on TDS and decided in favour of the company, vide STA 96/PB/2013 and STA 170/PB/2011 by staling that "sales tax is not payable on the subsidy received by PESCO from the government of Pakistan."
Adjustment of Input tax relating to Transmission and Distribution Losses: Tax authorities are of the view that losses of distribution system are not to be deducted in calculating sales. Resultantly, input tax adjustments are not being allowed in case of distribution losses, whereas in all processing industries and CNG stations, distribution losses are recognised and allowed by the tax authorities. Such losses are recognised all over the world. Even in some countries tax paid on goods destroyed is legible for tax adjustment. The fact is that power tariff is determined after taking into account losses factor resulting higher tariff. By this way there is no reduction in value of supply and amount of tax. Hence any further/artificial increase in sales volume by not allowing losses is nothing but over taxation, where losses are already part of sales price/ tariff. In spite of facts, tax distribution companies by tax authorities are being issued resulting involvement in litigations and attachments of bank accounts. It is pertinent to apprise that ATIR, Islamabad & Lahore accepted the appeals of PESCO & FESCO on levy of GST on T&D losses and decided in favour of the companies, vide STA 96/PB/2013 and, STA 170/PB/2011 and STA 874/LB/2013 respectively, stating the admissibility of input tax relating to T&D losses is in order.
Sales Tax on cash Collection Basis: Electricity was subjected to sales tax w.e.f. January 2000 and as per act-sales tax was required to be deposited on cash collection basis. Clause 5, Para· 1 of Electric Power Rules of 2000. Later on through amendment vide SRO No 560(I)/2006 dated 5.6.2006 w.e.f. 1.7.2006. Para-1 of Clause-39 was amended and words "Cash Collection basis" were replaced by Accrual Basis. In the wake of such amendment power sector companies are liable to pay sales tax even on behalf of even those consumers who do not pay their electricity bills, resulting accumulation of GST receivables of Rs 75 billion from DISCOs as on 29.2.2016. However, the subject issue was submitted to ECC for providing relief to power sector companies by reverting to deposit of sales tax on cash collection basis instead of accrual basis. The cabinet, in its meeting held on 12th October, 2011, while taking the briefing from Committee on Energy, inter-alia, decided that: Payment of GST by receiving agencies on non-paid bills shall be exempted.
The FBR was of the view that word exemption used in the Cabinet decision would result in restricting input sales tax adjustment to WAPDA (DISCOs) and KESC due to the legal bar on adjustment of input sales tax in case of exempt supplies and thus intension behind the decision will remain unfulfilled. In response, Ministry of Water & Power is of the view that zero rated sales tax will further escalate problem of GST refund and cabinet decision vide Case No 211/12/2011 dated 12th October, 2011 is required to be amended: In case of WAPDA (DISCOs) sales tax shall be collected during a tax period 'cash collection basis'.
Sales Tax not charged on supply to AJ&K: President/ Chief Executive of Pakistan in the past decided during the presentation of Mangla Raising Dam Project that FBR will not levy GST on electricity generated and supplied to AJK. It is also pointed out that copy of the minutes of the subject presentation was also provided to the then chairman FBR at that time. The chairman FBR did neither object on these minutes nor did issue any contrary instructions, which means he principally accepted the subject decision. At present bulk supply tariff is being applied for AJ&K and sales tax is not being charged as per aforesaid decision. Under Para-C of the said tariff it was mentioned that FBR will not charge GST on electricity generated and supplied to AJ&K. Consequently, GST is not being charged by power distribution companies on electricity supplied to AJK. Instead of issuance of notification from FBR litigation has been started due to non-levy of GST on power supplied to AJK with some Companies. ATIR Islamabad agreed in case of IESCO that sales tax is not applicable on power supply to AJK being independent state, FBR appealed to Islamabad High Court that accepted appeal and set aside ATIR decision. Now the IESCO has filed appeal in Supreme Court. Principally decision taken with AJK regarding non levy of sales tax needs to be implemented. In view of the aforesaid, Law and Justice Division is requested to legally analyse the aforesaid issues and guide this ministry to avoid litigation between the DISCOs and FBR, Ministry of Water and Power added.
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