A recent decision of the Economic Co-ordination Committee (ECC) of the Cabinet on extension in exemption of power companies from income tax on Purchase Price of Electricity (PPE) has reportedly created confusion in the power sector as FBR has directed banks to attach accounts of Discos, well informed sources told Business Recorder.
Officials in the Ministry of Water and Power who represented the Ministry in the ECC meeting were confident that a one-year extension in exemption has been granted to Discos, but the decision conveyed to them is different from what they heard in the meeting.
An official statement issued after the ECC meeting held on February 13, 2014 stated "the forum further considered Ministry of Water and Power''s summary and approved in principle one year extension in FBR''s SRO of 21 February 2008 on the ground that Nepra has directly determined tariff for the current year and; secondly, the burden should not be passed on to the consumers. ECC further decided to constitute a committee comprising Secretaries Ministry of Finance, Water and Power and Chairman FBR to work out modalities for the said extension".
Official documents available with Business Recorder reveal that the meeting was informed that the power tariffs of the (Gencos, Discos, NTDCL etc) were not cost compatible. At the time of corporatization, it was rational to pass on all exemptions available to Wapda to the corporate entities to keep the taxation system on a smooth footing. These entities were allowed income tax exemptions from their creation to their privatisation on notification of companies'' tariff. However, all the exemptions under Section-53, Second Schedule, were withdrawn and companies were also made liable to pay a minimum tax under Clause-113 of the Ordinance.
It was stated that in case of power sector, NTDC and Discos transfer electric power while charging wheeling charges and distribution margin. Therefore, it was not appropriate to include the purchase price of electricity in the turnover. In this context, FBR issued S.R.O.171(1)2008 adding Clause-5 of Part-3 of Second Schedule to Income Tax Ordinance-2000, stating: "Where the corporatized entities of Pakistan Water and Power Development Authority (Discos ) and 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".
It was stated that this SRO was issued when NTDC and Discos transfer the same electricity by charging wheeling charges and a distribution margin. Therefore, the real turnover of the companies is restricted to wheeling charges and distribution margin respectively and the price of electricity is ostensibly taken into account for accounting purposes only. However, if the price of electricity is subjected to minimum tax, the corporatized entities of Wapda will be burdened with a multiple taxation resulting in undue discrimination between the entities and the companies independent to determining their margin of profit on the whole of their turnover. Moreover, such multiple taxation will not only undermine the financial viability of the corporatized entities of Wapda but will also ultimately result in higher cost of power which would adversely affect the economic growth up to the date of the privatisation of corporatized entities of Wapda .
It was proposed that cost of electricity should not be liable to the minimum tax in view of the very weak financial position of corporatized entities of Wapda (Discos) and the SRO. 17(1)2008 dated 21-02-2008 be extended for further five years up to June 2018.
The meeting observed that the Federal Board of Revenue has not endorsed the proposal on the ground that earlier exemption was a short term measure for improvement of financial condition of corporatized entities of WAPDA (Discos) and could not be converted into a long term measure, Moreover, Finance Division''s no objection was also contingent upon Revenue Division''s support, which was lacking.
Minutes officially conveyed to the Ministry of Water and Power are as follows: The Economic Co-ordination Committee of the Cabinet considered the summary, dated 27th January 2014, submitted by the Ministry of Water and Power "Extension in exclusion granted to PPE (Purchase Price of Electricity) through SRO 171(1)/2008 dated 21st February 2008 up to date of Privatisation of the Corporatized Entities of WAPDA" and constituted a committee under the chairmanship of Secretary, Finance Division with Secretary, Ministry of Water and Power and Chairman FBR to look into the issue and suggest a way forward to the ECC. The Secretariat support to the committee will be provided by the Minister of Water and Power.