The dispute between Federal Board of Revenue (FBR) and Distribution Companies (Discos) on the legality of taxes has reportedly landed in the Ministry of Law and Justice for a legal opinion as power sector is facing financial difficulties in meeting its cash requirements, well informed sources in Pepco told Business Recorder. The sources said Ministry of Water and Power recently held a meeting with senior officials of FBR to sort out these tricky issues.
However, the meeting remained inconclusive. According to sources, the representatives of Discos argued that public sector power companies were following GoP policy and were urged to avoid litigation and disputes and resolve issues within the department. The representatives of FBR argued that public sector companies are not paying their due taxes due to which the tax collecting agency has opted for a stringent action against them. FBR, sources said, had attached accounts of Discos to meet the revenue shortfall despite the fact that the companies are depositing taxes on time. Secretary Water and Power, Younus Dagha, sources said, directed Discos to provide a helping hand to FBR so that due taxes can be collected.
The sources said it was agreed in the meeting that opinion of Law Ministry should be sought to resolve disputed issues between the two government departments. Explaining the position of power sector, the sources stated that tax authorities are initiating a litigation on grounds that Sales Tax @ 17% 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 while 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, by stating that sales tax is not payable on the subsidy received by Pesco from the GoP.
The sources said, tax officials are also arguing that losses are not involved in distribution system. 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 by FBR. On the other hand the representatives of Discos argued that such losses are recognised throughout the world and in some countries tax paid on goods destroyed is legal for tax adjustment.
Discos further argued that power tariff is determined after taking into account losses, a factor resulting in higher tariff which implies that there is no reduction in value of supply and amount of tax. Contrary to this fact, tax authorities are levying tax on companies resulting in litigations and attachments of bank accounts. ATIR, Islamabad & Lahore accepted the appeals of Pesco & Fesco on levy of GST on T&D losses and decided in favour of the companies.
The sources further stated that electricity was subjected to sales tax from January, 2000 and as per the Sales Tax Act it was required to be deposited on cash collection basis. However, later on through an amendment in 2006 the words "cash collection basis" were replaced by "accrual basis" due to which power sector companies are liable to pay GST even on behalf of those consumers who do not pay their electricity bills, resulting in the accumulation of GST receivables of Rs 75 billion from Discos'' consumers as on 29 February 2016. This matter was placed before the ECC for providing relief to power sector companies by reverting to the practice of depositing sales tax on "cash collection basis" instead of "accrual basis". It was decided that payment of GST by receiving agencies on non-paid bills shall be exempted.
FBR argues that the word "exemption" used in the Cabinet decision would result in restricting input sales tax adjustment to WAPDA (Discos) and KE due to the legal bar on adjustment of input sales tax in case of exempt supplies which implies that the logic behind the decision will remain unfulfilled. Therefore, the Revenue Division referred the matter to Cabinet Division proposing to the Cabinet Division that the word "exemption" may be replaced with "zero-rated". It was, however, sent to Ministry of Water and Power for comments before bringing to the notice of Prime Minister stating that presently levy of sales tax on electricity is resulting in net refunds to Discos and KE due to more input tax than output tax.
The sources said Pepco conveyed that zero-rated sales tax will further escalate problem of GST refund and requested the Cabinet Division for amendment in its decision in the following manner: "In case of Discos GST shall be collected during a tax period on "cash collection basis"."
The sources further stated that collection of sales tax from Discos on behalf of such consumers not paying bills cannot be justified as it places an extra burden on the financial health of companies. It was recommended companies be allowed to pay tax on actual cash collection.
The sources said another meeting is expected to be held between the stakeholders during the first week of next month aimed at resolving the tax dispute amicably. Water and Power Ministry took this matter up with the FBR during the PPP government. The then Secretary Water and Power, Zafar Mahmood (now Chairman Wapda), had written a letter to the Chairman FBR to resolve issues related to "unjustified" tax.