The non-payment of power distribution companies' refunds and taxation issues from collection of sales tax on billed amount to turnover tax are creating fiscal problems and are some of the major factors of power sector circular debt.
Sources told Business Recorder that different power distributing companies have also been urging for necessary legislation regarding the payment of sales tax on collection instead of on billed amount because of liquidity position of Discos. The distribution companies have cited non-payment of refunds, besides low recovery, as main factor for circular debt.
An official of the Finance Ministry stated that this was the general view of all the distribution companies that tax authorities have been charging sales tax on billed amount instead of on collection and consequently creating fiscal problems for the Discos. They added that the issue of circular debt in the power sector has been under discussion from all its aspects in the Finance Ministry from the day one.
Peshawar Electric Supply Company (PESCO) stated that it is facing various issues that are having direct impact on circular debt and these are needed to be addressed on urgent basis. The power distribution company added that amounts of Rs 25.5 billion and Rs 3.4 billion are receivable on account of tariff differential subsidy (TDS) and Industrial Support Package (ISP) respectively from government as on June 30, 2018.
Additionally PESCO complained that the FBR is collecting sales tax from Discos on billing basis irrespective of the fact whether this amount has been collected or not; thereby resulting in huge cash flow problems for PESCO and ultimately to CPPA as the collection of PESCO is around 90 percent and the overpayment to FBR on billing basis is contributing towards the short payment to Central Power Purchasing Agency (CPPA) and is a major cause of circular debt.
The PESCO further said that the issue of turnover tax has financial implication of more than Rs 1 billion per annum. The PESCO also cited the example of Wapda and stated that Wapda is exempted from income tax under Income Tax Ordinance 2001 and at the time of corporatization of Discos, it was considered to pass on all exemptions available to Wapda to its corporate entities.
Thus, keeping in view the implication of taxes and weak financial position of Discos, FBR issued SRO-171(1)2008, wherein It is stated "where the corporatized entities of Pakistan Water and Power Development Authority (Discos) and NTDC are required to pay minimum tax, the purchase price of electricity will be excluded from the turnover liable to minimum tax up to the tax year 2013.
The PESCO further stated that NTDC and DISCOs transfer the electricity by charging wheeling charges and a distribution margin, therefore, the real turnover of the companies comprises these sources. However, if the price of electricity is subjected to minimum tax, DISCOs will be burdened with a multiple taxation resulting In undue discrimination between the Discos and the companies independent to determine the margin of profit on the whole of the turnover, the PESCO maintained.
Moreover, such multiple taxations will not only undermine the financial viability of Discos but will also ultimately result in higher cost of power which would adversely affect the economic growth.
Therefore, PESCO proposed that cost of electricity should not be liable to the minimum tax and multiple taxation and very weak financial position of Discos and the SRO of dated 21-02-2008 may be extended till the privatization of Discos.
Sources further added that an amount of Rs 18.6 billion is outstanding against government of Khyber Pakhtunkhwa (KPK) on account of stay on tariff from September 2008 to Sept 2010. The PESCO also has an outstanding refund of Rs 31 billion against FBR, out of which Rs 15 billion have been decided in favor of PESCO by Appellate Tribunal Inland Revenue (ATIR), however the same is yet to be released to PESCO. The FBR has created tax demand of Rs 5 billion on account of non-charging of sales tax on tariff differential subsidy due from government.
Similarly, Azad Jammu and Kashmir (AJK) receivables of Rs 20.2 billion are outstanding as on June 30, 2018.