Diesel-based plants: Sales tax on power supply increased by 20%

Cost of electricity production will jump by Rs3.60 to Rs21.60 per unit.

ISLAMABAD:

In an effort to make up for the loss in tax revenues after the plunge in oil prices, the government has increased the tax rate by 20% on the supply of electricity generated by diesel-fired plants, officials say.

In addition to this, the economic managers have imposed 2.5% regulatory duty on the sale of high-speed diesel and 2% regulatory duty on the sale of furnace oil.

At present, the cost of power production through diesel is Rs18 per unit and after the increase in tax rate it may jump Rs3.60 to Rs21.60 per unit. Experts in the power industry say the higher supply cost will be passed on to consumers.

Earlier, the Ministry of Water and Power recommended a reduction in general sales tax on diesel sales from 37% to 17% in order to bring it on a par with the 17% tax on power supply. However, instead of reducing the tax on sales, the Economic Coordination Committee (ECC) of the cabinet increased the tax on electricity supply to 37%.

Four state-owned power plants in Lahore with power generation capacity of 840 megawatts and another 350MW plant in Faisalabad will run on diesel in summer in the wake of a sharp increase in demand.

According to officials, electricity demand will peak at 25,000MW in summer, up from 23,500MW in the same season last year. However, total power production will range between 15,000MW and 16,000MW.

The ECC, in a meeting held on April 30, imposed 2% levy on furnace oil despite the fact that the prime minister had directed that tax on the fuel should not be raised in order to save consumers from an increase in electricity tariffs.

The ECC was told that the Federal Board of Revenue (FBR) had recently imposed an additional 5% sales tax on fuel oil and associated products. However, the prime minister decided that furnace oil required for power generation would be exempted.

The ECC imposed sales tax on diesel-based electricity generation by independent power producers (IPPs) and state-run generation companies. This would put an unnecessary burden on the consumers as one of the fuel sources was exempted from the tax.

Under Sub-section (1) of Sales Tax Act 1990, the power purchaser was obliged to pay 17% sales tax on the supply of electric power. But contrary to this, sales tax on power supply was increased from 17% to 22% in January, to 27% in February and was further increased to 37% from March.

IPPs were facing great difficulties in running their plants on diesel because a big amount in cash guarantees was stuck with the FBR because of a huge difference in sales tax rates – 37% on diesel sales compared to 17% on supply of electric power. It was, therefore, imperative to bring the tax rates at equal levels.

Under Section 1 and Section 3 of Sales Tax Act 1990, the tax on supply of electric power exclusively generated through diesel should be charged at the corresponding rate of tax on diesel sales.

In a bid to avoid the accumulation of sales tax refund claims and adverse cash flow issues for power producers, it was recommended that sales tax on diesel-based generation may be levied at the same rate for the power sector with effect from January 2015.

The ECC approved the proposal regarding the increase in sales tax on the supply of electricity produced through diesel. 

Published in The Express Tribune, May 7^th, 2015.

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