Govt to scrap tax on power subsidy

Move will resolve dispute between distribution firms and FBR

ISLAMABAD:

The government has decided to resolve the controversy over the tax on subsidy being doled out to electricity consumers and decided to remove the levy in the upcoming budget for fiscal year 2022-23.

The tax on subsidy has been a chronic issue between the power distribution companies and the Federal Board of Revenue (FBR) as the latter collects sales tax on the subsidy given to the consumers.

Now, the government has decided to exempt the subsidy from sales tax through the Finance Bill 2022.

According to the Power Division, the distribution companies (DISCOs) are bound to charge the tariff determined by the National Electric Power Regulatory Authority (Nepra) and notified by the federal government.

It is the tariff that is collected from the end-consumers and the difference is called tariff differential subsidy (TDS).

The federal government picks the cost of TDS to facilitate the end-consumers and provides subsidy to cover the cost incurred by DISCOs on the purchase of electricity.

However, the FBR tends to collect sales tax on the TDS considering it a payment against the supply of goods.

The FBR argues that no exemption under the Sales Tax Act, 1990 was available to the TDS granted by the government to DISCOs as part of its socio-economic policy.

Power Division, however, was of the view that the collection of sales tax from DISCOs would result in an increase in the circular debt.

The division placed the matter before the Economic Coordination Committee (ECC) on September 30, 2021. However, the ECC put off its decision with the directive to seek specific legal opinion of the Law and Justice Division on the applicability of sales tax to the subsidy for electricity consumers.

In response, the Law Division pointed out that “a special full bench of the Appellate Tribunal Inland Revenue, Lahore bench and others have been pleased to hold that no sales tax is leviable on the amount of subsidy provided by the government to an electric supply distribution company.”

It was also noticed that although appeals had been filed by the FBR in the respective forums, they were still pending. Therefore, “decisions of the relevant appellate forums in favour of five DISCOs still hold ground”.

In order to resolve the issue, a series of meetings were held from time to time among the stakeholders.

In the last meeting held under the chairmanship of Power Division secretary on February 22, 2022, it was decided to insert an explanation after Section 2(46)(i) in the Sales Tax Act 1990, so as to explicitly clarify that the “government subsidy is not part of such value of supply for the purpose of charging sales tax under the Act”.

Approval of the cabinet was solicited to insert the explanation in the Sales Tax Act through the Finance Bill 2022.

The government will include the explanation in the Finance Bill that says “the value of supply does not include the amount provided by the federal government/ provincial governments to consumers and has never been chargeable to tax under the Act”.

The Power Division told the ECC in a recent meeting that the proposed explanation would definitely save several unnecessary litigations due to the lacunae in laws as well as resolve the lingering chronic issues.

After approval of the cabinet, the proposed explanation may be placed before parliament along with the upcoming Finance Bill.

During discussion, the ECC emphasised that for the insertion of explanation clause in the Sales Tax Act, the appropriate thing was the Finance Bill. It gave directives to submit the matter with the money bill in order to resolve the issue in the Finance Bill.

The ECC considered a summary submitted by the Power Division titled “Levy of sales tax on subsidy granted by the government of Pakistan to the distribution companies” and allowed to withdraw the summary.

Published in The Express Tribune, June 9^th, 2022.

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