The federal government has exempted power distribution companies from 1% turnover tax for one more year, providing relief to electricity consumers, but the decision may annoy the International Monetary Fund (IMF) that is advocating withdrawal of all tax exemptions.
Despite resistance by the Federal Board of Revenue (FBR), the Ministry of Water and Power sought a five-year extension in exemption from the minimum turnover tax. However, due to the FBR’s opposition, the ECC gave only a one-year extension, according to officials of the Ministry of Finance.
The ECC, which met here on Thursday, decided to constitute a committee comprising secretaries of the Ministry of Finance, Water and Power and FBR chairman to work on modalities for the extension, said a handout issued by the Ministry of Finance.
Based on the premise that the National Electric Power Regulatory Authority (Nepra) had determined tariff “directly” for the current year and, secondly, the burden should not be passed on to the consumers, the ECC decided to grant a year’s extension, it said.
Nepra set the tariff without taking into account the minimum turnover tax, which would keep power prices lower to the extent of the tax value.
The Ministry of Water and Power, which is the parent ministry of all state-owned power distribution companies, had insisted on the tax exemption, citing the “very weak” financial position of the distribution companies.
In 2008, the previous government had given a five-year exemption, which ended in June 2013. All the power distribution and transmission companies are sustaining heavy losses because of unchecked theft, line losses due to obsolete infrastructure and low recovery of bills. But the size of their balance sheets is too big, enough to give billions of rupees to the FBR in a year.
Under Section 113 of the Income Tax Ordinance of 2001, the FBR charges 1% tax on gross turnover of a company that is suffering from losses. If a company is profitable, it pays 35% income tax.
Under the constitution, income tax can be charged only when an entity or an individual is earning profit. But over the years, the FBR has imposed turnover tax to increase its revenues.
“The minimum turnover tax is nothing but a semi-direct tax,” remarked Ashfaq Tola, a renowned tax expert.
FBR Chairman Tariq Bajwa opposed the tax exemption during the ECC meeting, according to the officials. He reminded ECC Chairman Ishaq Dar, who is also the finance minister, Pakistan had committed to the IMF that it would not issue any new Statutory Regulatory Order (SRO) to give tax concessions. SRO is a legal instrument used to make changes to the law.
Under an agreement with the IMF, the government has completed an assessment to determine the exact size of tax exemptions. The FBR has estimated the exemptions at over Rs500 billion annually.
In a recent interview to The Express Tribune, Jeffery Franks, the IMF’s Washington-based mission chief to Pakistan, said the government had committed to implementing a plan to do away with the tax exemptions from the new fiscal year starting July.
The ECC turned down a request of the Ministry of Commerce to increase the ceiling set for sugar export and said the millers should first exhaust the existing limit of 400,000 tons.
Since the PML-N government allowed the export of sugar, prices of the commodity have increased by Rs5 per kg in the domestic market.
The ECC showed its dissatisfaction over the incomplete work done by the Ministry of Planning, Development and Reforms on import and distribution of fertiliser.
It constituted a sub-committee, led by the minister of planning and development, which would review jurisdictional placement of different federal government organisations after the devolution (post-18th Amendment) for review on professional lines, focusing on synergy, improved governance and coordination.
Published in The Express Tribune, February 14th, 2014.
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