Non-payment of refunds to Discos pushing up circular debt

ZAHEER ABBASI

ISLAMABAD: The non-payment of sales tax refunds by Federal Board of Revenue (FBR) to the distribution companies is one of the contributors to the power sector’s circular debt.

The Special Committee of the Senate on Circular Debt headed by Senator Shibli Faraz was constituted with terms of reference to examine all individual components of the circular debt, measures taken by the government to reduce the same and possibility of establishing three high-level committees to oversee the proposed reforms by the government to alleviate circular debt and address its underlying causes.

According to the report of the Senate committee, circulation of funds (injecting as loan/subsidy in power sector and taking out as taxes) results in refund claims of Discos that usually are not paid by Federal Board of Revenue (FBR). These refund related issues usually relate to sales tax and income tax.

Sale tax issues included: (i) the levy of sales tax on subsidy granted by the government to the Discos; (ii) disallowance of input credit against transmission and line losses; (iii) payment of sales tax on accrual basis rather than on collection basis because low recovery rates of Discos become a double financial hit; (iv) demand to charge sales tax on supply to AJ&K and domestic consumers of FATA on zero rate; (v) and chargeability of sales tax on capacity purchase price in case of Central Power Purchasing Agency (CPPA).

Income tax related matters pointed out by the power sector were; (i) the income tax issues included levy of minimum tax (Turnover Tax) on Discos; (ii) and transmission of electricity is not considered as supply of electricity by tax authorities rather it is considered as service requiring deduction of withholding tax by CPPA-G on payments to NTDCL.

The Discos have separate registrations with sales tax department and out of these 10 Discos, some claim refunds and others pay liability through separate returns.

Therefore, it may be appropriate to modify sales tax rules to allow consolidated sales tax returns and discharge netted off liability for all the distribution companies at CPPA level. This will help reduce cash flow issues for the power sector.

In recent past, a series of meetings were held between Ministry of Energy (Power Division) and FBR to discuss various tax issues and a summary has been moved by Ministry of Energy to ECC for approval on April 2018. However, these proposals and recommendations did not include consideration of consolidated tax approach for Discos.

The proceedings of above-referred meetings and related proposals from Discos, responses of FBR and recommendations of Ministry of Energy (Power Division) were included in the report that highlighted that Discos at their own level litigated the tax issues in appellate tribunals and got relief.