Well-informed sources told Business Recorder that at a recent top level meeting, Water and Power Ministry updated the high-ups of Finance Ministry about the issues related to circular debt and sought similar treatment in collection of sales tax as is being enjoyed by Hubco, Kapco and other Independent Power Producers (IPPs).
The MoF was further informed that one of the major factors for the piling up of the circular debt is blocking by FBR an amount of Rs 72.1 billion against which claims filed amount to Rs 35.2 billion either as refund or excess of input tax. "Not only is this heavy amount blocked with FBR but Discos and Gencos are also facing serious litigation with FBR over Rs 79 billion due to which they are also forced to incur legal charges," the sources quoted Water and Power Ministry as saying in its plea.
Last month, Minister for Finance had directed settlement of issues with FBR and release of stuck up amount to the power sector entities but progress on this matter remains negligible. The Ministry of Water and Power has requested FBR not to make forced recovery through attachment of the bank accounts of power sector entities and pointed out at least fourteen main issues on which Discos have been facing litigation with tax authorities which are as follows:
1) Attachment of bank accounts of Discos: There are many incidents of attachment of bank accounts of different Discos by FBR. It has aggravated the gravity of already existing financial crunch in power sector. Water and Power Ministry has requested that the respective RTOs, LTUs across the country may be directed not to attach the accounts of Discos till the resolution of circular debt ie December 31, 2013.
2) GST refund claims filed but payment not received: Corporatized entities of Wapda file sales tax returns on regular basis. Resultantly the tax liability is paid on timely basis. On the other hand, there is excess input tax relative to out tax of some companies therefore they are entitled to get refunds from FBR. Despite their hectic efforts tax authorities are not paying refunds and even in some cases companies are being involved in litigation on technical grounds.
3) Application of Sales Tax on Electricity supplies to AJK: President/Chief Executive of Pakistan on September 26, 2002 decided during the presentation of Mangla Raising Dam Project that CBR (now FBR) will not levy GST on electricity generated and supplied to AJK. Consequently electricity supplied to AJK is not being charged GST. Instead of issuance of notification from CBR/FBR litigation has started due to non-levy of GST on power supplied to AJK with some companies.
4) Water and Power Ministry maintains that despite all efforts and compliance with rules & procedures, FBR took coercive action and recovered millions of rupees from Bank accounts of Iesco. In case of Iesco, ATIR Islamabad has held that supplies to AJK are exempt from tax. Based on this decision LTU Islamabad has interpreted that being an exempt supply proportionate input tax is not admissible & again started litigation.
The ministry has requested that notification in this regard may be issued clarifying that neither the sales tax will be charged nor proportionate input tax will be disallowed with retrospective effect.
5) Adjustment of Input Tax against Sales Tax collected from steel melters: Distribution companies are collecting sales tax @ Rs 7 per unit from steel melters and re-rollers and it is included in the output tax of the company. Under the prescribed rules and procedures, all distribution companies are entitled to claim the input adjustment against their output tax. The same mechanism of adjustment of Input tax against the output tax is also supported by the Web Portal Sales Tax Return Form issued by FBR which automatically makes the adjustment of input tax from output tax and calculates the monthly tax liability of Discos.
7) Water and Power Ministry has claimed that despite all the efforts and compliance with rules & procedures, FBR took coercive actions and recovered billion of rupees from bank accounts of various Discos. Ministry has sought adjustment in the light of decision of the Lahore High Court.
8) Payment of Sales Tax on subsidy provided by federal government: Nepra is determining tariff based on cost of supply, but due to socio-economic conditions of the people, GoP is picking up tariff differential in order to provide electricity at subsidised rates. Tax authorities are pressing and initiating litigation on the ground that Sales Tax @ 16 percent is to be paid on the tariff differential subsidy provided by the GoP despite the fact that Sales Tax is levied on the sale of electricity under rules 13 and 14 of the special procedures of the sales tax on electricity. Rule 14 in particular provides that the sales tax shall be charged to the amount billed to the consumers. Subsidy is not billed to the consumers. Therefore, sales tax should not be charged and input tax should also be allowed against it.
9) Adjustment of in-put tax relating to line losses: The Tax authorities argue that losses are not involved in distribution system. Resultantly input tax adjustment is not being allowed in case of distribution losses, whereas in all Processing Industries and CNG Stations, distribution losses are recognised by Tax Authorities. Such losses are recognised all over the world. Even in some countries tax paid on goods destroyed is legible for tax adjustment. The fact is that tariff is determined after incorporation of line losses so companies may not be involved in litigations.
10) Sales Tax not charged on supply of Electricity to Pata: Pesco levied sales tax on the bills in Pata but local courts stopped Pesco from collecting sales tax and the appellant forum in Swat did not accept the appeal. Pesco has approached high court and case is pending. RTA has initiated litigation with the Pesco for evasion of Sales Tax.
11) Sales Tax on Development Activities: Distribution companies are under taking development activities on' behalf of GoP for installation and distribution of electricity network through MNA's quota in the Provinces. Tax authorities are stressing for payment of sales tax, on these development works and are initiating litigation.
12) Payment of sales tax on billing basis: Power Sector Distribution Companies have been forced to pay sales tax on billing basis through amendment in the Sates tax Act since July, 2006. Consequently, Discos are paying tax on behalf of those consumers who are not paying their electricity bills. Therefore, Water and Power Ministry has requested that Discos may be allowed to pay sales tax on cash collection basis like in the past up to June, 2006.
13) Payment of sales tax on capacity charges: Prior to 2008 the GST returns of all the corporate entities was centrally filed by Wapda by paying the GST on the value of energy purchase price only as per Rule 13(3) of Sales Tax Special Procedure Rules 2007.
14) Tax authorities argue that M/s Jamshoro Power Company Limited (JPCL) and Lakhra Power Generation Company Limited (LPGC) being public sector companies are not at par with IPPs like Hubco or Kapco, hence, cannot enjoy the exemption of sales tax on Capacity payments.
Deputy Commissioner Inland Revenue, Regional Tax Office, Hyderabad issued orders for recovery of unpaid amount of Sales Tax for Rs 471.919 million and Rs 506.827 million on Capacity Charges for the Financial Years 2007-08 and 2008-09 respectively from Jamshoro Power Company and Rs 39.495 million from LPGC for each year. Further, Tax authorities have issued notice on 21.06.2011 for recovery of Government dues by attachment of JPCL Bank Accounts in terms of Section 48(1) (CA) of Sales Tax Act, 1990.
JPCL & LPGCL applied for GST refund with respective tax authorities but instead of paying refund special audits were conducted and they were put in unnecessary litigation. Ministry of Water and Power maintains that Sales Tax Special Procedure Rule 2007 is to be applied on equal level keeping in view the law of consistency. The procedure adopted in case of IPPs, like Hubco or Kapco needs to be applied for companies operating in public sector. Hubco, Kapco and Gencos are registered under the Companies Ordinance 1984 and have equal status. The ministry has suggested that issue may be resolved with FBR through amendments in the Special Rules in the light of Sales Tax Act 1990.
Minimum Tax under Section 113 of income Tax Ordinance: In case of Discos the minimum tax is payable as per clause (6) of part 111 of the second schedule of the Income Tax Ordinance 2001, which is reproduced as under: "Where the corporatized entities of Pakistan Water and Power Development Authority (Discos) and National Transmission and Dispatch Company (NTDC) are required to pay minimum tax under section 113, the purchase price of electricity shall be excluded from the turnover liable to minimum tax up to the tax year 2013." The ministry has requested that the scope of this clause be enhanced up to completion of privatisation process of these entities.