Finance Minister Asad Umar has directed Finance Division and Power Division to arrange Rs 300 billion Islamic financing by mortgaging Discos' assets, aimed at reducing the stock of circular debt. Hubco's Chief Executive Officer Khalid Mansoor has written a letter to chairman Federal Board of Revenue (FBR), seeking his help in resolution of outstanding refunds appearing in sales tax returns of Hubco which is being assessed at the Large Tax Payers Unit, Islamabad, and sorting out circular debt, a permanent threat to the economy.
According to him, under the Sales Tax Act, 1990, all taxable supplies including supply of RFO and electricity are subject to 17 per cent GST. However, in October 2015, the supply of RFO by PSO was subjected to an enhanced rate of 20 per cent GST instead of 17 per cent while the GST rate payable on electricity was not changed and kept at 17 per cent. On IPPs representation and frequent follow-ups, the GST rate on RFO was reduced from 20 per cent to 17 per cent effective July 2018.
The company uses Residual Furnace Oil (RFO) for the production and supply of electricity, being supplied to the Central Power Purchasing Agency Guaranteed (CPPA-G). The RFO is exclusively supplied by Pakistan State Oil (PSO) to the company. Due this anomaly in input and output rates, a huge amount of GST became refundable from FBR and as of September 2018, the refund stands at Rs 6.4 billion. With the current scenario of low load factors for RFO plants, the company does not expect a substantial reduction in the refund amount in near future.
According to the power company, rising circular debt has resulted in severe liquidity constraints on the company. As of September 30, 2018, the overdue amount from the power purchaser stands at Rs 73.6 billion. "Circular debt as well as the financial strain on the company could be partially address by making supply of RFO by PSO to the company as "zero rated" supply under section 4 of the Act," the sources quoted CEO Hubco as saying in his letter.
Khalid Mansoor is of the view that this act would have following effects as well, in addition to the reduction of overall circular debt: (i) there would be no revenue loss as the company would continue supplying electricity by paying 17 per cent GST to FBR and; (ii) existing refund of Rs 6.4 billion would reduce gradually. "The company has requested chairman FBR to direct the concerned officials to issue the necessary notification by making supply of RFO by PSO to the company as "zero rated" supply under section 4 of the Act," the sources maintained.