FTO Orders 18% Sales Tax Collection
The Federal Tax Ombudsman (FTO) has uncovered a revenue loss of Rs. 9.4 billion and directed the Federal Board of Revenue (FBR) to enforce the collection of 18% sales tax from solar net metering electricity consumers across all four provinces. The directive instructs power distribution companies (DISCOs) to charge sales tax on the gross value of electricity supplied, without considering any reductions due to net metering.
Impact on Tax Revenue and Consumers
The FTO order also highlights a Rs. 3 billion loss in Withholding Income Tax due to the incorrect application of sales tax laws by power companies. This move aims to recover lost revenue and ensure uniform taxation policies among all DISCOs.
The complaint leading to this investigation was filed under Section 10(1) of the FTO Ordinance, 2000, challenging the alleged illegal sales tax charges on gross electricity supply instead of the net metering basis, as outlined in NEPRA SRO 892(1)/2015 and the Net-Metering Reference Guide by the Alternative Energy Development Board (AEDB).
K-Electric Consumers Face Discriminatory Charges
A K-Electric consumer who installed solar panels under NEPRA’s distributed generation framework lodged the complaint, arguing that K-Electric was incorrectly charging sales tax on the total electricity supplied rather than the net amount after subtracting solar-generated electricity.
In contrast, other DISCOs apply sales tax only on net electricity units, meaning K-Electric customers end up paying significantly higher electricity bills compared to consumers in other regions.
FBR’s Stance and Future Enforcement
The FTO report confirmed that FBR had previously clarified that all DISCOs, including K-Electric, must charge sales tax on the gross amount of electricity supplied, regardless of net metering. Despite these directives, enforcement remained weak, causing substantial revenue losses.
FTO also pointed out that the non-enforcement of tax laws resulted from administrative neglect, inefficiency, and delay, further exacerbating fiscal challenges. However, the complaint failed to establish clear maladministration under Section 2(3) of the FTO Ordinance, as K-Electric was following FBR’s taxation guidelines.
The decision now places additional financial strain on solar consumers as they will be required to pay full sales tax on electricity consumption, irrespective of net metering benefits.
