FBR serves notices for recovery of another Rs52.76 billion despite strong opposition from Power Division.

ISLAMABAD   -   The Federal Board of Revenue has recovered Rs13.86 billion from the bank accounts of three power distribution companies (Discos), on account of general sales tax on the supply of electricity to Azad Jammu and Kashmir, and served notices for the recovery of another Rs 52.76 billion on same grounds, despite strong opposition from the Power Division.

The FBR has recovered Rs10.50 billion from the bank account of Islamabad Electric Supply Company (IESCO), Rs1.78 billion from Peshawar Electric Supply Company (PESCO), and Rs1.58 billion from Gujranwala Electric Power Company (GEPCO) on account of GST on the supply of electricity to AJK, official source told The Nation. The board has also served notices to IESCO for the recovery of Rs 47 billion and Rs 5.76 billion to GEPCO on the account of GST on the power supply to AJK, the source added. The GST collection will have an annual impact of Rs 12.726 billion on the Discos that are currently providing power to AJK.

The Power Division on the other hand disputing the levying of GST on electricity supply to AJK, by FBR, has termed it as violation of the agreement signed between government of Pakistan and AJK, in 2003, at the time of Mangla Dam raising, and proposed that no GST should be charged on the power supply. To stop FBR from recovery of GST from the ex-WAPDA distribution companies, the Power Division has moved a summary to ECC arguing that an agreement for raising of Mangla Dam was signed among the then Ministry of Water and Power, WAPDA and Government of AJ&K on June 23, 2003.

According to the agreement, the Ministry shall ensure that the CBR (now FBR) does not levy the GST on electricity generated in and supplied to AJ&K since the GST is applicable in Pakistan and AJ&K already charges GST through its tax department. All rules prescribed by the Government of Pakistan with respect to GST would be applicable to the government. Consequently, the relevant DISCOs (IESCO, PESCO & GEPCO) are supplying electricity to AJ&K without charging any GST and treating the same as zero rated in accordance with the provision of the bilateral agreement.

Despite the fact that the bilateral agreement between two governments cannot be made subservient to any subordinate legislation, even if so exist or made to life, FBR does not recognize supply to AJ&K as zero rated and pushing for the recovery of the GST. According to the source, FBR has recovered huge amounts from the bank accounts of DISCOs with the view that supply of electricity to the AJK is neither exempted in terms of section 13, nor zero rated in terms of section 4 of Sales Tax Act 1990 and accordingly should be subject to applicable rates of sales tax.

The value of supply does not include the amount of subsidy provided by the federal government to provincial governments on the electricity or natural gas including re-gasified liquefied natural gas consumers and has never been chargeable to tax under the Act. In September 2023, FBR accepted the stance of PESCO and excluded the amount of electricity supplied by PESCO to AJK from the value of supply to the extent of subsidy received in that case.

Meanwhile, Finance Division held a meeting on January 08, 2024 under the chairmanship of the finance secretary, with the participation of all stakeholders, and deliberated on the issue holistically and it was decided that the Power Division may make recommendation to FBR for inclusion of the zero rating of “supply of electricity to AJK” in the Finance Bill for FY2024 25 and FBR will consider inclusion of the proposal in Finance Bill.

It needs to be emphasized that the matter carries financial implications for the DISCOs, by putting them in severe financial crunch, but also for the power sector in terms of swelling of circular debt. Further, due to uniform system of tariff methodology presently in vogue in the country, if the tax demanded by FBR attains finality the same will have to be passed on to the consumers and will be in violation of clause 5.3 of the bilateral agreement signed with Azad government of the State of Jammu & Kashmir and the GoP.

According to the Power Division, the supply of electricity to AJK should always have been and will be deemed to be zero rated supply. In the light of ECC directives, Chairman FBR, Secretary Finance and Secretary Power will hold meeting for the resolution of the GST issue, the source maintained.