ECC approves withdrawal of sales tax on subsidy granted to distribution companies
ECC approves withdrawal of sales tax on subsidy granted to distribution companies

ISLAMABAD: The Economic Coordination Committee (ECC) of the Cabinet on Wednesday approved the summary submitted by the Ministry of Energy regarding withdrawal of sales tax on subsidy granted to the distribution companies.

Federal Minister for Economic Affairs Omar Ayub Khan chaired the meeting.

A source in the Power Division said a dispute is going on between the Federal Board of Revenue (FBR) and the Power Division on the levy of general sales tax (GST) on the subsidy given to the power distribution companies for quite some time.
The distribution companies, being the licencees of the national Electric Power regulatory Authority (Nepra), are bound to charge the tariff determined by the latter and notified by the federal government.

Nepra determines the tariff for the distribution companies on “cost of service” basis and the government further subsidises the tariff determined by the regulator.

This is the tariff, which is finally charged to the end-consumers and the difference is picked up by the government as tariff differential subsidy.

In this scenario, the subsidy is not being given to the distribution companies instead this is provided for facilitation of the consumers, as the government is granting subsidy to cover the cost incurred by the distribution companies against the purchase of electricity units.

The FBR tends to charge sales tax on the tariff differential subsidy, considering it as a payment received against the supply of goods. Pursuant to the welfare policies of the government, subsidies are provided to the consumers. The government activity is neither taxable activity under the act nor is the subsidy covered under the concept of taxable supplies. The subsidy is; therefore, not chargeable to sales tax under the law.

The ECC, in its meeting held on September 30, 2021, considered the summary of the Power Division regarding the levy of sales tax on subsidy granted by the government of Pakistan to the distribution companies” and deferred the decision with the directive to the Power Division to seek specific legal opinion from the Law and Justice Division on the interpretation of applicability of sales tax on the subsidies to the electricity consumers.

According to the Power Division, it is evident that the sales tax can neither be charged on government of Pakistan, nor the end-consumer. If the distribution companies remain liable to pay sales tax from their own funds, the liquidity of the distribution companies will seriously be affected.

The implications include adversely affecting the ability to invest in infrastructure, the circular debt amount keeps mounting and prospects of privatisation will be jeopardised.

Currently, the FBR has issued notices, amounting to Rs167 billion of the general sales tax to the distribution companies over the tariff differential subsidy, which are being contested at different fora/courts of law.

Meanwhile, the ECC deliberated in detail and approved the summary presented by the Ministry of National Food Security and Research for the purchase of 175,000 tonnes of imported wheat by the World Food Programme (WFP) from PASSCO’s stock for Pakistan and Afghanistan.

The wheat flour will compliment the WFP’s food basket for distribution to the food vulnerable population in Pakistan and Afghanistan within the WFP’s commitment to eliminate hunger.

The meeting also approved the summary tabled by the Poverty Alleviation and Social Safety Division for inclusion of beneficiaries of Ehsaas Kafalat Programme with PMT score in between 29.01 to 37 under the recent NSER Survey in Ehsaas Emergency Cash (EEC-2) Programme.

These beneficiaries are proposed to be provided one-time emergency cash assistance of Rs12,000/beneficiary on first-come-first-served basis. This support would help mitigate the socioeconomic impact on poor and vulnerable segments of the society, amid the Covid-19 pandemic.

The ECC discussed in detail and approved the proposal submitted by the Ministry of Energy for increase in the oil marketing companies’ and dealers’ margins for motor spirit (MS) and high-speed diesel (HSD) with effect from the forthcoming revision in oil prices.

The committee also discussed the following summaries and directed the relevant ministries/divisions to resubmit their summaries after revision of the proposals:

Summaries submitted by the Ministry of Industries and Production on contractual obligations of Heavy Electrical Complex (HEC); provision of untargeted subsidy for November and December 2021 under the PM’s Relief Package; exemption of duties and taxes for uninterrupted supply of oxygen gas in the country for medical purposes; summary tabled by the Ministry of Petroleum, seeking permission to amend the petroleum concessions agreement allowing GHPL assignment of working interest in Wali, Jandran West, Saruna and Pezu blocks of OGDCL.

Earlier, Adviser to the Prime Minister on Finance and Revenue Shaukat Tarin presided over a meeting of the Technical Advisory Committee (TAC) of the ECC.

The meeting discussed the summaries in detail and proposed its recommendations for consideration of the Economic Coordination Committee.

The meeting was also attended by Federal Minister for National Food Security and Research Syed Fakhar Imam, Federal Minister for Planning, Development and Special Initiatives Asad Umar, Federal Minister for Industries and Production Makhdoom Khusro Bakhtyar, Federal Minister for Energy Hammad Azhar, Federal Minister for Privatisation Mohammedmian Soomro, Special Assistant to Prime Minister (SAPM) on Poverty Alleviation Dr Sania Nishtar, relevant federal secretaries and other senior officers.

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