K-Electric’s sales tax practices challenged as FTO mandates change across eleven DISCOs

ISLAMABAD: The Federal Tax Ombudsman (FTO) has mandated that eleven power distribution companies (Discos) collect an 18 percent sales tax based on the gross value of electricity supplied, dismissing the current practice of deducting for net metering.

This directive came following a complaint from a consumer of K-Electric, prompting the FTO to instruct the Federal Board of Revenue (FBR) to enforce the decision regarding sales tax collection on the gross electricity generated by solar panels across all four provinces, reported Dawn.

The consumer alleged that K-Electric was improperly charging sales tax on the total value of electricity provided, without accounting for net metering.

In contrast, the other Discos apply sales tax to the net electricity units—derived from subtracting the kilowatt-hours (KWh) supplied by consumers with solar panels from the KWh supplied by the Discos.

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Furthermore, the complainant contended that this tax treatment, which disregards net metering for K-Electric customers, is discriminatory, as it results in higher electricity bills compared to consumers served by the other eleven Discos.

The FTO’s investigation revealed that this practice has led to a significant revenue deficit of approximately Rs9.4 billion due to incorrect net metering deductions for sales tax across seven other Discos.

Additionally, a similar issue arises concerning withholding tax under Section 235 of the Income Tax Ordinance, where the FBR has incurred a loss of over Rs3 billion due to the erroneous interpretation of the Sales Tax Law by the power companies.

The complainant highlighted that they had installed solar panels following the framework outlined by the National Electric Power Regulatory Authority, which regulates distributed generation using alternative and renewable energy, as specified in SR0892(l)/2015.

The FTO clarified that the FBR had previously stated that all Discos, including K-Electric, are obligated to apply sales tax on the gross value of electricity supplied, without being influenced by net metering considerations. Despite this explicit guidance from the FBR, the eleven Discos failed to implement the legal provision, leading to a loss of Rs9.38 billion in revenue during FY24.

Furthermore, the FTO noted that while the complainant did not demonstrate any maladministration as outlined in section 2(3) of the FTO ordinance, K-Electric had been compliant with the legal tax provisions concerning net metering, as supervised by LTO Karachi, except for the discrimination claim raised by the complainant.