ISLAMABAD: The Federal Tax Ombudsman (FTO) has directed eleven power distribution companies (Discos) to collect 18 per cent sales tax on the gross value of electricity supplied and rejected the current practice of net metering deductions.

In his order on the complaint of a K-Electric consumer, the ombudsman has directed the Federal Board of Revenue (FBR) to implement the decision of sales tax collection on gross value of electricity generated through solar panels in the four provinces.

According to the complainant, K-Electric was illegally charging sales tax on the gross value of electricity supplied to the consumer without considering the concept of net metering. On the contrary, all other Discos charge sales tax on net electricity units, i.e., the net of the KWh supplied by consumers with solar panels, against the KWh supplied by Discos.

The complainant further claimed that tax treatment on net metering electricity bills is discriminatory as K-Electric consumers are forced to pay high electricity bills compared to consumers of other eleven Discos.

As a result, the FTO identified a huge revenue loss of Rs9.4 billion due to the current practice of net metering deductions of sales tax in seven other Discos.

At the same time, the same is the position with respect to withholding tax under Section 235 of the Income Tax Ordinance. The FBR has lost revenue of over Rs3bn due to the wrong application of the Sales Tax Law by power companies.

The complainant installed solar panels in terms of the framework prescribed by the National Electric Power Regulatory Authority for regulation of distributed generation by using alternative and renewable energy and net metering under SR0892(l)/2015.

FTO said that in the past, FBR has already clarified that all Discos, including K-Electric,, are required to charge sales tax on the gross amount of value of electricity supplied without having any effect of net metering.

Despite a clear order from the FBR, the provision of the law was not implemented by 11 Discos, leading to a revenue loss of Rs9.38bn during FY24. Moreover, the complainant failed to establish any maladministration in terms of section 2(3) of the FTO ordinance because K-Electric has been correctly following the legal provisions of laws concerning taxation treatment on net metering under the supervision of LTO Karachi except on the ground of discrimination raised by the complainant, FTO said.

Published in Dawn, February 26th, 2025