FTO Orders 18 percent Sales Tax on Solar Net Metering, A Game Changer for Power Consumers

The Federal Tax Ombudsman (FTO) has instructed power distribution companies (DISCOs) to impose an 18% sales tax on electricity provided to solar net metering customers, citing a significant revenue deficit of Rs9.8 billion. The directive, issued on Monday, requires both the Federal Board of Revenue (FBR) and DISCOs to apply this tax to the total value of electricity supplied, rejecting the previous deductions made for net metering.

The FTO emphasized that the Sales Tax Act of 1990 does not account for net metering reductions, and the tax should be calculated on the full amount of electricity delivered by DISCOs to consumers, irrespective of any surplus energy returned to the grid. This ruling aligns with the taxation of income tax under Section 235 of the Income Tax Ordinance 2001, which must also be applied on the total supply.

This decision contradicts earlier advice from the National Electric Power Regulatory Authority (NEPRA) and the Alternative Energy Development Board (AEDB), arguing that legal tax requirements take precedence over such regulations. The FTO also criticized 11 of the 12 DISCOs in the country for not adhering to proper tax rules, with K-Electric being the only company correctly implementing sales and income taxes on electricity bills.

This ruling comes after a complaint from a K-Electric customer who claimed unequal treatment due to the net metering deductions allowed under NEPRA's 2015 framework. However, the FTO ruled that tax laws must supersede these guidelines.

The FBR has been directed to ensure that all DISCOs, including Faisalabad Electric Supply Company (FESCO), Lahore Electric Supply Company (LESCO), and Islamabad Electric Supply Company (IESCO), comply immediately. Additionally, the FTO has called for an investigation into the substantial yearly revenue losses caused by the incorrect application of tax laws.

SOURCE: Profit Magazine Pakistan