25/02/2025
FTO ORDERS 18% SALES TAX ON SOLAR NET METERING CONSUMERS
DISCOVERY OF RS 9.8 BILLION REVENUE LOSS
The Federal Tax Ombudsman (FTO) has identified a massive revenue loss of Rs 9.8 billion due to discrepancies in tax collection from solar net metering consumers. In response, the FTO has directed power distribution companies (DISCOs) and the Federal Board of Revenue (FBR) to immediately impose an 18% sales tax on electricity supplied to net metering consumers.
SALES TAX ON GROSS SUPPLY, NOT NET METERING VALUE
The FTO clarified that sales tax must be charged on the gross amount of electricity supplied by DISCOs rather than the net value after deducting solar energy exported to the grid. This ruling contradicts the Net-Metering Reference Guide issued by the Alternative Energy Development Board (AEDB) and a previous NEPRA SRO 892(1)/2015 that allowed taxation on net consumption.
WITHHOLDING TAX UNDER SECTION 235 ALSO APPLICABLE
The ruling also enforces the withholding of income tax under Section 235 of the Income Tax Ordinance, 2001 on the gross supply value, eliminating any tax benefits previously enjoyed by solar consumers through net metering.
IMPACT ON SOLAR CONSUMERS AND INDUSTRY
Higher Electricity Bills for Solar Consumers:
Consumers using solar net metering will now face higher electricity costs due to the 18% sales tax on gross supply rather than net usage.
Uniform Taxation Across All DISCOs:
Previously, only K-Electric followed this taxation model, while 11 other DISCOs were not charging tax correctly. The FBR will now enforce compliance across all DISCOs.
Discouragement for Renewable Energy Investments:
The new taxation policy could negatively impact solar adoption in Pakistan, discouraging new investments in renewable energy due to reduced financial savings.
STRICT ENFORCEMENT ACROSS ALL DISCOS
The FTO has instructed the FBR Commissioners-IR to strictly implement the tax law for the following distribution companies (DISCOs):
Faisalabad Electric Supply Company (FESCO)
Gujranwala Electric Power Company (GEPCO)
Hazara Electric Supply Company (HAZECO)
Hyderabad Electric Supply Company (HESCO)
Islamabad Electric Supply Company (IESCO)
Lahore Electric Supply Company (LESCO)
Multan Electric Power Company (MEPCO)
Peshawar Electric Power Company (PESCO)
Quetta Electric Supply Company (QESCO)
Sukkur Electric Power Company (SEPCO)
Tribal Electric Supply Company (TESCO)
LEGAL BASIS OF THE DECISION
The FTO ruling states that the National Electric Power Regulatory Authority (NEPRA) has authority over tariff determination but not tax collection. Therefore, any guidelines or SROs issued by NEPRA or AEDB cannot override the provisions of:
Sales Tax Act, 1990
Income Tax Ordinance, 2001
The Supreme Court of Pakistan has previously ruled that fiscal laws take precedence over general regulations like those issued by NEPRA or AEDB.
GOVERNMENT TO INVESTIGATE RS 9.8 BILLION REVENUE LOSS
The FTO has urged an inquiry into the massive loss of government revenue, which has occurred due to improper tax collection by DISCOs over the years.
SOURCE
Business Recorder, 2025
