The Federal Tax Ombudsman (FTO) has ruled that all power distribution companies must collect an 18% sales tax on electricity supply without adjusting for net metering, citing concerns over significant revenue losses.
The decision comes after an investigation revealed that state-owned distribution companies (DISCOs) were failing to collect full sales tax from consumers, leading to an annual shortfall of Rs 9.38 billion in government revenue.
The FTO has now recommended a formal probe by the Federal Board of Revenue (FBR) into the tax collection practices of power firms, with a report due within 60 days.
According to the FTO ruling, distribution companies must charge sales tax on the total electricity supplied to consumers, rather than on the net amount after adjusting for excess electricity fed back into the grid under net metering.
The decision clarifies that Pakistan’s tax laws do not recognise net metering as a factor in sales tax calculation and that power companies must ensure compliance.
“K-Electric is already applying the correct tax on gross electricity supply, but state-owned DISCOs are not fully complying with the law, causing significant revenue losses,” the FTO’s ruling stated.
The ombudsman stressed that sales tax must be calculated based on the total units supplied, irrespective of how much electricity is returned to the grid by consumers using solar panels.
Following the ruling, the FTO has ordered the FBR to launch an inquiry into why power firms failed to collect the full tax amount, directing authorities to identify and rectify lapses in the system.
The FBR has been given 60 days to complete the investigation and submit a report.
The decision was triggered by a complaint from a K-Electric consumer, who objected to the company charging sales tax on total supply rather than the adjusted net consumption.
However, the FTO confirmed that K-Electric’s tax collection is in line with legal requirements and emphasised that all distribution companies must adopt the same approach.
With this ruling, millions of electricity consumers with solar panels could see an impact on their bills, as tax calculations will now be based on total energy consumption rather than net usage.
Power companies are now expected to revise their tax collection policies in accordance with the FTO’s ruling, ensuring full compliance with sales tax regulations.
The ruling is expected to increase government revenue and close loopholes in tax collection, while also clarifying taxation rules for solar net metering users across the country.
