FTO Imposes 18% Sales Tax on Solar Net Metering Users

Web Desk: The Federal Tax Ombudsman (FTO) has ordered the implementation of an 18% sales tax on consumers utilizing solar net metering across Pakistan, following a revenue shortfall of Rs 9.8 billion, as reported by Business Recorder.

Immediate Implementation of Sales Tax on Gross Electricity Supply

In its directive, the FTO has instructed power distribution companies (DISCOs) and Federal Board of Revenue (FBR) field formations to enforce this tax immediately. The order specifies that sales tax must be applied to the gross value of electricity supplied by DISCOs, without factoring in the offset from net metering—a system that allows solar panel users to adjust their electricity bills based on the energy they generate.

The FTO emphasized that sales tax is applicable on the total electricity supply value rather than on a net basis, meaning all DISCOs, including K-Electric, must charge sales tax on the full amount of electricity supplied, disregarding net metering adjustments.

Income Tax to Be Calculated on Gross Supply

Additionally, the same rule applies to income tax withholding under Section 235 of the Income Tax Ordinance, 2001, which must also be levied on the gross electricity supply value, independent of net metering credits.

Nepra Lacks Authority Over Taxation, FTO Asserts

The National Electric Power Regulatory Authority (Nepra) lacks the authority to impose or regulate sales and income tax, the FTO clarified. It stated that any taxation-related notifications from Nepra or the Alternative Energy Development Board cannot override the Sales Tax Act, 1990, or the Income Tax Ordinance, 2001. The ruling aligns with Supreme Court decisions, reaffirming that fiscal laws precede general regulations.

FBR Directives Are Mandatory for All DISCOs

The FTO highlighted that the FBR’s instructions are binding under Sections 72 of the Sales Tax Act and 214 of the Income Tax Ordinance. Therefore, all tax authorities must comply with the directives.

While K-Electric has been correctly applying sales and income tax on electricity bills, the remaining 11 DISCOs have failed to implement these legal provisions.

Complaint Filed Against Unlawful Sales Tax Collection

A complaint has been lodged under Section 10(1) of the Federal Tax Ombudsman Ordinance, 2000, challenging the illegal sales tax collection on total electricity consumption without recognizing the net metering system.

This directive is expected to significantly impact solar panel users, potentially increasing their electricity bills despite generating their power.