Tax ombudsman directs FBR to enforce tax rules on net metering

Pakistan’s Federal Tax Ombudsman (FTO) has directed the Federal Board of Revenue (FBR) to enforce tax regulations on net metering for electricity consumers.

In a ruling dated December 9, the FTO found that K-Electric had been correctly charging sales tax and withholding income tax on the gross amount of electricity supplied to consumers with solar panels, in line with the Sales Tax Act 1990 and the Income Tax Ordinance 2001.

However, other distribution companies (DISCOs) across Pakistan were not following the same practice, leading to a significant loss of government revenue.

The complaint, filed by a Karachi resident, alleged that K-Electric was illegally charging sales tax on the gross amount of electricity supplied, without considering the net metering system, which allows consumers to offset their electricity usage with the power they generate from solar panels.

The complainant argued that this practice was in violation of regulations set by the National Electric Power Regulatory Authority (NEPRA) and the Alternative Energy Development Board (AEDB).

The FTO, however, ruled that the Sales Tax Act and Income Tax Ordinance take precedence over NEPRA regulations. The FBR had previously clarified in a letter dated Nov. 12, 2020, that sales tax should be charged on the gross amount of electricity supplied, without any adjustment for net metering.

Despite this, most DISCOs continued to charge sales tax on the net amount, resulting in an estimated annual revenue loss of PKR 9.376 billion (approximately $33.5 million) for the government.

The FTO's findings revealed that while K-Electric was complying with the law, other DISCOs, including Faisalabad Electric Supply Company (FESCO), Lahore Electric Supply Company (LESCO), and Islamabad Electric Supply Company (IESCO), were not following the FBR's directive. This discrepancy has led to unequal treatment of consumers and a significant loss of tax revenue.

The FTO has recommended that the FBR take immediate action to enforce the tax regulations across all DISCOs and initiate an inquiry into the revenue loss. The FBR has been given 60 days to submit a report on the matter.

Chief Financial Officer K-Electric, Muhammad Aamir Ghaziani, said the FTO’s decision reinforces KE’s commitment to upholding the highest financial and governance standards in all areas of our operations.

“Transparency, regulatory compliance, and robust financial controls are at the core of KE’s practices, and we are pleased that the FTO’s review validates our approach. As a responsible corporate entity, we remain dedicated to following all applicable laws and ensuring that our financial management aligns with national and international best practices.”