Key Takeaways
- The government has assured DISCOs that their income tax liabilities will be passed on to consumers.
- LESCO and FESCO are estimated to seek Rs20 billion and Rs15 billion respectively under this arrangement.
- Industrial consumers argue this creates a perverse incentive and increases their production costs.
ISLAMABAD: The government has announced plans to shift the income tax liabilities of electricity distribution companies (DISCOs) to consumers, according to industry sources. This move has sparked strong criticism from industrial consumers, who argue that it effectively shifts the tax burden of commercial entities to electricity users.
Under the proposed arrangement, DISCOs are assured that their income tax liabilities will be passed on to consumers, regardless of whether they make a profit or incur a loss. This is drawing criticism from industrial consumers, who contend that it creates a perverse incentive by allowing distribution companies to pass tax costs through to consumers rather than bearing the consequences of their own financial and operational performance.
The financial implications are significant. Lahore Electric Supply Company (LESCO) has reportedly sought around Rs20 billion under this head, while Faisalabad Electric Supply Company (FESCO) has estimated its tax liability at approximately Rs15 billion. These figures highlight the substantial burden that this arrangement could impose on consumers.
Industry representatives estimate that, at an electricity tariff of around Rs35 per unit, the minimum turnover tax alone can translate into an additional burden of approximately 50 paisa per unit. This burden could be higher where a Disco reports a net profit and its overall income tax liability exceeds the minimum turnover-based amount.
Industrial consumers argue that this arrangement undermines the pressure to improve efficiency, reduce expenditure, and strengthen financial management. They contend that the government cannot simultaneously impose indirect taxes and other charges on consumers through electricity bills while presenting subsidies as relief for the same consumers.
The concern is particularly significant for industrial consumers already facing high electricity costs. Any additional amount allowed in the tariff increases production expenses and affects competitiveness. The industry has also questioned whether the same arrangement would continue after the privatisation of DISCOs. Under the proposed privatisation framework, private investors would acquire ownership or management control of distribution companies.
Industrial consumers want clarity on whether electricity users would continue to be required to finance the income tax liabilities of privately owned companies, including taxes on profits earned by their new owners. They maintain that the government cannot simultaneously impose indirect taxes and other charges on consumers through electricity bills while presenting subsidies as relief for the same consumers.
The issue is linked to the minimum turnover tax regime, under which DISCOs are required to pay tax at a reported rate of 1.25 percent of turnover. Since the tax is linked to turnover rather than profitability, a company may incur a tax liability even when its accounts show a net loss.
