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Sales tax on supply of energy is unconstitutional?

By Dr.Ikramul Haq

Dr. Ikramul Haq, a leading international tax counsel, is a well-known author specialising in international tax, press, intellectual property, corporate and constitutional law. Dr. Ikram is Chief Partner of Lahore Law Associates (fax: +92 42 7226953, e-mail: irm@brain.net.pk; website: http://www.paktax.com.pk). He is a member of the visiting faculty of the Institute of Direct Taxes in Lahore. He served for 12 years as Deputy Commissioner of Income Tax. He studied literature, journalism and law, for his Masters and Doctorate degrees. He has written many books on various aspects of Pakistani law and global narcotics trade, some of which are co-authored with his wife, Mrs. Huzaima Bukhari, Additional Commissioner of Income Tax. He has been awarded Doctorate of Law for his research: Tax Reform in Quasi-Constitutional Perspective.

The levy of sales tax on supply of electricity and natural gas by the Federal Government vide Sales Tax (Amendment) Ordinance, 1999, promulgated on 13th August, 1999, is unlawful and void under the Constitution of Pakistan. It is an established position of law that supply of electricity being transmission of energy does not qualify as sales of “goods” under the relevant provision of the Constitution of Pakistan of 1973 and in terms of section 2(12) of the Sales Tax Act, 1990 (hereinafter: “the Act”).

The Central Board of Revenue (CBR) explained the levy on supply of energy in Sales Tax General Order No. 08 of 1999, dated 18th September 1999, which says:

            “Subject: Levy of Sales Tax on “Electricity” and “Natural Gas” requirement to correctly print consumers’/consumers’ name and his tax Registration/Identification Numbers.

                Sales tax on “Electricity” and also on “Natural Gas” has been levied with effect from[*] (16th August 1999. The Electricity Bills and the Gas Bills, issued by the Electricity and Gas Distribution/Supply companies shall be treated as the Sales Tax invoices under section 23 of the Sales Tax Act, 1990, and shall show the amount of sales tax payable by the Consumers/Customers. This amount as paid by the Consumer/Customer, during a tax period shall constitute input tax to determine the tax liability of a registered person in terms of section 7(i) of the Sales Tax Act, 1990 provided that such Electricity Gas bill is in the name of the registered person.

                2.             Since a tax invoice, under section 23, requires printing of name, address and registration number of recipient, all commercial and industrial enterprises, register with the sales tax department, are required to intimate to Billing section of the relevant Electricity Supply Company/Gas Supply Company about the full and correct name of the business enterprise (registered person), address at which taxable activities/supplies are made, sales tax registration number and Common Taxpayer Identifier (CTI) number (if any) requesting them to insert these in their computer programmes urgently. Also the registered persons should pursue such corrections by the respective Billing Companies and ensure that it is got done by the [24th December, 1999], positively.”

Recently, the CBR further explained the concept of value of supply in Sales Tax General Order No. 1/2000, dated 24th January 2000, which says:

“Subject: Value of supply in respect of electrical energy by IPPS including Hubco & Kapco.

                A question has arisen as to the value of supply of the electricity supplied by Independent Power Projects (IPPs) to M/s WAPDA and M/s KESC. The contracts between M/s WAPDA/KESC and different IPPs envisage a tariff structure comprising a number of categories e.g. the consideration of money on account of Energy Purchase Price (E.P.P.), Capacity Purchase Price (C.P.P.), Energy Purchase Price Premium, Excess Energy Bonus, and Supplemental Charges (S.C), etc.

2.             The EPP is payable by WAPDA/KESC on account of purchase of “electrical energy” while the consideration received by I.P.Ps on account of CPP is for net capacity of the plant which is to be paid during the contractual period. The payment of CPP, etc is not relatable to the supply of electricity.

3.             The issue has been examined in the Central Board of Revenue and it is ruled that the value of supply of electricity by IPPs is the amount received on account of Energy Purchase Price only. Therefore, any amount in excess of EPP received on account of Capacity Purchase Price, Energy Purchase Price Premium, Excess Bonus, Supplemental Charges etc. is not to be included in the value of supply as defined in clause (46) of section 2 of the Sales Tax Act, 1990. However, the assessment of sales tax is to be done in accordance with the provision of section 7, 8 and all other relevant provisions of the Act, rules and notifications. The IPPs will be entitled to claim full input tax adjustment against the sales tax paid on purchase of furnace oil and other tax-paid purchases for making supply of electricity subject to the provisions of section 8 and the notifications issued thereunder.

  • This ruling applies only to IPPs including HUBCO and KAPCO, because of their peculiar arrangements with WAPDA/KESC and is not applicable to any other person, including Captive Power Projects, engaged in the production and supply of electricity.”

Note:    As evident from CBR’s instructions, in the case of some IPPs, sales tax paid by them on fuel purchases can be passed on. These IPPs would pass it on to WAPDA in their invoices. The imposition of Sales Tax on energy, therefore, had no financial impact for these IPPs. However, for many IPPs sales tax paid by them on fuel could not be passed on.  For these IPPs, the imposition of Sales Tax on energy has been a direct burden and for the national exchequer a negative development. These IPPs would be bearing from their own pockets the burden of sales tax on fuel. Now, these IPPs can adjust the Sales Tax paid by them on fuel (input tax) against Sales Tax charged by them from WAPDA (Output Tax). Hence, the National Exchequer is the net loser—considering that WAPDA and CBR are both ‘government.

It is well established that the Federal Government under Federal or Concurrent Lists contained in Fourth Schedule to the Constitution has no power to levy tax on services. The supply of energy is not sale of “goods” by any stretch of imagination. The supply of electricity and natural gas through a well-defined infrastructure constitutes services. It is clear that by inserting sub-section (3) to section 3 of the Sales Tax Act, 1990, the Federal Government has clearly transgressed its constitutional powers.

The Federal Government has no authority whatsoever to charge sales tax on supply of electricity and natural gas. Entry 49, Part 1 of the Federal Legislative List empowers the Federal Government to impose “taxes on the sales and purchases of “goods” imported, exported, produced, manufactured or consumed.” The expression “goods” as used in this Entry even in its widest possible connotation and scope does not include supply of energy. Article 260(1) of the Constitution says: “goods” includes all materials, commodities and articles.”

The expression “goods” as used in Entry 49 read with Article 260(1) of the Constitution does not include supply of energy in the form of electricity or natural gas. The definition of “goods” under the Constitution is certainly wide enough to include “electricity and natural gas” but sale tax is levied on their “supply”. The supply on energy is admittedly neither goods or material nor commodities and articles. This shows beyond any doubt that levy of sales tax on supply of electricity and natural gas is unconstitutional.

The Electricity Act of 1910 vide Section 2(g) defines “energy” to “mean electric energy when generated, transmitted, supplied or used for any purpose except the transmission of a message.” This definition also confirms that supply of electricity being energy cannot be termed as a “goods”.

The term “goods” is defined in section 2(12) of the Sales Tax Act of 1990 as under:

            “goods” include every kind of immovable property other than actionable claims, money, stock, shares and securities.”

Section 3(3) of the said Act as inserted by Sales Tax (Amendment) Ordinance, 1999 imposes sales tax by a registered person on the supply of-

            (i)         electrical gas;

            (ii)        natural gas;

            (iii)       petroleum gases including liquefied petroleum gas; and

            (iv)       petroleum products.”

[underlined for emphasis]

The definition of “goods” in Constitution does not include supply of “electricity” and “gas” and the Sales Tax Act, when read in conjunction with General Clause Act, also confirms that “goods” do not mean supply of energy. The levy of sales tax on supply of energy is, therefore, violative of Constitution. The insertion of sub-section (3) to Section 3 of the Act is in violation of Entry 49. The Federal Government has no authority to levy sales tax on services. In Concurrent Legislative List, electricity is mentioned in Entry No. 34 but natural gas is not mentioned in either Federal or Concurrent Legislative List. In terms of Article 142(b) of the Constitution, both the Federal Parliament and Provincial Assemblies have powers to make laws with respect to any matter in the Concurrent Legislative List. The supply of electricity being a service clearly falls outside the ambit of Federal Legislature in terms of Article 142(c) of the Constitution that gives exclusive powers to a Provincial Assembly to make laws with respect to any matter not enumerated in either Federal Legislative List or the Concurrent Legislative List. The issue of natural gas is even more obvious that it is not mentioned in Concurrent List; hence the Federal Government has no authority to tax its supply.

It is internationally recognised that the supply of electricity and natural gas is a service and not a sale of goods. It is worthwhile to mention that section 3(3) of the Act says, “Sales tax shall be charged on the supply of “electric energy” and “natural gas” etc. The most important question for consideration is whether supply of electrical energy is sale of goods or providing of services. It needs little effort to prove from relevant provisions and case law that supply of energy has never been considered as sale of goods. It has always been considered as providing of service (the analogy can be derived from providing of services by PTCL to telephone subscribers which is not considered as sale of goods). It is now for all the concerned to consider the matter and give a judgment as to whether levy of sales tax by the Federal Government on “supply of” electricity, natural gas and other forms of energy is constitutional or not?

Notwithstanding the above arguments (even if argument sake it is accepted that Federal Government is competent to impose tax on supply of electricity and gas), The simultaneous levy of GST and withholding of income tax on electricity, gas and telephone bills, increasing cost of production at least by 34 per cent, is a fatal blow to the already dying industrial units.

It is a matter of great concern that the Federal Government (under the Nawaz Sharif regime) without giving proper consideration to constitutional provisions decided to impose GST on energy, which is purely a service-oriented sector. The industrial and commercial consumers are already paying advance income tax on electricity and gas bills under the following provisions of the Income Tax Ordinance, 1979 (hereafter: “the Ordinance”)

            Sub-section (7E) of Section 50 of the Ordinance reads as follow:

            “(7E)      At the time of preparing electricity consumption bill in respect of any commercial or industrial consumer, the person responsible for preparing such bills, shall charge tax on the amount of the electricity bill at the rates specified in the First Schedule, and the credit for the tax so collected in any financial year shall, subject to the provisions of section52, be given in computing the tax payable by such consumer for the assessment year commencing on the first day of July next following the said financial year, or in the case of an assessee to whom section 72 or section 81 applies, the assessment year in which the “said date” as referred to therein falls, whichever is the later.”

Para K of the First Schedule to the Ordinance provides Rate of collection of income tax under sub-section (7E) of section 50,-

            (a)           in the case of commercial consumer if the electricity bill–

                (i)            does not exceed Rs. 400                                                                                                                Rs. 60

                (ii)           exceeds Rs. 400 but does not exceed Rs. 600                                                                           Rs. 80

                (iii)         exceeds Rs. 600 but does not exceed Rs. 800                                                                          Rs. 100

                (iv)          exceeds Rs. 800 but does not exceed Rs. 1000                                                                        Rs. 160

                (v)           exceeds Rs. 1000 but does not exceed Rs. 1500                                                                     Rs. 240

                (vi)          exceeds Rs. 1500 but does not exceed Rs. 2000                                                                     Rs. 360

                (vii)         exceeds Rs. 2000 but does not exceed Rs. 2500                                                                     Rs. 480

                (viii)       exceeds Rs. 2500 but does not exceed Rs. 3000                                                                     Rs. 600

                (ix)          exceeds Rs. 3000                                                                                                                           Rs. 720

                (b)           in the case of an industrial consumer if the electricity bill

                (i)            does not exceed Rs. 500                                                                                                                Rs. 30

                (ii)           exceeds Rs. 500 but does not exceed Rs. 750                                                                           Rs. 40

                (iii)         exceeds Rs. 750 but does not exceed Rs. 1000                                                                         Rs. 50

                (iv)          exceeds Rs. 1000 but does not exceed Rs. 1500                                                                       Rs. 80

                (v)           exceeds Rs. 1500 but does not exceed Rs. 2000                                                                     Rs. 120

                (vi)          exceeds Rs. 2000 but does not exceed Rs. 3000                                                                     Rs. 180

                (vii)         exceeds Rs. 3000 but does not exceed Rs. 4000                                                                     Rs. 240

                (viii)       exceeds Rs. 4000 but does not exceed Rs. 5000                                                                     Rs. 300

                (ix)          exceeds Rs. 5000                                                                                                                         Rs. 360”

Sub-section (7G) of Section 50 of the Ordinance reads as follow:

            “(7G)      At the time of preparing gas consumption bill in respect of any commercial or industrial consumer, the person responsible for preparing such bill, shall charge tax on the amount of the gas bill at the rates specified in the First Schedule, and the credit for the tax so collected in any financial year shall, subject to the provisions of section 53, be given in computing the tax payable by such consumer for the assessment year commencing on the first day of July next following the said financial year, or in the case of an assessee to whom section 72 or section 81 applies, the assessment year in which the “said date” as referred to therein falls, whichever is the later.”

Para M of the First Schedule of the Ordinance provides Rate of collection of income tax under sub-section (7G) of section 50 as under:

            (a)           in the case of commercial consumer if the gas bill–

                (i)            does not exceed Rs. 2500                                                                                                             Nil

                (ii)           exceeds Rs. 2500 but does not exceed Rs. 4000                                                               Rs. 150

                (iii)         exceeds Rs. 4000 but does not exceed Rs. 6000                                                               Rs. 300

                (iv)          exceeds Rs. 6000 but does not exceed Rs. 7500                                                               Rs. 400

                (v)           exceeds Rs. 7500                                                                                                                    Rs. 500

                (b)           in the case of industrial consumer if the gas bill–

                (i)            does not exceed Rs. 2500                                                                                                             Nil

                (ii)           exceeds Rs. 2500 but does not exceed Rs. 5000                                                               Rs. 250

                (iii)         exceeds Rs. 5000 but does not exceed Rs. 10,000                                                           Rs. 500

                (iv)          exceeds Rs. 10,000 but does not exceed Rs. 20,000                                                      Rs. 1000

                (v)           exceeds Rs. 20,000 but does not exceed Rs. 30,000                                                      Rs. 2000

                (vi)          exceeds Rs. 30,000                                                                                                           Rs. 3000”

The levy of GST in addition to collection of advance income tax on electricity and gas is highly unjustified even if it is constitutionally valid. It appears that the so-called democratic regime (sic) took this decision to show just higher figures of tax collection. No serious debate was initiated to determine the constitutional validity of these measures and possible repercussions for the industrial growth and economy. The provinces, it appears, also did not lodge any protest at the time of its levy (or they were not consulted at all!), which is exclusively their right (yet we talk of provincial autonomy and devolution of powers!) One hopes that the present government will give a serious thought to both the aspects discussed above. It is a very important constitutional issue having serious implications for relationship between the Federation and the federating units. The Federal Government has no right to snatch away what is the rightful due of the provinces.


[*]

The Sales Tax (Amendment) Ordinance 1999 was promulgated on 13th August 1999 with immediate effect. It is not clear how CBR construed that it became effective from 16th August 1999.

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