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Subsidies were never Chargeable to Tax therefore Subsidies provided by Government to DISCOs are exempted from Sales Tax --- Lahore High Court, Lahore

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Subsidies were never Chargeable to Tax therefore Subsidies provided by Government to DISCOs are exempted from Sales Tax --- Lahore High Court, Lahore

Islamabad 27-09-2024: In a significant ruling, the Lahore High Court, Multan Bench, has held that government subsidies provided to electricity distribution companies (DISCOs) are not subject to sales tax, dismissing the tax department’s challenge in a case involving Multan Electric Supply Company Limited (MEPCO) and Faisalabad Electric Supply Company Limited (FESCO).

The Court’s decision, issued by a Division Bench in [S.T.R No. 25/2021], stems from a reference application filed by the Commissioner Inland Revenue under Section 47 of the Sales Tax Act, 1990. The case revolved around the Tariff Differential Subsidy (TDS) provided by the federal government to DISCOs and whether it should be included in the taxable value of supply under the Act.

The Inland Revenue Department contended that the subsidies received by the DISCOs should be subject to sales tax, relying on the absence of specific exemptions prior to the 2022 amendment of the Sales Tax Act. The Court was asked to address two critical legal questions:

Whether the Tariff Differential Subsidy (TDS) is exempt from sales tax under the Sales Tax Act, 1990.

Whether the Appellate Tribunal Inland Revenue had erred by not including the subsidy in the value of the supply.

The Lahore High Court, presided by Mr. Justice Asim Hafeez and Mr. Justice Anwaar Hussain, held that subsidies provided by the government are not subject to sales tax, emphasizing that the amendment introduced through the Finance Act, 2022 was merely a clarification of the original legislative intent.

In its judgment, the Court noted that the Explanation added to Clause (46) of Section 2 of the Sales Tax Act, 1990 confirmed that the value of supply does not include government subsidies, and these subsidies were never chargeable to tax. The Court dismissed the department’s argument that the amendment did not apply retroactively, stating that the clarification simply reinforced the legislature’s intent from the outset.

The Court referenced several earlier rulings, including Commissioner Inland Revenue Vs. M/s GEPCO Limited (S.T.R No.77467/2022) and Commissioner Inland Revenue Vs. M/s Faisalabad Electricity Supply Co. Ltd. (S.T.R No.113/2014), which had similarly held that subsidies provided to electricity companies are not taxable.

The Court also clarified that the case of Commissioner Inland Revenue, LTO, Lahore Vs. Messrs Gujranwala Electric Power Co. (GEPCO) (2024 PTD 440), cited by the applicant, was unrelated as it dealt with turnover tax under the Income Tax Ordinance, 2001, rather than sales tax.

This judgment provides much-needed clarity for electricity distribution companies, which have been receiving subsidies from the government to cover the cost of electricity supplied to consumers. It affirms that such subsidies will not be counted towards the taxable value of supply, effectively reducing the tax burden on DISCOs.

The ruling also signals a consistent judicial approach, as the Court emphasized that clarifications in tax law do not alter the legal framework but confirm the legislature’s original intention, preventing ambiguity in future taxation of subsidies.

With the dismissal of the Inland Revenue Department’s reference applications, the Lahore High Court has ruled in favor of MEPCO and FESCO, exempting government subsidies from sales tax and reinforcing the principle that such payments are not part of the taxable supply under the Sales Tax Act, 1990.