Massive tax blow to solar consumers in Pakistan

The Federal Tax Ombudsman (FTO) has instructed power distribution companies (DISCOs) across Pakistan to apply an 18 percent sales tax on electricity supplied to consumers using solar net metering.

In an order issued on Monday, the FTO directed the Federal Board of Revenue (FBR) and DISCOs to impose the tax on the gross value of electricity supplied, rejecting the previous practice of net metering deductions.

The directive clarified that under the Sales Tax Act 1990, net metering adjustments are not recognized, and the tax must be calculated based on the total electricity supplied by distribution companies, regardless of any surplus power fed back into the grid.

The ruling also applies to withholding income tax under Section 235 of the Income Tax Ordinance 2001, stating that tax must be deducted on the gross amount rather than the net metered value. This decision overrides previous guidance from the National Electric Power Regulatory Authority (NEPRA) and the Alternative Energy Development Board (AEDB), with the FTO emphasizing that fiscal laws take precedence over regulatory provisions.

The FTO report revealed that 11 out of the country’s 12 DISCOs had failed to comply with tax regulations, noting that only K-Electric had been consistently charging both sales and income tax on electricity bills. The ruling follows a complaint from a K-Electric consumer, who alleged discriminatory treatment, arguing that NEPRA’s 2015 framework permitted net metering adjustments. However, the FTO ruled that tax laws override regulatory guidelines.

The FBR has been instructed to ensure immediate compliance by all DISCOs, including Faisalabad Electric Supply Company (FESCO), Lahore Electric Supply Company (LESCO), Islamabad Electric Supply Company (IESCO), and others. Additionally, the tax authority has been urged to launch an inquiry into the non-compliance of various DISCOs with tax regulations.

The decision is expected to affect thousands of solar energy consumers across Pakistan, many of whom opted for net metering as a cost-effective and eco-friendly alternative to conventional electricity. Industry experts warn that imposing an 18 percent sales tax could discourage the adoption of renewable energy, at a time when Pakistan is working to increase its reliance on sustainable power sources.

So far, neither the FBR nor NEPRA has issued an official response to the directive.