The Federal Tax Ombudsman (FTO) has issued a directive that consumers utilising solar net metering across the country would be subject to an 18% sales tax following the discovery of a significant revenue loss amounting to Rs9.8 billion, Business Recorder reported.

In an order, the FTO has instructed power distribution companies (DISCOs) and the Federal Board of Revenue (FBR) field formations to implement such changes “immediately.”

The directive has clarified that sales tax must be applied to the gross value of electricity supplied by DISCOs, without considering the net metering arrangement—where consumers with solar panels offset their electricity consumption with the power they generate.

The FTO reiterated that the sales tax is “mandated on the total supply value, not on a net basis,” which means that all DISCOs, including K-Electric, are required to charge sales tax on the full amount of electricity supplied, disregarding any offsets from net metering.

Moreover, the same principles would apply to the withholding of income tax under Section 235 of the Income Tax Ordinance, 2001, which must also be calculated on the gross amount, independent of net metering.

The FTO emphasised that the National Electric Power Regulatory Authority “does not have the authority” to impose sales or income tax. Any regulatory notifications or guidelines issued by Nepra or the Alternative Energy Development Board regarding taxation “cannot supersede” the provisions outlined in the Sales Tax Act of 1990 or the Income Tax Ordinance of 2001.

Such fiscal laws precede general regulations and have been affirmed by the Supreme Court, it added.

The instructions issued by the FBR are “mandatory, and all tax authorities responsible for enforcing the relevant laws must adhere to the directives” outlined in Sections 72 of the Act and 214 of the Ordinance.

K-Electric has been “correctly applying” sales tax and income tax on electricity bills by the law, it added.

The other eleven DISCOs have “not followed such legal provisions” when collecting sales and income tax from consumers.

A complaint has been lodged under Section 10(1) of the Federal Tax Ombudsman Ordinance, 2000, regarding the unlawful imposition of sales tax on the total value of electricity supplied to consumers without recognizing the net metering concept.

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The complaint has alleged that it has created an “unfair financial burden and discriminatory treatment,” especially since other DISCOs charge based on net metering across the country.

The complainant, a KE customer, installed solar panels in compliance with NEPRA’s framework for regulating Distributed Generation using renewable energy and net metering.

The order stated that the FBR would instruct the relevant Commissioners-IR to enforce the legal tax provisions concerning net metering for the following DISCOs:

• Faisalabad Electric Supply Company
• Gujranwala Electric Power Company
• Hazara Electric Supply Company
• Hyderabad Electric Supply Company
• Islamabad Electric Supply Company
• Lahore Electric Supply Company
• Multan Electric Power Company
• Peshawar Electric Power Company
• Quetta Electric Supply Company
• Sukkur Electric Power Company
• Tribal Electric Supply Company

The FTO has also been urged to investigate the substantial revenue losses incurred by the government, amounting to billions annually.