ISLAMABAD: The treatment of income tax liabilities of electricity distribution companies (DISCOs) as a pass-through cost in consumer tariffs has emerged as a major concern for the industrial sector, with industry representatives questioning why electricity consumers should bear the tax burden of distribution companies even when they incur losses.
According to industry sources the government has reportedly assured DISCOs that their income tax liabilities would be passed on to consumers irrespective of whether a company makes a profit or suffers a loss.
The arrangement is drawing strong criticism from industrial consumers, who argue that it effectively shifts the tax burden of commercial entities to electricity users.
The financial implications are substantial. 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.
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.
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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. The 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 contend that the arrangement 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.
They argue that when companies are assured recovery of their costs through tariffs, the pressure to improve efficiency, reduce expenditure and strengthen financial management is weakened.
The industrial sector has called on the government either to exempt Discos from tax on their income or require them to pay their tax liabilities from their own resources instead of automatically transferring the burden to electricity consumers.
Industry representatives 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.
They argue that any assessment of the actual cost of electricity and the government’s relief measures should take account of the additional tax burden being incorporated into distribution companies’ revenue requirements.
The concern is particularly significant for industrial consumers already facing high electricity costs, as 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 argue that if a private investor earns profits from operating a Disco, the associated tax liability should ordinarily be borne by the company under the applicable tax regime rather than automatically being passed on to consumers. The issue therefore raises questions about the future treatment of tax costs in tariff determinations and whether the same cost-recovery principle would apply to privately operated distribution businesses.
Industry representatives have also pointed to examples where minimum turnover tax rates for other businesses have reportedly been reduced following representations by the affected sectors.
According to industry sources, the minimum turnover tax rate applicable to some companies was reduced to as low as 0.2 percent after they raised concerns over the financial burden. They have also cited a reported minimum turnover tax rate of 0.75 percent for gas distribution companies, including Sui Northern Gas Pipelines Limited (SNGPL) and Sui Southern Gas Company Limited (SSGC).
The industry wants the government to explain why electricity distribution companies are subject to a higher reported rate of 1.25 percent and why the resulting liability should be transferred to consumers through electricity tariffs.
The comparison has strengthened calls for a review of the tax treatment of regulated utilities, particularly where the companies’ operating costs and tax liabilities are incorporated into regulated revenue requirements.
Any revision, however, would require examination of the applicable tax provisions and the specific treatment of each category of company.
The issue has taken another turn in the case of Hyderabad Electric Supply Company (HESCO), where the Federal Board of Revenue (FBR) has reportedly directed the company to include government subsidies in calculating its turnover for minimum turnover tax purposes.
According to industry sources, HESCO had been calculating its turnover after deducting subsidies. Following the FBR’s direction to include those subsidies, the company is facing an additional tax demand of around Rs3 billion.
The case highlights a potential difference between the accounting treatment of subsidies in a regulated electricity business and their treatment for taxation purposes.
For Discos, government subsidies may form part of the financial flows associated with electricity supplied to consumers. If such amounts are included in the turnover base for minimum tax purposes, the taxable turnover could rise even though the subsidy is intended to provide relief to consumers or compensate the company under the applicable arrangements.
The reported Rs3 billion additional demand has added to industry concerns over the extent to which tax liabilities arising from the treatment of subsidies can ultimately be reflected in electricity tariffs.
The matter also raises questions about whether subsidies intended to support consumers could indirectly increase the tax burden recovered through the power-sector tariff mechanism.
Industry representatives argue that the broader problem stems from the treatment of costs in the electricity distribution business. Where tax liabilities and other expenditures are allowed to be passed through to consumers, they contend, companies have limited financial incentives to minimise those costs.
They maintain that the tariff-setting process should distinguish between legitimate and efficiently incurred costs and liabilities that arise from a company’s own financial performance or tax position.
The issue is also relevant to the government’s wider power-sector reform and privatisation agenda. If the same tax pass-through arrangement continues after privatisation, consumers could remain exposed to the tax liabilities of distribution companies even after ownership and management have shifted to private investors.
Industry representatives are seeking a clear government policy on whether income tax liabilities will remain recoverable through consumer tariffs, how minimum turnover tax will be treated when a Disco incurs losses, and whether the approach will change following privatisation.
Copyright Business Recorder, 2026