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

In an order issued on Monday, the FTO instructed the Federal Board of Revenue (FBR) and DISCOs to ensure the tax is levied 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 taxes must be charged on the total electricity provided by distribution companies, regardless of any surplus power fed back into the grid.

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

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

The FBR has been directed 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. The tax authority has also been urged to launch an inquiry into the non-compliance of various DISCOs with tax regulations.

The decision is likely to impact thousands of solar energy consumers across the country, many of whom had opted for net metering as a cost-effective and environmentally friendly alternative to conventional electricity usage. Industry experts suggest that the imposition of the 18 percent sales tax could discourage the adoption of renewable energy solutions at a time when Pakistan is striving to enhance its reliance on sustainable power sources.

Neither the FBR nor NEPRA has yet issued an official response to the directive.