Govt mulls circular debt tax to offset fiscal pressure

KARACHI: The government is planning to impose circular debt tax on industrial electricity consumers in a bid to reduce the gigantic Rs2.2 trillion of outstanding dues in the power sector, people familiar with the matter said on Saturday.

The Federation of Pakistan Chambers of Commerce and Industry (FPCCI) warned the government against imposing circular debt tax on businesses, asking it to instead curtail transmission and distribution losses and implement power sector reforms.

The business community has been calling for reforms in the power sector to control pilferage, line losses and stop corrupt practices, it said.

“Circular debt has doubled during the last two years although the government raised power tariffs multiple times in the past,” said Anjum Nisar, president of the FPCCI. “Circular debt will continue to haunt the Prime Minister Imran Khan’s resolve of reducing cost of doing business, elimination of peak-hour charges from industrial power tariff and discount on consumption of additional units.”

Circular debt stood at Rs1.4 trillion in 2018, swelled to Rs2.2 trillion in June-end last year, and increased further by Rs116 billion in the first quarter of 2020/21, according to the ministry of energy.

­As much as Rs243 billion was added to circular debt in first half of FY2020, while an increase of Rs294 billion was seen in second half of the fiscal year. In the same way, around Rs288 billion was added in the first half of FY2018-19 whereas, the second half also witnessed a rise of Rs198 billion.

“The government pledged to revamp the power sector and continued to raise electricity prices to eliminate subsidies but failed to implement reforms to make the power sector efficient,” said Nisar.

“Circular debt issue could have been resolved, if the government had eliminated production, transmission and distribution losses, checked electricity theft and recovered the outstanding electricity dues.”

The FPCCI called for power sector reforms, considering the matter of overbilling, technical losses, transmission issues, proposal on decentralisation of the sector, promotion of off grid solutions, incentives for renewable energy solutions and capacity payments to the independent power producers.

“If the government fails to take immediate measures the power sector is likely to choke up due to heavy outstanding dues,” said Nisar.

FPCCI advised closing down of inefficient independent power producers (IPPs), tariff re-negotiation with IPPs, improving efficiency and reducing costs of state-owned plants, and conversion of tube wells to solar power.

“We have to resolve the circular debt issue by revamping the entire power sector, including tariff setting, efficiencies of power generating units, supply chain network and payment recoveries,” said FPCCI president. “Power sector problem is a multifaceted and the government must avoid increasing the cost further, especially for the industry.”