ISLAMABAD: The Economic Coordination Committee (ECC) of the cabinet has deferred decision on tax exemptions worth billions of rupees and increase in margins on liquefied natural gas (LNG) imports following opposition from the Finance Division which fears it will not be able to meet revenue target.
Pakistan State Oil (PSO) and Pakistan LNG Limited are importing around 1 billion cubic feet of LNG per day and any hike in their margins will push up gas prices and put burden on the consumers. Power, textile, other industries and compressed natural gas (CNG) filling stations are major consumers of the imported gas.
The Ministry of Energy (Petroleum Division) had sought an increase in margins on LNG imports after the Federal Board of Revenue (FBR) refused to withdraw 1% withholding tax. In a meeting of the ECC on Tuesday, the Petroleum Division argued that 1% withholding tax was levied on the value of LNG cargoes at the import stage, which the FBR treated as non-refundable.
It translated into an effective tax rate of around 71% of the margins allowed by the Oil and Gas Regulatory Authority to PSO, which would lead LNG importers towards financial collapse, the Petroleum Division said.
It proposed that margins of importers should be jacked up by 1.32 percentage points from 2.5% to 3.82%.
In that regard, the Ministry of Energy (Petroleum Division) presented a summary before the ECC, seeking tax exemption and a uniform tax rate for LNG imports to avoid the hassle of tax refund.
After discussions, the ECC gave directives for further consultation on the tax exemption issue following resistance from the Finance Division.
A senior government official told The Express Tribune that the Petroleum Division sought exemption from 3% minimum value addition tax on LNG imports and reduction in input and output sales tax on gas imports and onward supply of re-gasified LNG to Sui Northern Gas Pipelines (SNGPL) from 17% to 12%.
It was informed during the meeting that SNGPL – a state-owned gas transmission and distribution company – was paying 17% general sales tax to PSO and was receiving nothing in sales tax from the textile sector and only 5% from CNG stations.
Owing to this anomaly, Rs7.97 billion of SNGPL had been stuck and it was facing cash flow problems.
Earlier, the FBR had agreed that 12% tax would be charged at the import stage and the same 12% on LNG sale to the consumers to avoid the accumulation of tax refund cases.
The Petroleum Division sought exemption from provisions of Section 153(1)(b) of the Income Tax Ordinance 2001 on payments received by Sui Southern Gas Company (SSGC) from SNGPL for the LNG re-gasification carried out by Elengy Terminal effective July 2015.
It also sought exemption from Section 153(1)(b) on payments received by Pakistan LNG Terminals Limited or Pakistan LNG Limited for LNG re-gasification by terminal operators Elengy Terminal and Pakistan GasPort Limited.
The FBR backed a proposal for exemption from 8% withholding tax levied on SSGC and Pakistan LNG Terminals for reimbursement in respect of LNG services agreement.
However, the FBR pointed out that the issue could only be resolved through a money bill in parliament. Therefore, it was proposed that exemption from withholding tax would be allowed through the money bill.
Economic managers were informed that SSGC was required to pay 8% of gross terminal charges in withholding tax. These charges did not reflect the income of SSGC as it only collected the amount from the buyer of re-gasified LNG – SNGPL – and handed over the same to LNG terminal operators.
The role of SSGC was only that of a facilitator. Owing to unavailability of tax exemptions, the company faced a tax burden of Rs506 million in financial year 2015-16 and Rs694 million in 2016-17. Pakistan LNG Terminals under the current tax system would also be subject to the same withholding tax deduction.
Published in The Express Tribune, April 19th, 2018.