Pakistan's GIDC controversy and solution thereof
Levy should be abolished as it has not been utilised for designed purpose
Representational image. PHOTO: REUTERS
ISLAMABAD:
Perhaps the government underestimated the potential of controversy the gas infrastructure development cess (GIDC) issue carried.
The government withdrew the GIDC ordinance within days of its promulgation. The hurried manner in which it was introduced further sent people searching for ulterior motives. The issue is rather complicated and deserves a cool analysis. GIDC was levied in 2012 on certain sectors to generate resources for financing gas infrastructure projects. There was and continues the need for augmenting the gas infrastructure to step up supplies to various sectors of the economy.
Stakeholders of compressed natural gas (CNG), textile, independent power producer (IPP), fertiliser and other sectors on which the GIDC was levied didn’t like it, arguing that it slows down the sectors and other ways should be found to generate required resources.
The stakeholders went to courts, one after another, and the courts decided against the government and annulled the GIDC levy. The government managed to introduce the GIDC again through follow-up corrective legislation.
All taxation finally affects the people - the consumers - and only indirectly affects companies whose profits and revenues are impacted partly through reduced sales. The margin is to be shared between the government in the form of taxes and levies and the companies as profit.
The reverse is also true. If a levy is reduced, although the immediate benefit goes to the companies, the final benefit goes to the consumers. To the chagrin of government, it was construed the beneficiaries were the companies only.
Government system could not bring out this point adequately and consequently, GIDC ordinance had to be withdrawn. Total accrued GIDC payable by the companies is estimated at Rs720 billion, of which the companies have deposited Rs282 billion, leaving net dues of around Rs440 billion. It is said that out of the Rs440 billion, Rs147 billion is doubtful, pertaining to the pre-2015 period.
Fifty per cent of the net dues had been offered to be remitted. The government expected an income of Rs220 billion. Another stream of revenues was expected as the annual revenue in future was estimated at Rs42 billion. The controversy is that a benefit of Rs124-220 billion is being gifted to companies, which belong to ruling party supporters and election campaign financiers.
There were three motivations for the government in introducing the GIDC ordinance. First, to ward off a possible refund of Rs282 billion in case courts decide against the imposition of GIDC levy. This would have caused serious budgetary issues in an already serious budgetary crunch.
Second, to generate some financial resources - worth Rs42 billion per year in addition to the past arrears of Rs220 billion - to finance the gas sector as well as reduce budgetary shortages. Third, the GIDC reduction would have benefitted the consumers as well. There are five possible parties or situations that are to be handled in this controversy:
Category A - those who paid GIDC and charged customers/products accordingly. This could be taken as transaction completed. Category B - those who paid GIDC but did not charge their customers/products. Such a thing would be rare to find. They deserve refund if the GIDC is withdrawn or reduced.
Category C - those who did not pay GIDC but charged their customers/products. It may be likely and has to be investigated. They should pay full GIDC to the extent they have charged. A reduced rate may be applicable to them in the future.
Category D - those who neither paid GIDC nor charged their customers/products. It would not be possible for them to charge for the gone period. They may not be charged GIDC for the gone period. They may be eligible for the new reduced rate.
Category E - a mix of the above positions, which is the most complicated case and may not be there.
It was the category C of companies, which did not pay GIDC but collected the same from the consumers, which sparked the major worry among the public. It was suspected that the reduction would halve the liabilities of large companies, whose owners could be cronies and financial supporters of the ruling party. And even cash resources and refunds would accrue to them.
Solution
What is the solution? Do away with the GIDC. It has not been utilised for the purpose it was designed and in the milieu of privatisation and market operations, as intended, there is no need for public funds in gas sector development.
It is an anachronism. Gas and electricity prices have been increased and a major avalanche is due in the near future in this respect. The government will search for ways and means to reduce energy costs and tariffs within the framework of IMF agreement.
Eliminating the GIDC would offer an ideal opportunity. Controversy would remain in case of those who have not paid the GIDC but have charged the customers. Full refund from such companies is to be made in this case. No concession at all.
There may be some mixed-up cases. Large companies may be subject to a forensic audit to get the required numbers. This could be done under an arrangement with the Supreme Court, whereby the past GIDC refunds by the government are not required in lieu of the GIDC concession the government would be making and passing on the benefit to people in terms of reduced energy and fertiliser prices.
Concluding, there does not appear to be any cronyism in all this, but confusion yes.
The writer is a former member energy of the Planning Commission
Published in The Express Tribune, September 23rd, 2019.
Perhaps the government underestimated the potential of controversy the gas infrastructure development cess (GIDC) issue carried.
The government withdrew the GIDC ordinance within days of its promulgation. The hurried manner in which it was introduced further sent people searching for ulterior motives. The issue is rather complicated and deserves a cool analysis. GIDC was levied in 2012 on certain sectors to generate resources for financing gas infrastructure projects. There was and continues the need for augmenting the gas infrastructure to step up supplies to various sectors of the economy.
Stakeholders of compressed natural gas (CNG), textile, independent power producer (IPP), fertiliser and other sectors on which the GIDC was levied didn’t like it, arguing that it slows down the sectors and other ways should be found to generate required resources.
The stakeholders went to courts, one after another, and the courts decided against the government and annulled the GIDC levy. The government managed to introduce the GIDC again through follow-up corrective legislation.
All taxation finally affects the people - the consumers - and only indirectly affects companies whose profits and revenues are impacted partly through reduced sales. The margin is to be shared between the government in the form of taxes and levies and the companies as profit.
The reverse is also true. If a levy is reduced, although the immediate benefit goes to the companies, the final benefit goes to the consumers. To the chagrin of government, it was construed the beneficiaries were the companies only.
Government system could not bring out this point adequately and consequently, GIDC ordinance had to be withdrawn. Total accrued GIDC payable by the companies is estimated at Rs720 billion, of which the companies have deposited Rs282 billion, leaving net dues of around Rs440 billion. It is said that out of the Rs440 billion, Rs147 billion is doubtful, pertaining to the pre-2015 period.
Fifty per cent of the net dues had been offered to be remitted. The government expected an income of Rs220 billion. Another stream of revenues was expected as the annual revenue in future was estimated at Rs42 billion. The controversy is that a benefit of Rs124-220 billion is being gifted to companies, which belong to ruling party supporters and election campaign financiers.
There were three motivations for the government in introducing the GIDC ordinance. First, to ward off a possible refund of Rs282 billion in case courts decide against the imposition of GIDC levy. This would have caused serious budgetary issues in an already serious budgetary crunch.
Second, to generate some financial resources - worth Rs42 billion per year in addition to the past arrears of Rs220 billion - to finance the gas sector as well as reduce budgetary shortages. Third, the GIDC reduction would have benefitted the consumers as well. There are five possible parties or situations that are to be handled in this controversy:
Category A - those who paid GIDC and charged customers/products accordingly. This could be taken as transaction completed. Category B - those who paid GIDC but did not charge their customers/products. Such a thing would be rare to find. They deserve refund if the GIDC is withdrawn or reduced.
Category C - those who did not pay GIDC but charged their customers/products. It may be likely and has to be investigated. They should pay full GIDC to the extent they have charged. A reduced rate may be applicable to them in the future.
Category D - those who neither paid GIDC nor charged their customers/products. It would not be possible for them to charge for the gone period. They may not be charged GIDC for the gone period. They may be eligible for the new reduced rate.
Category E - a mix of the above positions, which is the most complicated case and may not be there.
It was the category C of companies, which did not pay GIDC but collected the same from the consumers, which sparked the major worry among the public. It was suspected that the reduction would halve the liabilities of large companies, whose owners could be cronies and financial supporters of the ruling party. And even cash resources and refunds would accrue to them.
Solution
What is the solution? Do away with the GIDC. It has not been utilised for the purpose it was designed and in the milieu of privatisation and market operations, as intended, there is no need for public funds in gas sector development.
It is an anachronism. Gas and electricity prices have been increased and a major avalanche is due in the near future in this respect. The government will search for ways and means to reduce energy costs and tariffs within the framework of IMF agreement.
Eliminating the GIDC would offer an ideal opportunity. Controversy would remain in case of those who have not paid the GIDC but have charged the customers. Full refund from such companies is to be made in this case. No concession at all.
There may be some mixed-up cases. Large companies may be subject to a forensic audit to get the required numbers. This could be done under an arrangement with the Supreme Court, whereby the past GIDC refunds by the government are not required in lieu of the GIDC concession the government would be making and passing on the benefit to people in terms of reduced energy and fertiliser prices.
Concluding, there does not appear to be any cronyism in all this, but confusion yes.
The writer is a former member energy of the Planning Commission
Published in The Express Tribune, September 23rd, 2019.