Tax issues can cause urea price hike

FMPAC chairman says stuck refunds have sparked cash flow challenges

Usman Hanif June 18, 2021


Stakeholders of the fertiliser industry have said that they will be forced to increase prices if the budget for 2021-22 failed to address the longstanding issues pertaining to the sales tax regime, non-payment of subsidy and delay in release of sales tax refund.

In a letter sent to Finance Minister Shaukat Tarin on Thursday, Fertiliser Manufacturers of Pakistan Advisory Council (FMPAC) Chairman Tariq Khan pointed out that the stuck tax refunds had caused cash flow challenges for the manufacturers.

“The mismatch between general sales tax on inputs and outputs has resulted in refundable dues of over Rs38 billion,” the letter stated. “Currently, the industry is paying input tax of Rs100-186 on a bag of urea, which is four to five times more than the output tax of Rs33 per bag for natural gas and RLNG-based fertiliser production.”

Read: Govt to retain power to arrest tax evaders: Tarin

If the Federal Board of Revenue (FBR) fails to harmonise the sales tax regime before the budget is approved by parliament, the fertilser sector will be forced to pass on the impact of rise in finance cost to farmers in the form of hike in urea prices, he stated.

Khan appreciated the finance minister for automating refund processing and issuing tradable bonds to settle a large amount of sales tax refunds for the industry.

Moving on to the non-allocation of budget to cover past subsidy of Rs19 billion, the letter added that the government’s commitment remained unfulfilled to date, which shook the confidence of local industry.

“We request the finance minister to issue directives to the authorities to expedite the settlement of outstanding subsidy claims through the Ministry of National Food Security and Ministry of Industries and Production via issuance of tradable bonds,” he said.

Khan offered FMPAC’s support to the government to steer documentation of the economy and highlighted that the council was ready to share information about unregistered dealers with the FBR.

In line with this commitment, the fertiliser industry has actively encouraged its dealers to register with the FBR and has restricted business with unregistered dealers.

“However, the progress on sales tax registration has remained sluggish from the dealers’ end,” he said. “In the absence of any specific exemption from Section 21(G) of the Income Tax Ordinance 2001, sales to unregistered dealers will remain restricted, which may impact the agricultural output and threaten national food security.”

In view of the industry’s strategic importance in ensuring food security and propping up the economy, FMPAC urges the government to address the distortion in taxation through the Finance Bill 2021, he wrote in the letter.

Read more: Over-reliance on indirect taxes irks economists

Speaking to The Express Tribune, Insight Securities analyst Muhammad Shahroz confirmed that the disparity between input and output costs had caused serious cash flow problems for fertiliser companies.

Arif Habib Limited Head of Research Tahir Abbas said that fertiliser subsidy, which was announced in 2016 for urea and DAP, had been stuck with the government and cash flow of the fertiliser sector was under pressure.

“Likewise, the sales tax on inputs - 5% on feed gas, 17% on fuel gas, 17% on RLNG, 5% on phosacid and 10% phos rock - is higher compared to 2% sales tax on the final product,” he said. “This difference has led to the accumulation of enormous sales tax refunds with the government.”

Both of these issues must be resolved to ease cash flow problems of the fertiliser sector, said the analyst.

Published in The Express Tribune, June 18h, 2021.

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