Tax burden crippling fertiliser industry

FMPAC says sector not getting fair return on recent investment.

KARACHI:

The Fertiliser Manufacturers Pakistan Advisory Council (FMPAC), a representative body of fertiliser manufacturers, has said that 89% of the increase in urea prices that has taken place in the last five years is a result of new government taxes on the industry and inflation.

FMPAC Executive Director Shahab Khawaja said that local urea prices have increased by Rs1,126 per bag in the last five years, while only 11% of this price increase was due to gas curtailment as the government did not honour its supply contracts with fertiliser manufacturers.

He said this while talking to reporters at a local hotel on Tuesday.

Fertiliser industry representatives reiterated that the industry is not getting fair returns on its recent investment of $2.3 billion that it made on government-approved policies.

According to Khawaja, there exists a misconception that manufacturers enjoy raw material subsidy from the government in the form of reduced feed gas prices. “This subsidy is not for the manufacturers, but is, in fact, passed on to the farmer through subsidised prices of the products.”

Therefore, he said, not only is the fertiliser industry passing on feed gas subsidy to the farmer; it is also failing to gain a much larger advantage voluntarily in addition to paying taxes to the government.

In 2003, Khawaja said, the average delta between domestic and imported price of urea was Rs846 per bag out of which the government provided subsidy through concessionary feed gas of Rs66 per bag (net of taxes), while the remaining Rs780 per bag was passed to farmers by the fertiliser sector.

“That happened despite the fact that there was no legal or moral obligation to maintain such a differential between locally produced and imported urea,” he added.

Khawaja believed the declining urea production in the last four years from 2010 to 2013 has resulted in billions of dollars of loss to the national exchequer in terms of urea import and subsequent subsidy to keep the prices at par with locally produced urea.

Adding further, Khawaja said the year 2010, 2011, 2012 and 2013 have been the worst years for the fertiliser sector as instead of providing gas to local plants, the government preferred to import urea by spending approximately $2 billion.

He informed that in 2013 alone, the government spent $335 million on importing 968,000 tons of urea and also provided a subsidy of Rs17 billion.

“If the local urea industry is shut down, it will cost approximately $2.3 billion to import the required urea content and an additional subsidy of Rs96 billion to maintain current domestic local prices.”

He said that if urea prices move to international parity, the farming community will possibly bear the burden of approximately Rs100 billion on collective annual incomes and if this cost increase is added to the consumer end it will result in rampant food inflation and insecurity in the country.

He informed that if prices increase by Rs150 to 200 per bag it is expected that urea application will decline by 8 to 10%, resulting in approximately 8% drop in acreage which will translate into a loss of Rs70 billion to the country’s GDP.

Published in The Express Tribune, April 2^nd, 2014.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.