Irritants in evolving devolution

Irritants in evolving devolution

Irritants in evolving devolution With more than Rs700bn contribution to the exchequer — more than one-fourth of the national revenue — the country’s oil and gas sector has started to feel the pinch of evolving taxation measures at the federal and provincial level, partly because of the process of devolution following the 18th Amendment and the 7th National Finance Commission Award of 2009.

The sector has taken pride in being the country’s largest revenue contributor, chiefly because more than 99pc of the Rs700 amount is raised from consumers, with the oil and gas companies playing the role of tax collector or withholding agents on behalf of the government.

The case in point are the ‘other taxes’ in tax-revenue such as the Gas Infrastructure Development Cess, Natural Gas Development Surcharge and Petroleum Levy; non-tax items like royalties on crude and natural gas, windfall retained against crude production and petroleum levy on liquefied petroleum gas.

All these items are estimated to have raised about Rs400bn last fiscal year ending June 30, 2016. On top of all this is the indirect tax in the form of general sales tax on petroleum products and natural gas.

However, a set of new revenue steps initiated by the federal government, oil and gas regulatory authority and the provincial governments, particularly Punjab and Sindh, has irked the oil industry.

Every time a new measure is introduced by any of the three stakeholders, the industry has used its muscle and warned the government of supply chain disruption.

Conversely, it has not used its influence in the power corridors to formulate a time bound mechanism for the creation of mandatory storage capacity required under licence rules, despite the historic supply chain failure of January 2015 that led to the transportation and energy crisis.


The federal government has so far taken an evasive approach on this inter-provincial issue … The result is payment of double taxation and an increase in the cost of doing business


The case in point here is the inability of the ministry of defence to issue no-objection certificates in more than six months to about a dozen oil marketing companies for setting up new storages across the four provinces.

With the devolution of general sales tax on services, the provinces have started bringing new services into the tax net and raising funds for their development needs. Implementation is, however, causing serious teething problems. The industry created a hue and cry in May 2016 when the government of Punjab started collecting infrastructure development cess on petroleum products deboned in the province.

Although, the collection was rolled back on the backdoor persuasions of the federal government at the last moment by Chief Minister Shahbaz Sharif, it was clear the industry had not taken the matter seriously when the relevant law — The Punjab Infrastructure Development Cess Act 2015 — was passed almost a year ago.

This was followed by a controversy over new fee structure introduced by the Oil and Gas Regulatory Authority (OGRA). The matter is pending in courts for adjudication.

Ambassador Maleeha Lodhi rang Nasdaq’s closing bell as part of Pakistan’s independence celebrations along with members of the Pakistan-American Business Association which organised the event in New York on Aug 25.
Ambassador Maleeha Lodhi rang Nasdaq’s closing bell as part of Pakistan’s independence celebrations along with members of the Pakistan-American Business Association which organised the event in New York on Aug 25.

At the heart of the dispute is the entire fee structure imposed through Pakistan Rules 2016 Oil (Refining, Blending, Transportation, Storage and Marketing); but the most worrying for the industry is the percentage of sales demanded by Ogra, which it feels was unlawful, being a kind of sales tax — an exclusive power of the government.

These rules required all oil refineries, marketing companies and oil pipeline companies to pay Rs2m non-refundable fee for grant, renewal, modification, extension, assignment, review, transfer, amendment, relocation or re-issuance of a licence. Similar charges are also payable by oil blending, grease plants, storage and testing facilities.

On top of that, every refinery, OMC, lubricant marketing company and pipeline is also required to pay 0.005pc of gross sales. This 0.005pc fee of the gross sales in particular is being viewed by the oil industry as a ‘sales tax’ which it argued could only be imposed by the government and was outside the purview of the regulator.

Moreover, the oil industry is also demanding the government to withdraw double taxation at the provincial and federal level through general sales tax on services and goods or to allow a proportionate increase in the prices of petroleum products.

As if that was not enough, the industry felt aggrieved by the withdrawal of two separate statutory regulatory orders (SROs) by the ministry of finance and revenue of February 6, 2008 and March 26, 2014 to disallow provincial sales taxes as input tax adjustment at the federal level.

Through the finance bill 2016-17, the government has disallowed the input tax claim of provincial services sales tax against sales tax on goods under sales tax act of 1990 with effect from July 1, 2017. This means the oil industry will not be entitled to get adjustment for tax on services like port charges, Fauji Oil Terminal charges, wharfage, white oil pipeline charges and other service charges.

The oil industry has reported that almost all the goods and services procured by it attracted sales tax — provincial sales tax on services and federal sales tax on goods — which is paid by the oil firms and recorded in their books as ‘input tax’ receivable and net-off (adjusted) against output of federal sales tax charged to the consumers on sale of petroleum products.

Ironically, the governments of Punjab, Sindh and the federation have failed so far to put in place a mechanism for distribution of sales on services, particularly among the provinces. This brings to the limelight an old dispute over taxes on services on the basis of origin or destination and how to share them among various governments if the public is to be saved from multiple stages of taxation.

That is why the oil tankers contractors have been threatening of strikes and wheel jams. Both the provincial governments have imposed sales tax on transportation services to raise their tax base. Punjab wants collection on the basis of destination of the carriage service while Sindh obviously wants this at the stage of origin.

Both have the right to tax a particular services but propriety requires that an inter-provincial service should be structured in a manner that does not over-burden the public and gives a fair share of revenue to each province. In doing so, the principle of input tax adjustment at the final stage needs to be applied across the supply chain.

The federal government has so far taken an evasive approach on this inter-provincial issue since it has disallowed input tax adjustments by amending the above mentioned federal laws in June this year. The result is payment of double taxation and an increase in the cost of doing business.

Source: http://www.dawn.com/news/1280533/irritants-in-evolving-devolution

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