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February 14, 2018



Urea subsidy elimination likely to offset tax incentive

LAHORE: A government’s proposal to eliminate subsidy on urea is likely to offset the benefit of a three percent reduction in sales tax on the key agriculture input, industry officials said on Tuesday.

“Reduction in general sales tax on urea from 5 to 2 percent and end of Rs100/bag subsidy regime will increase the retail price for farmers,” an official said, referring to a proposal discussed in a government’s meeting last month.

Government constituted a committee, headed by Federal Minister for National Food Security and Research Sikandar Bosan, to address the anomalies in fertiliser subsidy scheme, and examine the viability of a proposal to substitute the existing cash subsidy with elimination or reduction of sales tax on fertilisers.

An industry official said the reduction of general sales tax on urea from 5 percent (Rs70/bag) to 2 percent (Rs28/bag) would bring down a bag price by Rs42. “But, elimination of Rs100 cash subsidy will lead to increase in price by Rs58 per bag,” the official added. “This would nullify the impact of tax reduction unless the high cost of production is reduced.”

The industry officials said local gas tariffs of $4.65/million metric British thermal unit (MMBtu) in Pakistan are already much higher as compared to $1.3 to 3/MMBtu in Middle East and US.

Government, in annual budget for the current fiscal year of 2017/18, had decided to maintain urea prices up to 1,400/bag.

Later, it was decided that cash subsidy of Rs100/bag on urea fertiliser would be provided once fertiliser makers submit sales invoice and tax returns to the Federal Board of Revenue.

Pakistan is self-sufficient in fertiliser production with annual capacity of six million tonnes little over total demand.

The subsidy scheme announced in the budget of FY2017 ended on June 30.

Yet, the government, in budget for the 2017/18 fiscal year, announced a reduction in sales tax to Rs100 from Rs400/bag of diammonium phosphate. Besides, the government also announced cash subsidy of Rs11.6 billion for urea.

The officials said the industry supported the government initiative. However, the fertiliser makers have been running from pillar to post to get subsidy payments for the last two years.

Officials believed that reduction in cost of production to make agriculture profitable is a major challenge. Government made all-out efforts to facilitate farmers by decreasing input prices through curtailment of sales tax, provision of cash subsidies and supply of cheap gas to the fertiliser industry. Price reduction encouraged farming community to increase crop outputs.

Urea sales increased seven percent to 5.86 million tons in the 2017 calendar year, while diammonium phosphate off-take rose eight percent to 2.38 million tons.

Fertiliser industry has so far absorbed Rs106/bag in the recent times since the subsidy regime was introduced two years back. Urea subsidy made the industry to absorb over Rs6 billion during FY2017. The amount was apart from the cost of financing required due to delayed subsidy payments from the government.

“With the elimination of subsidy, the industry will have rights to recover the loss of Rs106/bag,” the industry official said, foreseeing an increase in urea prices.

Industry officials said the tax reduction is likely to pile up refunds as there is a mismatch between input and output general sales taxes.

Industry officials urged the government to make import of diammonium phosphate subject to zero-rated sales tax. Besides, the government must consider removal of capping on urea prices in case of subsidy withdrawal, they added.