LPG tax rationalisation must without penalising domestic players

LAHORE: There is a dire need to rationalise the taxes on domestically produced and imported LPG, as the cumulative taxes and duties of imported LPG are much lower. We are protecting imports and penalising domestic players in this business.

The planners perhaps want to ensure smooth supply of LPG that is the kitchen fuel of the poor. Equal taxes and sales tax on imported LPG would make it expensive. Thus, importers would not be able to compete with domestic distributors of LPG. Prudence demands that the cost for both should be equal to conduct business competitively.

However, the planners have overdone the concessions on LPG imports, as now domestic LPG costs more than the imported fuel. Importers can indulge in over import, and sell all their gas at lower rates leaving the domestic players high and dry.

For importers, the duties are clearly defined, and in some cases, they are exempt from some levies. But for domestic distributors, the price mechanism is complicated.

They have to bear huge expenses for obtaining LPG quota from the LPG producers, and all of the producers are in the government sector.

The quota is awarded in open bidding for the lots available with the producers. Anyone can quote from one ton quota to 5, 10 or more.

The bidders offer different price for the quantity they need, but the problem is that the price of quota is fixed on the price quoted by the highest bidder. This is a non-transparent process, as someone desiring a quota for one ton, may quota double or triple the price quoted by all other bidders.

The applicants are allotted their demanded quota on the basis of highest bid and have to deposit the amount after calculating the daily supply of LPG for five years. The amount runs in to several millions of rupee. This is called signature bonus.

The signature bonus is non-refundable and is a guarantee that the distributor will lift the stock daily come what may. Current average of signature bonus is Rs7,000/ton, which means that apart from all government levies, the domestic distributors after paying all taxes and duties has to add Rs7,000 in the cost of LPG. In addition there is a petroleum development levy worth Rs4,669 on the domestically produced LPG. Imports are exempt from this levy.

The domestic LPG distributors have to pay three percent additional sales tax on top of the regular sales tax of 17 percent. The importers are exempt from additional sales tax of three percent, and the sales tax that they pay at import stage is 10 percent.

Another point worth noting is that OGRA fixes the price of domestic LPG, while there is no regulation of price on imported LPG.

All other taxes and levies are the same for both local and imported LPG. The lower rate of sales tax alone brings down the price of imported LPG to make it feasible for importers to market it in Pakistan.

But the additional sales tax, petroleum levy and signature bonus are highly discriminative that give advantage to importers. They always have an upper hand in sales, and instead of OGRA they determine the price of the product.

As pointed out earlier, at the time of bidding of LPG quota, one or two bidders offer to buy the quota (minimum quantity) at almost double the price offered by other bidders and that high price becomes the reference price for all quota allocations.

The high bidders are either LPG importers or their proxies. By bidding very high signature bonus, they ensure that LPG cost for the domestic distributors remains high. The government is the producer of LPG and the main beneficiary of signature bonus. It should voluntarily reduce the signature bonus by half to give breathing space to local distributors. Alternately, it should refund 50 percent of the signature bonus at the end of the five year contract.

Many officials wonder as to why the domestic producers are surviving despite incurring losses. The answer is simple. The LPG business is conducted purely on cash. So, there is no cash problem for them for the time being, and whatever they lose is adjusted in the signature bonus that they have paid at the start of the quota contract.

Five years down the line, they will have no cash to bid for extension of quota. The importers would then enjoy monopoly.