Settlement of tax-related disputes: MoU with E&P companies has no legal status: Sohail

The Chairman of Federal Board of Revenue (FBR), Sohail Ahmed, has said that the memorandum of understanding (MoU), signed between FBR and exploration and production (E&P) companies for settlement of tax-related disputes, has no legal status, as the companies were unable to fulfil commitment of around Rs 5-6 billion by March 31, 2010.
On the conclusion of the meeting of National Assembly standing committee on finance on Wednesday, he told media that the MoU signed between the FBR and E&P companies has no legal validity. The companies had agreed to pay nearly Rs 5-6 billion under the MoU by March 31, 2010. However, they failed to deposit the due amount. Therefore, the FBR would review the MoU in view of non-compliance by the said companies.
When asked why the case was still pending at the level of tribunal in the presence of the MoU, he said that the legal status of the MoU between the E&P companies and FBR has ended due to non-compliance of these companies to meet the conditions of the MoU.It is worth mentioning that the FBR and the E&P companies had signed an MoU for settlement of tax-related disputes to the tune of nearly Rs 14 billion. Under the said MoU, the E&P companies had agreed to pay the due amount, in instalments, by June 2010 for settlement of the disputed amount.
Over 25 E&P companies were required to pay taxes to the tune of nearly Rs 14 billion, which had accumulated since 2003. Under the MoU, tax rate was agreed to be applied in accordance with the provisions of Petroleum Concession Agreement. Under this MoU, the FBR and E&P companies had resolved issues pertaining to de-commissioning cost, depletion allowance and tax rates.
In March 2010, the FBR, through a series of meetings with the E&P companies'' association (PPEPCA), had reached this consensus so as to facilitate the companies in resolving the tax issues ensuring prompt payment of government revenues, FBR chairman added.However, he confirmed, on Wednesday, that the MoU with the E&P companies is no more a legal document due to failure of this sector to deposit the agreed amount.
Responding to a query of inflationary impact of the VAT, he reiterated that the inflationary impact of the VAT would not be more than 1-2 percent. "How the inflationary impact of the VAT could be 15 percent when the rate of the VAT would be reduced to 15 percent as compared to existing rate of 16 percent sales tax. The higher rates of 24-18 percent would also be reduced to 15 percent", he added.
There is a misconception among people that VAT would have huge inflationary impact. The FBR will suffer transitional losses to the tune of Rs 50 billion while switching over from sales tax to VAT. Thus, the inflationary impact of the VAT would be nominal in view of the said transitional losses.