The prices of urea fertilizer are expected to be further increased by Rs 40 kg per bag due to government's recent decision which restricts claimability of input sales tax from unregistered dealers through the Tax Laws (Second Amendment) Ordinance 2019.
The objective of amendment through Presidential Ordinance is to bring major distributors into the sales tax regime. Industry insiders said that against the sales made to unregistered distributors who make purchases of Rs 10 million on monthly basis or Rs 100 million on annual basis, the manufacturers would not be granted input adjustments.
With majority of the fertilizer dealers being unregistered, this could lead to Rs 40/bag increase in urea prices. The sources said with the implementation of the Ordinance, fertilizer industry would face financial loss of Rs 85 per bag as the industry was paying Rs 125 per bag on inputs and receiving output tax of Rs 40 per bag on governments' behalf. The Ordinance has serious implications which will result in shortage of urea in the country.
"To bear the loss of Rs 85 per bag, by not claiming sales tax on sale to unregistered dealers, the impact on fertilizer industry would be Rs 10 billion per annum," the sources added.
The government is also working on a new proposal aimed at bringing gas prices for fertilizer industry at par with international gas prices and paying subsidy directly to the farmers.
Ministry of Industries and Production has also accused local fertilizer industry of making windfall gains, asking them to bring down prices on their own. The new proposal floated by the Minister for Planning, Development and Special Initiatives will deny level playing field to the entire industry and windfall is foreseen in case of at least two groups who will earn over Rs 260 billion in case the proposed policy is implemented, because the plants of these groups are operating on old policy and would be making Rs 1200-1400 per bag profit.
"This will cause serious market distortion, with so much leverage with new plants and will have undue benefit at the cost of loss to the exchequer," he added.
The proposed increase in gas price within next couple of weeks will prospectively increase price of various end products. This comes at a time when inflation has hit its highest level since the incumbent Government took over with inflation numbers in November-2019 reflecting a 12.7 percent year on year rise.
According to data released by PBS, increase in inflation is largely due to higher food prices with nearly 35 percent of the national consumer price index comprising of food and non-alcoholic beverages. With the prospective increase in gas prices likely to have a notable impact on price of fertilizers, which is a key input dictating food prices, the government must bear in mind the inflationary impact of any decision taken.
Oil and Gas Regulatory Authority (OGRA) made a recommendation to the government to increase gas prices on December 16, 2019 which would lead to 135 percent increase in fertilizers feed gas prices, along with 32 percent increase in fuel prices. According to the OGRA Ordinance, the government has 40 days to respond to the recommendation which, if implemented, would lead to Rs 600 per bag increase in urea prices. Together these two steps may lead to a potential increase in urea prices by Rs 640/bag.
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