Cabinet to meet on 20th: Changes in input tax adjustment procedure likely

The federal cabinet which is scheduled to meet on Thursday (Feb 20) with Prime Minister Imran Khan in the chair is expected to approve changes in the input tax adjustment procedure for the petroleum exploration and production companies operating as joint ventures.

Sources told Business Recorder that the proposed changes in the procedure of input tax adjustment would result in timely payment of refunds to the E&P companeis operaitng as joint ventures.

The responsibility to charge and pay output sales tax is on the supplier in case of production and supplier of gas from bore-holes or wells. Input tax suffered by such a person on purchase of goods and services in relation to production and sale of gas is adjustable against output tax on supply of gas.

Aforesaid mechanism was available under Chapter IV of Sales Tax Special Procedure Rules 2007 "Special Procedure for Collection and Payment of Sales Tan on Natural Gas" which was rescinded vide SRO 694(1)/2019 dated 29-6-2019 as it had created an anomaly for the said registered persons. This input/output mechanism is equally applicable on supply of gas from bore-holes and wells by E&P companies operating in a Petroleum Concession Area.

However, where a Petroleum Concession Area is run by a Joint Venture of more than one E&P companies, the companies are required to charge and pay sales tax according to their respective share in the production and sale of gas.

On the other hand, invoices of sales tax in respect of goods and services in respect of the entire Petroleum Concession Area are issued in the name of one of E&P companies, called the Operator. Thus, where the Operator is required to charge and pay sales tax on supply of gas according to its respective share in terms of Petroleum Concession Agreement it has to adjust the entire sales tax charged by the suppliers on supply of goods and services in relation to entire Petroleum Concession Area.

The invoices in respect of goods and services required for entire operations of a Petroleum Concession Area are issued in the name of the Operator by the vendors, whereas the Operator is entitled to charge sales tax in respect of its share in supply of gas from a Petroleum Concession Area.

This leads to piling up of refunds in cases of Operators as their share in production and supply of gas is restricted in terms of respective Petroleum Concession Agreements and compromises their cash flow despite the fact that excess of input tax over output is refundable under section 10 of the Sales Tax Act, 1990. However, under the provisions of Rule-34(d) of Sales Tax Rules, 2006 the refund becomes admissible after a minimum period of consecutive 12 months.

The issue can be addressed by issuing an SRO allowing the Operator to transfer share of common input tax to other registered persons/Working Interest Owners in a Petroleum Concession Area proportionate to their respective shares. Other Working Interest Owners would be able to adjust input tax so transferred by the Operator against their respective output sales tax liability.

The proposed amendment does not involve any loss of revenue as under the present scheme of things other Working Interest Owners (WIOs) are required to charge and pay sales tax on their respective share in supply of gas without adjustment of any input tax invoiced in the name of the Operator, sources added.