GIDC removal on feedstock: Fertilizer sector urges government to reduce gas prices

The fertilizer manufacturing sector has urged the government to consider measures for reduction of gas prices through removal of GIDC on feedstock to ensure prices of urea at affordable rates for the growers. Fertilizer manufacturing circles also said that arrangements should be made for immediate payment of all the pending subsidy claims in line with the decision of PM Office dated 24 July 2017.
These circles observed that reduction in the cost of production to make agriculture profitable is a major challenge. All-out efforts have been made by the government to facilitate the farmers by decreasing input prices through curtailment of GST, provision of cash subsidies and cheaper feed gas for the fertilizer industry. This reduction in prices, especially fertilizers, has been widely applauded by the farming community, sources said while talking to Business Recorder on Tuesday.
In the Federal Budget 2017-18, it was decided to maintain prices of urea up to 1400 per bag. It was also decided at a high-level meeting held in the Prime Minister office on 24-01-2017 that the fertilizer subsidy scheme will remain a federal government initiative. Later, it was decided that cash subsidy on urea fertilizer at the rate of Rs 100 per bag will be provided after sales on the basis of sales tax invoice and sales tax returns submitted by the manufacturers to the Federal Board of Revenue (FBR).
The fertilizer industry supported the government initiative, however, it has been running from pillar to post for subsidy payments for the last two years. It is learnt that a committee had been consituted under the chairmanship of Federal Minister of National Food Security & Research (NFS&R) to address the anomalies in fertilizer subsidy scheme, and examine viability of proposal for substituting the existing cash subsidy with elimination/reduction of sales tax on fertilizers. The fertilizer industry has taken up case with the ministry to take into account their viewpoint before taking a decision on the proposal.
It may be understood that subsidy on urea is not to benefit the industry but the farmers. Hence, the substitution of subsidy with reduction of GST on urea will have implications for both and must be understood, they said. The reduction of GST on urea from 5% (Rs 70 per bag) to 2% (Rs 28 per bag) will prima facie lead to reduction of end selling price by Rs 42 per bag.
However, elimination of Rs 100 cash subsidy will lead to increase in price by Rs 58 per bag (100-42=58), thus nullifying the impact of GST reduction, unless the high cost of production is reduced, since the gas prices in Pakistan are much higher than international industry (USD 4.65 per MMBTU in Pakistan against USD 1.3 to 3 per MMBTU in Middle East/USA).
The industry has already absorbed PKR 106 per bag in the recent times since the subsidy regime was introduced to support the farmers' community. It would be recalled that subsidy was reduced from PKR 156 to 100 in 2017/18 and it alone necessitated the industry to absorb PKR 6.72 billion, not mentioning the cost of financing required due to delayed subsidy payments and earlier contribution of approximately Rs 6 billion during FY 2016/17. With the elimination of subsidy, the Industry will be within its rights to recover the above-mentioned loss of PKR 106 per bag, and hence we foresee the adjustment in urea sales price.
The mismatch of input and output GST on urea, if output GST is reduced to 2%, (output will be Rs 26 against input of Rs 114 per bag) will lead to serious financial implications for the fertilizer industry due to further piling up of tax refunds/adjustable. Presently, the input taxes vary from 5 to 17 percent, hence, over Rs 14 billion are already awaiting adjustment/refund.
The analysts of the industry are of the view that the government must continue subsidy for ensuring affordability of urea prices to the farmers. If subsidy on urea is to be continued, the mechanism for subsidy disbursement should either be directly to the farmers or a method be devised whereby the fertilizer producers are paid subsidy within 15 days at the end of every month. In case of reduction of output GST to a flat rate of 2%, the mismatch of GST between input and output be addressed through ZERO based GST on all the inputs to avoid GST refunds. Similarly, to compensate for the higher cost of production based on RLNG, output GST be reduced to zero percent on urea produced using RLNG for benefit of the farmers. To help remove market distortions, DAP be subjected to zero-rated sales tax regime at import stage besides abolishing three percent additional GST. The government may consider measures for reduction in gas through removal of GIDC on feedstock to ensure that prices of urea are kept affordable as gas prices for fertilizer production in Pakistan are double the international prices.