LNG financial relief: PSO seeks amendments to taxation laws, Rs628bn allocation

ISLAMABAD: Pakistan State Oil (PSO) has sought amendments to taxation laws about LNG financial relief and allocation of funds of Rs 628 billion in budget of FY 2023-24 as the company now has no fiscal space to absorb substantial fluctuation in international oil prices.

PSO’s Managing Director/CEO Syed Muhammad Taha in a letter to Secretary Petroleum Division has submitted different proposals for federal budget 2023-24.

PSO is facing severe liquidity crises with total receivables from the Power Sector, SNGPL and other government entities amounting to a staggering Rs 750.6 billion as of May 01, 2023.

Sharing his views on LNG diversion subsidy, the MD stated that PSO procured LNG from Qatar Gas under long term contract which was supplied to SNGPL primarily for LNG based power generation plants. However, to meet higher demand in winter, at the behest of GOP, LNG diverts to domestic and other subsidized sectors including fertilizer, export-based industries etc.

Due to such diversion, PSO has suffered a massive cash shortfall of Rs 106.5 billion during the current fiscal year to date, aggregating shortfall from LNG business to Rs 398 billion. In addition, LPS and exchange loss amounting to Rs 79.8 billion and Rs 6.7 billion respectively, have also accumulated, aggregating to the total receivable amount of LNG business to Rs 478.5 billion.

As the price differential between LNG cost and the subsidized price is unbudgeted, the timeline for recovery of this amount is uncertain which is jeopardizing PSO’s efforts in maintaining an uninterrupted supply of petroleum products in the country.

Keeping in view the critical situation, PSO has requested to allocate the funds of Rs 628 billion in the federal budget to cover current aggregate shortfall of Rs 478 billion and estimated shortfall of Rs 150 billion (based on current year’s payment pattern) expected to arise in FY 2023-24.

PSO had supplied furnace oil to GENCO III, which was unable to make timely payment to PSO as per agreed terms. PSO has been given to understand that CPPA-G has already released the majority of this payment to NPGCL/GENCO-III over the period of time, however, these funds of Rs 69 billion were instead utilized as follows: (i) investment in Nandipur Power Plant, Rs 32 billion; and (ii) line losses/tariff differential, Rs 37 billion.

The total amount of LPS accumulated on this outstanding balance amounts to Rs 77 billion. Therefore, PSO has urged that the agreed and reconciled amount should be paid to it at the earliest by allocating Rs 149 billion in the upcoming federal budget or finalise the acquisition of Nandipur & GEPCO to Pakistan State Oil Company Limited PSO.

Commenting on receivables from IPPs, PSO has stated that complying with GoP’s instructions, PSO is supplying furnace oil to HUBCO and KAPCO which are unable make timely payments to PSO further straining PSO’s financial situation. Currently, Rs 30 billion are outstanding from HUBCO and KAPCO and PSO has requested that funds be allocated for HUBCO and KAPCO so that they can pay off PSO’s debt in FY24.

Being a national flag-bearer, PSO, despite liquidity challenges, ensures uninterrupted supplies of JP-1 to PIA which is unable to make timely payments to PSO resulting in an aggregate receivable amount of Rs 26.5 billion. Since GoP is considering restructuring PIA and taking over its liabilities, Rs 26.5 billion may be allocated for the settlement of PIA’s receivables in the coming fiscal year, the sources quoted MD PSO as saying.

On exchange loss on FE-25 loans, PSO maintains that complying with directives of Ministry of Finance (MOF), it is booking FE-25 loans to support the FX reserves of the country. As of May 01, 2023, an amount of Rs67 billion is booked in PSO’s books as exchange loss on the FE-25 loans and MoF is yet to pay the same. PSO has sought allocation of this amount.

PSO has been supplying subsidized fuel to various entities at the behest of GoP and has a decade old receivable of Rs 9 billion. Out of this amount, Rs 7.3 billion is for furnace oil supplied to KAPCO and K-Electric on subsidized rates. Remaining amount of Rs 1.6 billion relates to PMG/HSD sold at subsidized rate as per the GoP instructions. These price differential claims are audited and need to be paid to PSO urgently.

Commenting on change in LNG taxation policy, PSO claimed that it used up its cash flows and borrowing limits to bridge the cash shortfall caused by its LNG business. These long outstanding receivables have placed PSO under severe liquidity stress, weakening the company’s balance sheet and eroding its profitability. Financing the huge deficit from SNGPL has resulted in an alarming increase in PSO’s finance cost posing a significant threat to its profitability.

The taxation of LNG is covered under section 148 of the Income Tax Ordinance, 2001 (minimum tax regime) wherein one percent of the import value as increased customs duty, sales tax and federal excise duty is withheld at import stage. The tax liability is then computed as higher of: (i) tax collected under the aforementioned section; and (ii) corporate tax rate which is currently 29 percent of taxable income.

According to MD PSO, this significant increase in finance cost and exorbitant rate of tax makes the LNG business unsustainable. Finance cost incurred by PSO during July 2022- March 2023 due to shortfall from SNGPL is Rs 18.3 billion which is 105 percent of LNG’s operating profit in the aforementioned period resulting in loss after tax of Rs8.6 billion for the nine months ended March 31, 2023.

Keeping in view the critical situation, PSO has requested the following changes in the taxation policy of LNG in the Income Tax Ordinance, 2001: (i) excluding LNG (PCT code 2711.1100) from 12th schedule to the Income Tax Ordinance, 2001; and (ii) including LNG (PCT code 2711.1100) in clause 56 in part IV (exemption from section 148) of the second schedule to the Income Tax Ordinance, 2001.

Consequently, the taxable income of LNG shall be charged at corporate tax rate i.e. 299 percent for computation of tax liability which may provide some relief to PSO.

Given PSO’s dire financial situation, the company now has no fiscal space to absorb substantial fluctuation in international oil prices. PSO’s high level of receivables and expected LNG shortfall in FY 2023-24 will expose and disrupt the country’s entire supply chain of petroleum products. To avert a major fuel supply crisis in the country and mitigate the situation, PSO stated that it looked forward to Finance Division’s cooperation in allocating the said budget and change in taxation policy.

Copyright Business Recorder, 2023