Reducing financial burden: SNGPL proposes amendments to tax laws

ISLAMABAD: Sui Northern Gas Pipeline Company Limited (SNGPL) has proposed amendments to tax laws to reduce financial burden through alteration in sales tax, income tax and minimum turnover tax, well informed sources in Petroleum Division told Business Recorder.

The gas utility company referred to its previous correspondence through which certain tax issues were identified requiring resolution through amendments in tax laws. However, none of those proposals were considered in the Finance Act 2023.

SNGPL says that it is imperative to extend relief to Sui Companies on immediate basis in upcoming Finance Bill for FY 2024-25 as non-consideration of its proposals has already been having adverse impact on the liquidity and profitability of Sui Companies.

Rs160bn FBR notice lands SNGPL in hot water

In a letter to Director General (Gas) Petroleum Division, SNGPL presented a brief of present tax issues and required measures to deal with the adverse financial position.

Sales Tax issues: RLNG was brought in the system in 2015 on the directions of the federal government, a dedicated pipeline was laid from Karachi to Sawan field which was completed in September 2018; however, before September 2018, for managing RLNG Supply chain, a temporary arrangement was made with SSGC under Gas Transportation Agreement (GTA) whereby custody of RLNG was given to SSGC in Karachi against replenishment/ Swap of equivalent quantity of natural gas from Sawan and other fields (allocated to SSGC) to SNGPL.

The tax department is levying Sales Tax on swap of RLNG with indigenous natural gas in case of Sui Companies as follows: (i) in case of SNGPL, the tax department conducted a Sales Tax audit of SNGPL for the period from July 2017 to June 2018. As a consequence, they have raised a demand of Rs 60 billion. Recently the tax authorities raised a further demand of Rs 100 billion for previous five years by replicating the issue of swapping of gas; (ii) In case of SSGC, tax department passed Order raising demand of Rs. 22.22 billion plus penalty of Rs. 1.11 billion for FY 2017-18, which is currently subjudice before appellate Tribunal and has further issued Show Cause Notice for FY 2016-12 on said issue.

The tax authorities consider that this transaction is an exchange of goods; i.e., RLNG with natural gas thus this exchange of goods falls under the ambit of the definition of supply as defined in section 2 (33) and thus attracts output tax @ of 18%.

SNGPL has proposed the following amendment to sort out this issue provided that the swapping of RLNG and indigenous natural gas between Gas Transmission and Distribution Companies shall not constitute supply, and has never been considered as supply under the Act.

Accumulation of input tax on purchase of LNG/ RLNG: SNGPL through its earlier letter highlighted the issue of accumulation of input sales tax on purchase of RLNG, adding that it has not been able to adjust input sales tax on purchase of RLNG due to the following reasons: (i) revision in sales tax rate on purchase of RING/LNG from 12 % to 17% in Finance Act 2021; (ii) supply of RLNG to export-oriented sectors at reduced rate of $ 6.5/ MMBTU and $9/ MMBTU; (iii) due to depletion of indigenous gas reserves significant quantity of RLNG has to be delivered towards domestic sector, as per the approved guidelines of the government, where it is sold at highly subsidised indigenous gas rate.

According to SNGPL, its accumulated balance of unadjusted input sales tax of SNGPL has increased to Rs 120 billion. In view of critical circular debt situation which could lead to international default in RLNG payments the company has requested that the matter of recovery of sales tax needs to be expedited.

SNGPL has proposed that sales tax rate on RLNG/ LNG supplied to gas transmission and distribution companies be revised from 18% to 12% through amendment in 8th Schedule of Sales Tax Act, 1990.

SNGPL has further stated that it is unable to fully adjust input tax on purchase of system gas against output tax charged to consumers due to following reasons: (i) periodic upward revision in gas purchase (Wellhead) prices in Dollar as well as ever increasing Dollar Rupee exchange rate differential; (ii) indigenous gas supplied to export oriented industry and domestic sector in SSGC network at highly subsidized rate; and (iii) sales tax rate of fertilizer feed has since been reduced to 5 per cent.

The gas utility company has proposed reduction in sales tax rate from 18 % to 12 % on purchase of system gas by incorporating amendment in 8th schedule of Sales Tax Act, 1990.

The gas utility company, has however, highlighted that the reduction in GST rate on LNG / RLNG and system gas sales to gas distribution companies will not have any adverse effect on revenue of the Government as the revenue foregone in case of reduction in the rate will be offset by the reduction in the refund claims of gas distribution companies.

For compliance with Section 73(2) of Sales Tax Act, 1990, SNGPL has stated that under provision of this section Gas Companies are required to make payment of gas purchase invoices within 180 days from the date of issuance of gas purchase invoice and in case of failure to comply with the requirement input tax on such invoices is disallowed. However, due to prevailing gas sector circular debt issue, Sui Companies are unable to meet the requirement of this section. Recognizing this as energy sector issue, prescribed time limit of 180 days was increased to 545 days in March 2013.

SNGPL has proposed that in order to address the issue of payment of gas purchase invoices within 180 days from the date of issuance of gas purchase invoice, following amendment may be made in section 73(2) of the Sales Tax Act 1990: “Provided that time limit of 180 days as provided in the subsection shall not apply in case of payment made to Gas/ RLNG/ LNG supplying companies against purchase of Gas/ LNG/ RLNG by Gas Transmission and Distribution”. For removal of doubt, SNGPL has clarified that the proviso would be deemed to be present always in the sub-section.

On proposal of reduction in minimum tax rate, SNGPL has stated that till June 2010, rate of Minimum Income Tax was 1% of turnover; however, realizing the excessive burden of minimum tax on high turnover on low margin industry, the rate was reduced to 0.5% for Sui Companies, Oil Marketing Companies (OMCs) and oil refineries. After nine years, this relief has been withdrawn and the turnover tax was increased to 0.75% from July 2019 onwards.

SNGPL pointed out that as this increase was agitated by oil refineries and OMCs; therefore, original relief of 0.5% was restored though Finance Act 2021 and Finance Act 2022 respectively; however, the rate of 0.75% continued to prevail for Sui Companies. Moreover, during the last couple of years, RLNG prices have considerably increased mainly because of its linkage with price of Brent Crude. The overall sales revenue of SNGPL has crossed Rs. one trillion for the Fy202l-22 and FY 2022-23 which has exposed the Company to additional tax burden.

SNGPL has proposed that in order to address this issue faced by the gas companies, the following amendment in Income Tax Ordinance 2001 be ratified: “the rate of minimum tax on turnover rate for gas transmission and distribution companies may be reduced from 0.75 % to 0.5 % in Part 1 Division IX of First Schedule of Income Tax Ordinance 2001.”

Compliance with Section 34(5) of Income Tax Ordinance 2001: SNGPL has argued that due to prevailing gas sector circular debt issue, balance payable to gas creditors along with Late Payment surcharge (LPS) on overdue balance is piling up. Under section 34 (5) the amount unpaid for over three years has been offered back and is exposed to tax at prevailing corporate tax rate thereby increasing Company’s normal income tax liability. This would unnecessarily increase Company’s tax liabilities without any real income as Company’s obligation to pay these creditors continue to exist.

The gas utility company requested Petroleum Division to take up the matter with Ministry of Finance and Chairman FBR for extending the proposed relief to the Sui Companies by making necessary/ amendments in tax laws.

According to SNGPL, it understands that Ministry has prepared draft summaries for ECC of the Cabinet on highlighted issues, requesting the Ministry to expedite the finalization of the summaries, which would help the Sui Companies to resolve these issues on permanent basis.

Copyright Business Recorder, 2024