Finance Bill 2019: Fertilizer industry pinpoints anomalies, refers case to FBR

The country's fertilizer industry has pointed out anomalies in Finance Bill 2019 and referred its case to Federal Board of Revenue (FBR) to be heard in the recently constituted Anomalies Committee. According to a letter written to the FBR, the fertilizer industry has mentioned seven clauses which need to be improved in the Finance Bill 2019 which are as follows;
1- Mismatch of input/out put of urea and phosphatic fertilizers. The industry says with 2 percent output GST on all fertilizers and higher inputs on manufacturing supply chain (5-17pc) leads to huge GST refunds, which already stand at 24 billion for the fertilizer industry. Inputs: GST on urea (Rs 110 per bag) includes natural gas (Rs 68 per bag on including feed stock @5pc; Rs 28 + 17 percent GST on fuel equivalent to Rs 40), and Rs 42 as input GST on other items @17 percent.
Output: GST is Rs 35 per bag @ 2% thus a huge mismatch of input and output GST exists (refund of Rs 75 per bag on natural gas &Rs 146 per bag to plants operating on RLNG generating refund of Rs 7-8 billion per annum and Rs 2-3 billion per annum respectively). The industry argues that Rs 210 per bag as input GST on locally manufactured DAP, againstRs62 @ 2 percent output GST on DAP results in huge mismatch. Similarly input/output GST imbalance is for other fertilizer products as well. Phosphate acid imported for DAP production is taxed @ 5 percent, rock phosphate (for phosphatic fertilizers) taxed @ 10% whereas power and steam are taxed @ 17% (FFBL specific). The industry has suggested that for all fertilizer products, GST on all industrial inputs including (but not limiting to natural gas, feed and fuel LNG/RLNG, phosphatic acid, rock phosphate, power and steam used for fertilizer manufacturing) be reduced to zero percent with no revenue loss to the government.
2 -Re-introduction of 3 percent minimum value addition tax (VAT) on imports-The industry has pointed out the anomaly that 3 percent minimum VAT is currently payable under Chapter X of Sales Tax Special Procedure Rules (Rules) on all imports excluding goods imported by manufacturer for in house consumption. Imposition of 3 percent minimum VAT on fertilizer industry/which is non-refundable and is unlikely to get adjusted in the given input-output mismatch scenario, is likely to increase cost of fertilizer business and affect affordability of imported DAP and relevant raw material/other fertilizers for farmers. The fertilizer companies are already in refundable position with respect to its imported fertilizers with services and other goods inputs subject to higher GST of 13 percent-17 percent in addition to existing 2 percent GST on imported fertilizer resulting in substantial amount of GST refunds. Fertilizer industry argues that specific exclusion may be granted to import of fertilizer and relevant raw materials (phosphate acid and rock phosphate) for the 3 per cent minimum VAT payable under the proposed 12th schedule in the interest of farmers.
3 - On increase in Corporate Tax. Fertilizer industry stated that on the basis of previous Finance Acts, most of the companies have restarted their deferred tax @ 25 per cent and fixing the Corporate Tax rate @ 29 per cent will result in reversal of the deferred tax. This will cause a huge unplanned exercise in the books of accounts of the companies. Fertilizer industry has urged the federal government to reconsider this clause.
4 - Tax credit on balancing, modernization and replacement of u/s 65B: Tax credit u/s 65B in respect of balancing, modernization and replacement for the expansion of existing projects was initially introduced on the premise of encouraging the industry to enhance capacity and companies have already started their projects for capacity enhancement. The abolishment of this section will result in serious hit on both tax credit and also discourage the industry for further enhancement of their capacity. Fertilizer industry has requested the government to restore it.
5 - Commenting on clause (94), applicable on service providers the industry claims that this clause is being omitted and the tax rate for services therein having reduced rate of 2 per cent of turnover is being increased to 4 per cent of the gross amount of turnover. Fertilizer industry has argued that normally service providers have thin margins and the omission of this clause, will result in 100 per cent more than payment, ie, instead of 2 percent, now 4 percent is proposed which may end up in payment of more income tax than annual tax liabilities and causing another income tax refund pile up towards FBR. The industry has proposed that this clause should be restored.
In the recommendations sent to the anomalies committee, fertilizer industry maintained that provincial sales tax refunds need to be refunded on urgent basis as bulk of the sale tax refunds have been blocked at PRA/SRB due to unavailability of online verification of input tax paid. This process has to be considered for early processing of refunds and once the verification is done at PRA/SRB level, intimation to relevant RTO/ LTO needs to be made within seven days.
Raising objection on minimum tax on imported fertilizer, domestic fertilizer industry says that imported fertilizers were historically taxed under the normal tax regime, but were converted into fixed tax regime in 2017 and later brought under the minimum tax regime during 2018/19 resulting in increased tax burden for the fertilizer industry.
The industry maintains that since procurement/marketing of imported products by manufacturing sector of the fertilizer industry is well documented and transparent, taxation of imported products for the manufacturing sector be taxed under the normal regime instead of fixed/minimum tax regimes.