The domestic fertilizer industry has sought removal of discrepancies in taxes on different types of fertilizers that are hurting the industry as well as farmers. In this regard, a meeting was held between the representatives of fertilizer industry and the Federal Board of Revenue (FBR). Fertilizer Manufacturers of Pakistan Advisory Council (FMPAC) has written a letter to Member IR Policy, FBR on different issues facing the domestic fertilizer industry.
According to the FMPAC, the present tax laws caused significant imbalance between input and output GST, leading to perpetual piling up of refundable/adjustable/receivables of fertilizer manufacturers, who are already suffering losses because of nonpayment of subsidy 19 billion during the last 3 years and GST refundable/adjustable of Rs 32 billions. The industry maintains that the imposition of Minimum Tax Regime on import of fertilizer even by manufacturers resulted in incremental tax burden leading to higher costs and additional burden on the farmers.
Explaining grievances about respective tax amendments, FMPAC says that the Finance Act 2018 reduced the rate of output GST on sale of urea from 5% to 2% but no corresponding adjustment was made in the input tax rates which were maintained at 5% to 17% which led to significant mismatch by triggering considerable amount of unadjusted sales tax. The Industry claims that it is currently paying input tax of around Rs 101 to Rs 144 per bag of urea , which is much in excess of the output GST of Rs 32 per bag resulting in GST refund/adjustment of Rs 68 to 111 per bag. Similar mismatch exists in case of other locally produced fertilizer products as well. The current rates for natural gas and RLNG have been taken into account.
The massive mismatch between input and output taxes is adding to already outstanding huge refund of fertilizer industry (almost 7.8 billion per annum) and thus cash flow challenges for the industry. The FBR has been requested that for all locally produced fertilizer products, GST on natural gas/RLNG be reduced to zero percent both for feedstock and fuel to ease the delta between input and output GST, and special attention be given towards settlement of massive existing sales tax refunds awaiting disbursement by the fertilizer manufacturers. FMPACT further states that the reduced output GST at flat rate of 2% while maintaining the GST on Phosphoric Acid for the fertilizer sector @ 5% and Rock Phosphate @ 10% besides Custom Duty of 5% (3+2 additional) has caused a wide mismatch between input taxes (Rs 218 per bag of DAP) and output (Rs 67 per bag of DAP) leading to heavy refund liability for FBR and agony for the manufacturers.
According to the industry, similar mismatch exists in case of NP, as well. Moreover, lower rate of GST on finished goods may induce unnecessary imports at the cost of domestic industry besides negatively impacting foreign exchange reserves and trade deficit, and the industry is requesting that the gap between input and output GST of DAP and NP may be addressed through zero based GST on all industrial inputs especially Phosphoric Acid, Rock Phosphate and commensurate relief on steam and power used for manufacturing of DAP and related products.
It was also brought in the notice of participants that through Finance Act 2017, fertilizer imports by fertilizer manufacturers were imposed under minimum tax regime resulting in incremental tax burden on whole agricultural value chain.
The Finance Act 2018-2019 sought to bring back some protection to imports (including fertilizer manufacturers) through substitution of FTR to Minimum Tax Regime vide insertion of clause 148 (8)(a) to the Income Tax Ordinance, 2001. However, this respective clause capped the tax liability to a minimum of 5% of import value, thereby effectively maintaining the same tax position that was applicable under the previous budget (i.e. FTR at 5.5% of import value).
The Association was also of the view that further Sales Tax (3%) on import of DAP and other fertilizer is yet another issue. This tax is non-refundable and adjustment is also an issue as output GST is less than input GST and Additional Sales Tax taken together. The association therefore urged the government that Further Sales Tax on import of DAP and other fertilizer by manufacturers be abolished to improve availability / affordability of phosphate.
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