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General Sales Tax on urea

Can only have an adverse impact on national economy

Apr 09 - 15, 2001

Reportedly the Government of Pakistan (GoP) has decided to impose 15 per cent General Sales Tax (GST) on nitrogenous type fertilizer (urea) produced in the country. Whatever may be the reasons, one can say with full conviction that the objective, one and the only one, is to raise over one billion rupee to meet the shortfall in revenue collection. While for any other tax, the revenue department would have to chase millions of tax evaders, collection of GST from a few urea manufacturers is the easiest way. Production and sales of these units are not only fully documented and even if producers wish, they cannot fudge the data.

It was reported that the GoP wants the manufacturers to bear the full impact of this tax. This ardour is not only unrealistic but completely devoid of commercial approach. If the GoP imposes this tax, it will be ultimately collected from the farmers. No manufacturer will be ready to absorb the full impact. If price of urea is increased it will impair the GoP's plan of accelerating GDP growth rate through higher production and productivity in agriculture sector. In case manufacturers are compelled to absorb this levy, their profit margin will be reduced. At a time when the GoP has to convince the existing as well potential investors to invest in the sector to add another 2.5 million tonnes per annum urea production capacity, any attempt to curtail profit margin will be a deterrent. Pakistan may not see any increase in production capacity at all. This will increase the import bill of already forex starved country.

The first question which arises is, Is this a prudent decision? The reply is in negative. Any attempt to collect this tax will not only affect the profitability of urea manufacturers but more importantly urea offtake will be reduced. As such urea offtake, during the year, has been lower due to limited availability of irrigation water. It is apprehended that production of most of food and cash crops will be lower and cashflow of farmers would be lower as compared to previous years. While the GoP can increase support prices, which it has been doing without any failure in the past, this step will cause cost-pushed inflation.

According to a sector expert the GoP has not issued any notification as yet. One can only workout the impact of GST once notification and its mechanics are known. However, it is estimated that GST will be around Rs 220.00 per tonne. It is very easy to calculate the quantum of GST collection as urea production/sales figures are known. The GST collection from urea alone will be over a billion rupee. In his opinion, the GoP must not try to overcome an immediate problem of shortfall in revenue collection by bleaking the prospects for addition of 2.5 million tonnes capacity.

According to another analyst, the GoP may or may not impose this tax as notification has not been issued as yet. The GoP only wanted to get a feel how urea manufacturers and farmers respond to this levy. He said, "I have all the reasons to believe that the GoP will not impose the tax., not because of any resistance by urea manufacturers but due to pressure of farmers." Water shortage has already and will continue to cause serious problems for farmers. It is true that an immediate solution to overcome water shortage is not there, but no efforts should be made to add further problems for farmers.

According to an industry expert, "The only fault of urea manufacturers is that they run plants above designed capacity, optimize cost of production and distribute dividend to their shareholders. This pinches many hearts and they never miss an opportunity in suggesting withdrawal of subsidy on feedstock and/or imposing new taxes on fertilizer industry. Had urea units were incurring losses the same people would have suggested incentives for the industry." He referred to textile industry and said, "Despite enjoying many incentives and complete protection this industry has never been able to work efficiently. Rather incentives have resulted in inefficient working. Huge non-performing loans and hardly any payment to shareholders are the two point which support this belief. As against this, urea units have been prompt and current on debt servicing and pay attractive dividend to shareholders. On top of this, urea manufacturers have doubled production capacity in the country during last ten years. Therefore, if the GoP is still willing to give more incentives to inefficient textile industry, there is no reason to penalize the efficient urea manufacturers?"

The country needs additional 2.5 million tonnes urea capacity to remain self-sufficient in urea production and to produce exportable surplus for financing import of DAP. Therefore, no effort should be made to change industry fundamentals. Local urea manufacturers must get feedstock at Middle East price and no GST should be imposed on locally produced urea. The GoP must not try to meet the short-term objectives by sacrificing long-term objectives. Pakistan needs fresh investment, which can be ensured by ensuring attractive return on investment and efficient use of each input.