TAXING ENERGY PRODUCTS FOR REVENUE GENERATION
TAXES SHOULD BE REDUCED TO MAKE THE COST AFFORDABLE AND SUPPLY MUST CONTINUE WITHOUT ANY INTERRUPTION.
SHABBIR H. KAZMI
May 30 - June 5, 2011
All the countries including the United States of America deficient in indigenous production of energy products are suffering from hike in energy cost. Pakistan faces even graver situation because the government tries to tax energy products to overcome the shortfall in revenue collection.
While the crude oil prices were low, consumers didn't feel the pinch, but now the situation has virtually become unbearable. Despite persistent hike in electricity and gas tariffs, outages have gone longer but the government still says it is not recovering the full cost from the consumers.
Many experts do not agree with the much talked about payment of subsidy on energy products, in fact they call it a fallacy. The government has not been able to convince the experts on pricing formula. Even the various committees of parliament have not received any satisfactory reply from those responsible for fixing the prices of energy products and the tax component. There is a consensus that many types of taxes are added in the cost. The experts still say that more than half of the retail prices of energy products are nothing but tax.
Since most of the exploration and production (E&P) companies, oil and gas marketing companies and even refineries are operating in the public sector, they are the major sources of income as well as revenue collection for the government. First taxes are collected on the products and huge earnings are reported. Then huge corporate tax and dividends are collected. Though government terms inter corporate debt a reason for the dismal financial condition of the energy sector, billions of rupees corporate tax and dividend are being collected from these companies.
One can look at the annual accounts of OGDC, PPL, PSO, SSGC and SNGPL, to mention a few, to reconfirm this statement of the sector's experts. The benefit is also reaped by the private sector companies that include Mari Gas, Shell, and refineries. In fact, the private sector companies are contributing more towards corporate tax and also pay good dividends to their shareholders, simply because they are more efficient and the level of corporate governance is also better as compared to public sector enterprises.
A further probe also indicates that the indigenous oil and gas production is on the decline. This can be attributed to a slowdown in exploration activities and failure to drill development wells. The E&P companies hold delays in payment from the refineries responsible for the cash crunch. However, a question arises, if these companies are cash starved why do they pay colossal dividends? In fact, they should retain the money for undertaking their core activities rather than meeting demand of the government 'give me more money'.
Pakistan has an enviable success record of 1:2, meaning that if two wells are drilled one bears either oil or gas. Experts say that the government should take two policy decisions 1) impose a cap restricting the companies not to pay more than 50 per cent cash dividend and 2) corporate tax on companies should be reduced to 10 per cent. To reciprocate, E&P companies have to increase their production by 10 per cent per annum and in case they fail to meet the target, a penalty should also be imposed.
For those who are shocked with the suggestion of imposition of penalty in case of failure to meet the target, they should refer to the policy and practices of the Indian government. Interestingly, some of the companies facing probe belong to private sector. As against this, many E&P companies are operating in the public sector and there should have been more stringent monitoring. However, to reward the better operating companies bonuses should be given to the staff working on the drilling rigs, responsible for maintaining transmission and distribution of oil and gas.
It is also necessary to bring it to the notice of the judiciary that litigation is going on regarding many oil and gas fields for years, if the issues are resolved oil and gas production can get a big boost. Experts say that the country faces a shortfall of about 1,000mmcfd at present; this can be met if some of the larger fields commence production once the court judgments are announced. The honorable Chief Justice of Supreme Court of Pakistan is requested to instruct the judges to complete hearing of these cases on priority and announce the judgments at the earliest. Enhancement of gas availability can boost the GDP growth rate significantly, create more job opportunities, and also help the government in collecting more tax despite reduction in tax rates.
Pak Arab Refinery, a joint venture of Pakistan and Abu Dhabi government has constructed two pipelines: one for black oil and the other white oil products. These have eased the load on Pakistan Railways and lessen reliance on tankers. Since both the pipelines terminate at Mahmood Kot, it creates traffic congestion. There is a suggestion that some branches may be extended to make the operations more efficient. This will also free Shrine Jinnah Colony from the unauthorized occupation of roads and open plots. Decades ago, the government had decided to remove oil storage facilities from Keamari, to be precise the decision was made in 1970 when India dropped a bomb at the oil installation area.
Similarly, it should me made mandatory for Pakistan state oil company to retain 20 per cent of its profit before tax for the enhancement of its storage facilities. Oil products should be discharged either at Port Qasim or Gwadar to ease the pressure on Karachi port. Dispatch of hundred of oil tankers in 24 hours of a day from Karachi port must be stopped immediately because roads are not capable of taking this load. Movement of these tankers is a major reason of wear and tear of the roads.