KARACHI: Decision made by the Government to restrict claimability of input sales tax from unregistered consumers through the Tax Laws (Second Amendment) Ordinance 2019 is expected to increase price of Urea by Rs 40/Bag by the end of January.
The objective of this amendment through Presidential Ordinance is to bring major distributors into the sales tax regime.
Industry insider said that against the sales made to unregistered distributors who make purchases of Rs 10 million on monthly basis or Rs 100 million on annual basis, the manufacturers would not be granted input adjustments.
An industry representative shared that to promote registration of maximum people for sales tax purpose, government has now introduced this penal provision. With majority of the fertilizer dealers being unregistered, this could lead to a Rs 40/bag increase in urea prices.
It was highlighted that the distributors are reluctant to get themselves registered under the tax net and this impact would eventually be passed on to the farmers.
On the top of this, the Government is expected to make a decision on gas price increase in three weeks which will prospectively increase price of various end products.
This comes at a time when inflation has hit its highest level since the incumbent Government took over with inflation numbers in November-2019 reflecting a 12.7% year on year rise.
According to data released by PBS, increase in inflation is largely due to higher food prices with nearly 35 percent of the national consumer price index comprising of food and non-alcoholic beverages.
With the prospective increase in gas prices likely to have a notable impact on price of Fertilizers, which is a key input dictating food prices, the Government must bear in mind the inflationary impact of any decision taken.
Oil and Gas Regulatory Authority (OGRA) made a recommendation to the Government to increase gas prices on the 16th of December,2019 which would lead to 135% increase in fertilizers feed gas prices, along with 32% increase in fuel prices.
According to the OGRA Ordinance, the Government has 40 days to respond to the recommendation that if implemented would lead to Rs 600/Bag increase in Urea prices.
Together these two steps may lead to a potential increase in Urea prices by Rs 640/bag.
The Government may decide to pass on some of the impact arising from the possible fiscal measures, however refusing to pass on any gas price increase and reverting back on the fiscal changes introduced through the Tax Laws (Second Amendment) Ordinance 2019 does not seem to be a possibility.
The decisions taken by the Government are steps in the right direction and should allow for sustainable economical growth.
It is imperative that the Government increases the tax base to cover its burgeoning deficits with recent numbers reflecting revenue shortfall of Rs 118 Billion by FBR for the period July-December 2019.
Also, increasing gas prices is the need of the hour as the cost of gas in the country is continuously on the rise at the back of depleting indigenous reserves and increasing mix of LNG.
Revenue shortfalls of state-owned gas distribution companies on the other hand have been ever rising and are estimated to be around Rs 94 Billion.
Having said this, it is imperative that the Government takes a steadfast approach in bringing in reforms in a steady manner to ensure that the farming community may steadily pass on the impact through gradual increase in output prices.