The Federal government has passed a Tax Ordinance on 26th December 2019, which restricts fertilizer companies from claiming input sales tax on retailing urea to unregistered dealers. The Fertilizer industry fears disruption in fertilizer supply because of the Tax Ordinance.
This has very serious implications for the industry and the farmers as 99% of urea dealers are not registered with the FBR.
The law reads:
A registered manufacturer shall make all taxable supplies to a person who has obtained registration under this Act …… failing which the supplier shall not be entitled to claim credit adjustment or deduction of the input tax as attributable to such excess supplies to unregistered person.
While the intent of the law is appreciated, it has serious business implications. The supply chain of fertilizer across the country will be disrupted since registration of existing dealers’ network or induction of new dealers is expected to take considerable time.
The loss on account of inability to claim the refund/adjustment on the attributable input sales tax on supplies to the unregistered dealers may lead to price hikes leading to the incremental burden on farmers. The industry-wide impact is expected to be billions of rupees per annum. In the middle of the Rabi crop season, any disruption of in Urea supply will hurt the wheat crop and endanger the national food security.
The fertilizer industry is already facing a GST imbalance and this new ordinance, which has been enforced without addressing the legitimate concerns of the fertilizer companies, will lead to losses in billions.
Describing the issue, sources in fertilizer industry disclosed that they pay GST to government in various ways, such as in feedstock gas where 5% GST is applicable, and on fuel stock gas the fertilizer manufacturers are paying 17% GST and on account of other input taxes, the industry is paying 17 percent GST, while the output GST is collected @ 2% GST.
In simple terms, a fertilizer manufacturer is paying Rs. 125 as input GST and collects Rs. 40 as output GST, thus Rs. 85 is refunded to the fertilizer manufacturers per bag. As per the new ordinance, fertilizer companies will not be able to claim the Rs. 85 because 99% of urea dealers are not GST registered, which costs the industry a loss of Rs. 10 billion. Furthermore, at this stage, the government is already liable to pay Rs. 29 billion to fertilizer manufacturers on account of previous sales tax adjustments.
In a statement, Executive Director of Fertilizer Manufacturer of Pakistan Advisory Council (FMPAC) Brig (Retd) Sher Shah stated:
Contrary to the government’s claim of promoting “ease of doing business”, this Ordinance may have serious implications on the fertilizer industry as well as the farmers, as the entire supply chain is feared to be disrupted since registration of the existing dealers is expected to take considerable time.
“FBR has been requested to allow reasonable time to targeted dealers for registration,” he further added in his statement.