LPG committee recommends abolition of WHT, AST and reduction of GST on commodity
Islamabad-The Committee on LPG has recommended an increase of Petroleum Levy (PL) from 10 to 15 per cent, abolition of 5.5 per cent Withholding Tax (WHT) and, Additional Sales Tax (AST) of 3 per cent and reduction of General Sales Tax (GST) from 17 to 10 per cent on LPG. “Report on Sustainable LPG Supply Chain” also proposed that OGRA to suggest a mechanism for reasonable marketing margin determination within 6 months for benchmark price setting, official source told The Nation.
To make LPG safe and affordable fuel for domestic and commercial customers across the country with reliable supply The Cabinet Committee on Energy (CCoE) had constituted a committee headed by Deputy Chief Planning Commission and was directed to submit its Report on Sustainable LPG Supply Chain.
It is worth to mention here that the Marketing, Distribution and Transportation margins is up to 1,247 per cent higher as compared to other petroleum products. The Marketing, Distribution and Transportation margins makes more than 50 per cent of the LPG producer price and 30 per cent of the end consumer price. The committee has submitted its report on LPG policy to the CCoE, the source said.
Presently, the LPG sector is governed through LPG policy 2016 approved by CCI. The LPG market is currently regulated with domestic producer prices benchmarked at Saudi CP, a fixed marketing margin and regulated end-consumer pricing. The import of LPG is encouraged through cost incentives through tax concessions (WHT and GST).
The committee noted that, the LPG market in Pakistan is non-competitive and somewhat dysfunctional in passing efficiency to the end-customers. All incentives and efficiencies are absorbed by the market players due to non-transparent transaction structures in the downstream market. The committee recommended the continuation of regulated market structure for some time. During this period, OGRA needs to improve data collection, transparency, and monitoring of the LPG supply chain. A strong enforcement regime is required and OGRA will need to strengthen its role accordingly.
For reduction in the number of marketing companies the committee recommended that, OGRA will have to revise the qualification criteria for issuing marketing license and enforce the license standards for investment, storage, distribution, and safety practices of these companies. The committee noted that the marketing license issuance needs to have adequate scrutiny of the financial and technical capability. Small companies with inadequate financial and technical capabilities tend to go for short term gains. It is therefore required that the number of marketing companies is limited, and larger size players are encouraged. Marketing companies are responsible for the distribution and retail of the LPG, however, the marketing companies do not take full responsibility of the distribution end and are happy in delivering the product to the distributors on wholesale/bulk basis. The committee noted that the distribution and retail should be a direct responsibility of the marketing companies, with a much larger footprint at the retail end.
Fixed Margin for marketing companies is also detrimental to the market development. The marketing companies have little incentive to upscale operations, and they tend to operate on least-investment model to secure maximum profits. Fixed margin is more favourable to smaller marketing companies and comparatively less attractive for larger players with more capital investments. Fixed Margin also incentivises marketing companies to maximise their sale in the urban areas and save on freight costs attracted in rural/remote area sales. OGRA can evaluate sliding scale to determine fair return for marketing companies. State Owned Enterprises (SOEs), such as PSO, are the main importers of LPG and expected to quickly react to demand changes. PPRA rules applicable to PSO are not conducive for quick import and requires 30 days response time which is too long for LPG purchase. Reduction in response time will enable the SOEs to bridge the demand-supply gap on a shorter notice without compromising the competitive procurement.
Domestic production ex-gate price is computed as the Saudi Aramco Contract Price (CP Price). To give a fair international benchmark price to the domestic producers, the producer price floor may be set at 75 per cent of the CP price with no ceiling in price. The LPG marketing companies may enter bidding for securing domestic LPG supplies, with a floor price of 75 per cent of CP price.
Regarding LPG Air-Mix plants, the committee noted that it was not only an expensive option, but also difficult to operate and maintain, making the whole scheme unaffordable and unsustainable. The committee recommended that the government should have instead ensured the supply of LPG cylinders to the area and arranged direct subsidy transfer to the target customers, where required.
Petroleum Development Levy (PDL) is determined against a fixed revenue target by the Finance Division. PDL should not be treated as a revenue target only, instead it should be used as balancing figure to equalise the cost of imported and domestic LPG. Currently freight, port handling and other costs of imports are around 20 per cent higher than the domestic LPG, if tax treatment is kept the same for both. The difference can be balanced through a variable PDL. Practice of signature bounce should be discontinued. True price discovery through auction/bidding should be done as proposed.
The committee recommended the abolition of With Holding Tax on LPG import which is current 5.5 per cent, abolition of 3 per cent Additional Sales Tax on domestic LPG, and reduction of GST from 17 per cent to 10 per cent on domestic LPG. The committee noted that use PDL as a balancing number to equalize domestic and imported LPG prices and recommended 15 per cent of the CP price (last month average).
On Demand Side Management, it is recommended to impose/continue moratorium on use of LPG in transport vehicles, discourage new development of LPG Air-Mix plants on government expense. For supply energy to the target areas, incentive for LPG bottling/refilling plants and direct subsidy for consumers has been proposed.
On Regulatory functions, it is proposed that OGRA to strengthen and establish robust monitoring, reporting, compliance, and enforcement functions across the value chain, Performance audit (third party) of existing marketing companies to be carried out (6 months) and cancellation of license proceeding to be initiated against non-compliant companies, OGRA to review the existing licensing regime and revise the criteria for qualification investment and license conditions for LPG marketing companies (3 months). OGRA to also conduct a study on market consolidation, suggest a mechanism for reasonable marketing margin determination (6 months) for benchmark price setting, to study and devise different pricing zones (ceiling prices) for LPG sales in the country (6 months). The committee recommended that OGRA may allow Petrol pumps to be used as selling points for LPG cylinders, subject to safety consideration and other codal formalities.