The decision by the Government of Pakistan (GoP) 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 Rs40/Bag within the first month of 2020.
The objective of this amendment, through Presidential Ordinance, is to bring major distributors into the sales tax regime. Speaking with an industry expert it was revealed that against the sales made to unregistered distributors who make purchases of Rs10 million on monthly basis or Rs100 million on annual basis, the manufacturers would not be granted input adjustments.
Another fertilizer industry representative informed that to ensure registration of maximum people for sales tax purpose, the GoP has now introduced this penal provision. With majority of the fertilizer dealers being unregistered, this could lead to Rs40/Bag increase in urea price. It was highlighted that the distributors are reluctant to get themselves under the tax net and this impact would eventually be passed on to the farmers.
On the top of this, the GoP is also expected to make a decision on gas price increase shortly, which will also increase price of various end products. This comes at a time when inflation has hit its highest level since the incumbent government took over, inflation numbers in November 2019 reflecting a 12.7%YoY increase.
According to data released, the 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 increase in gas prices, a significant increase in the cost of production of urea is expected. It is worth noting that any hike in urea price does not bode well in achieving food security.
Oil and Gas Regulatory Authority (OGRA) had recommended to the GoP to increase gas prices, effective 16th of December 2019. A 135% increase in feedstock price, 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 Rs600/bag increase in urea prices.
Together these two steps may lead to a potential increase in urea prices by Rs640/bag. The GoP may allow the urea manufactures 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 facilitate sustainable economic growth. It is imperative that the GoP has to increase tax incidence to cover its burgeoning deficits with recent numbers reflecting revenue shortfall of Rs118 billion by FBR for the period July-December 2019.
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 on the rise and are estimated to surpass Rs94 billion.
Having said this, it is imperative that the GoP must take a steadfast approach in bringing in reforms in a steady manner to ensure that the farming community may conveniently pass on the impact through gradual increase in fertilizer prices.
[box type=”shadow” align=”” class=”” width=””]Inventory built up
Urea offtake declined 23%YoY to 380,000 tons in November 2019, while showing recovery on a sequential basis. This takes 11MCY19 urea offtake to 4.8 million tons, down 4% YoY. The ending inventory was reported a 1,041 tons in November 2019 as against 245,000 tons in November 2018. Company-wise, Urea offtake declined across the industry with EFERT/FATIMA witnessing lowest/highest decline. DAP offtake, on the other hand, increased 53/49% YoY/MoM in November 2019, containing the 11MCY19 DAP offtake decline at 10%. In line with the 11MCY19 offtakes, analysts have revised down urea offtake assumptions for, with limited improvement in following years, backed by our expectation of continued operations of LNG based plants in medium term. We believe sector’s price performance will remain a function of: 1) demand supply situation, 2) pricing power amid potential gas price hikes and 3) Supreme Court’s ruling on the GIDC scenario.[/box]