Ministry of Petroleum & Natural Resources has proposed Federal Board of revenue (FBR) to reduce tax rates for petroleum exploration companies in coming budget (2016-17) to encourage investment in oil and gas sector in Pakistan.
According to the budget proposals of the Ministry of Petroleum submitted to the FBR for consideration, Ministry of Petroleum has supported proposal of Pakistan Petroleum Exploration and Production Companies (PPEPCA) for reduction of tax rate from 40 percent to 30 percent. PM Office has also endorsed that the current rate of taxation may be considered for reduction in consultation with FBR to further encourage the participation of the private sector in oil and gas exploration.
It is understood that due to stability clause within already executed Petroleum Concession Agreements/ Petroleum Sharing Agreements, change of any provision with regards to existing tax rates is not possible. However, FBR may give consideration to the recommendations provided in PPEPCA’s report with regards to change in existing tax rates to future awards of blocks, Petroleum Ministry said.
The FBR is presently examining the report of PPEPCA Expert Committee on Finance and Taxation received from Petroleum Ministry.
The Strategy Paper on Tax Rate Reduction said that the oil & gas has been the major global commercial energy source for decades and expected to play a leading role in future as well. Historically, Pakistan has been oil importing country but has been fortunate that till recently most of the energy needs of the country were being met through indigenous gas production. However, for at least past 5 years, the supply of natural gas has been unable to meet the demand.
It is important to mention here that E&P is one of the largest taxes paying sector with over Rs 94 billion contribution to the government exchequer in 2011. In order to retain the existing foreign E&P companies and to attract new ones, it is imperative that the government proactively takes necessary measures.
High oil and gas taxes hamper local production, job creation and revenues for the government. Instead of raising taxes, policymakers can spur new revenue by incentivizing investors and unlocking access to more domestic energy. Increased indigenous oil and natural gas activity would generate enough revenue to fund our growing needs for the country’s development.
As a first step, keeping in mind the long-term investments, high risk nature of the oil and gas exploration industry, in order to induce fresh investment as well as aligning with international practice, a concessional tax rate of 30 percent of net income should be offered to E&P companies. This rate would be over the above the Royalty and other commitments, already being paid under the Exploration Licenses granted by the government.
Given the huge oil and gas exploration potential in Pakistan, a stable and attractive fiscal regime will encourage new E&P companies to undertake more exploration activity in Pakistan. More exploration activity should result in an increase in finds of new oil and gas reserves. This, in turn, will help reduce the need for importing energy sources at extremely high costs with precious foreign exchange and also secure the energy resources for the country and provide much needed employment to rapidly growing youth population.
The indigenous supply not only helps in saving valuable foreign exchange but is the best way to secure the country’s energy supplies.
In order to retain the existing foreign E&P companies and to attract new ones, it is imperative that government proactively takes necessary measures and address the issues creating hurdles in Foreign Direct Investment.
In the past, the Regulation of Mines and Oil-Fields and Mineral Development (Government Control) Act, 1948, prescribed the tax rate ranging between 50 to 55 percent with Royalty as being part of taxes. This was in line with the tax rates for other corporate sectors at that time.
To induce investment by corporate sector, tax rate on companies has recently been reduced in line with international practices. In budget 2013, the government reduced the rate of tax for such companies to 34 percent of net income which will further reduce by 1 percent each year for the next 4 years coming down to 30 percent by Tax Year 2018.
To induce investment by corporate sector the companies registered with sale tax authorities and selling their products to registered persons are entitled for 2.5 percent income tax credit on their income tax liability under Section 65A of Income Tax Ordinance, 2001. However, the tax credit is not available to E&P companies.
To promote further investment in Pakistan, the companies are entitled for income tax credit at 10 percent of the value of investment in plant and machinery under Section 65B of Income Tax Ordinance, 2001. However, the tax credit is not available to E&P companies, it said.
Keeping in mind the long-term investment merits and high risk nature of oil and gas exploration industry, E&P companies have entered into long-term contracts with the government. The decisions have been based on long life cycle and economic viability of business. The one time taxes like -flood surcharge, tax for internally displaced persons and super tax negatively impacts the economics of the sanctioned projects and adds uncertainty in investment climate of the country.
Ministry of Petroleum and Natural Resources and their arms including Directorate General of Petroleum Concessions (The Regulator) are always supportive of all the initiatives raised by PPEPCA in the past. However, recently this has been observed that the functionaries working in the prestigious function of regulator tried to control and influence E&P companies instead of support then in tough times. This can also be addressed through adoption of “Dispute Resolution Mechanism” where difference of opinion arises.
It said that to promote investment from new entrants, the process for approvals has to be streamlined which adds certainty in investment climate of the country.
Investors besides investing foreign direct investments through equity would also be appreciative of the facts that it adds value on timely basis. The issuance of Gas Price Notification on time would really assist them in predicting the matter of cash flow.
Post 18th Amendment, E&P companies are confused where they receive compliance notices from federal as well as provincial regulators and authorities. Clarity should be provided to E&P companies to induce business friendly environment in the country instead of ending every matter in court of law, it added.
Source: Business Recorder