Defaulting on payment obligations


WEB DESK: A recent report reveals that three independent power producers (IPPs) namely Orient, Saif and Sapphire have won the case against the Sui Northern Gas Pipelines Ltd (SNGPL) in the international arbitration court in London.

SNGPL had diverted gas to other sectors in 2011 by invoking force majeure in violation of the gas sales agreement that guaranteed that the cost of the withheld gas was to be reimbursed by whichever party failed to implement the agreement. Soon after the gas was diverted, the then Chairman of the Independent Power Producers Advisory Council Abdullah Yousuf wrote a letter to the government dated February 2012.

In his letter, Yousuf had pointed out that “government of Pakistan diverted the gas and SNGPL wrongly claimed force majeure and the withheld capacity payments should be reimbursed either by one or both of the entities.” The amount in question is a whopping 735.8 million rupees. Based on the government’s modus operandi in recent years the government is most likely to opt for a raise in gas tariff to pay the three IPPs and/or negotiate a phased payment plan that would minimise the increase in tariff.

In this context, it is relevant to note that the Federal Board of Revenue (FBR) has blocked over 17 billion rupees of refunds due to Sui Southern Gas Company (SSGC). The sales tax refund claims by SSGC arise because the average cost of gas purchased from fields allocated to SNGPL is considerably higher than the fields allocated to SSGC. The cost equalisation formula/regulatory price structure leads to the sale price to gas consumers of SSGC being lower than the purchase price from petroleum exploration and production companies (E&P) leading to an input tax on purchases higher than the output tax on sales which results in about one billion rupee sales tax refunds every month. Failure to pay the resulting refund has prompted SSGC to recommend to the Ministry of Finance to include supply of natural gas by gas distribution companies and reduce the sales tax to 8 percent (from the current 17 percent) in the Eighth Schedule of Sales Tax Act 1990 through an amendment in the Finance Act 2016.

However, the state-owned entities are not the only ones whose refunds are not being released by the government. It has also been unable to meet its obligations with respect to the refunds payable on sales and income tax of the productive sector and this, in turn, is having a major impact on the country’s growth rate with productivity negatively impacted due to liquidity problems.

The FBR justifies the delay in refund payments by maintaining that a careful review is required as millions of rupees of bogus claims are filed each year. This may be valid, yet it is equally relevant to note that the refund claims by well-established companies are also pending since long and this is due to the Finance Ministry’s need to meet its unrealistic budget revenue targets, considered critical given the ongoing International Monetary Fund’s programme. Reports also indicate that those eligible for refunds are being privately told by FBR officials that there is simply not enough money in the treasury to accommodate their justified claims, a more credible rationale.

Thus, it is extremely disturbing that the federal government is fast emerging as a defaulter – with respect to the IPPs, state-owned entities and the private sector in the matter of refunds. Its usual response has been to pass on all costs, be the cost due to its policy of cost equalisation or through borrowing, onto the common man through higher tariffs or through raising existing taxes.

The country has been subjected to higher electricity tariffs due to the government’s decision to borrow at market rates to retire the circular debt and a mini-budget was announced end November last year envisaging an additional 40 billion rupees. This is eroding the value of each rupee earned by the common man – a fact that would have political implications – however the Sharif administration remains focused on macro targets set by the IMF notably the budget deficit and foreign exchange reserves which are mostly debt enhancing as per the mission leader for the ongoing IMF programme.

Source: Business Recorder