Home »Taxation » Pakistan » E&P companies allowed to transfer input tax to working interests

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  • Dec 28th, 2017
  • Comments Off on E&P companies allowed to transfer input tax to working interests
The federal government has allowed exploration & production (E&P) companies serving as operator in a petroleum concession area to transfer proportionate input tax to other working interest owners. The government also approved exclusion from 2 percent extra tax on supply of lubricants by Oil Marketing Companies (OMCs), official sources told Business Recorder.

The decision has been taken on a summary of the Federal Board of Revenue (FBR) which was submitted directly to the federal cabinet instead of Cabinet Committee for Disposal of Legislative Case (CCLC).

The source said that chapter IV of the Sales Tax Special Procedure Rules, 2007 lays down "special procedure for collection and payment of sales tax on natural gas" where under in case of production and supply of gas from bore-holes or wells, responsibility to charge and pay output sales tax in on the person making supply. Input tax suffered by such a person on purchase of goods and services in relation to production and sale of gas is adjustable against output on supply of gas.

The FBR argued that this input/output mechanism is equally applicable on supply of gas from bore-holes and wells by E&P companies operating in a petroleum concession area. However, where a petroleum concession area is run by a joint venture of more than one E&P companies, the companies are required to charge and pay sales tax according to their respective share in the production and sale of gas. On the other hand, invoices of sales tax in respect of goods and services in respect of the entire petroleum concession area are issued in the name of one of E&P companies, called the operator.

The operator is entitled to charge sales tax in respect of its share in supply of gas. This leads to piling up of refunds in cases of operators as their share in production and supply of gas is restricted in terms of respective petroleum concession agreements and compromises their cash flow despite the fact that excess of input tax over output is refundable under section 10 of the Sales Tax Act, 1990. However, under the provisions of Rule-34(d) of Sales Tax Rules, 2006 refund becomes admissible after a minimum of consecutive twelve months.

The issue can be addressed by amending Sales Tax Special Procedure Rules, 2007 by allowing the operator to transfer share of common input tax to other registered person/working interest owners proportionate to their respective shares. Other working interest owners would be able to adjust input tax so transferred by the operator against their respective output sales tax liability.

The sources further stated another key issue was that under Rules 58T of Sales Tax Special Procedure Rules, 2007, extra tax @ 2 per cent in addition to standard sales tax rate of 17 per cent is chargeable on lubricating oil among certain other items. Extra tax had been levied on account of non-payment of tax by downstream wholesale/ retail chain.

According to sources, no input tax adjustment is respect of goods subject to extra tax is admissible under clause C of the sub-section (1) of section 8 of the Sales Tax Act, 1990. This was a source of hardship for the manufacturers as they could not claim input tax adjustment on purchase of lubricating oil utilized in their industrial undertakings.

The sources maintained that lubricating oil marketing companies were agitating this dispensation allowed to OMCs on the ground that their businesses of sale of lubricating oil has been pitched at distinct disadvantage vis-à-vis OMCs and were demanding similar dispensation and the demand has been endorsed by the OGRA.

The FBR was of the view that both the issues can be addressed through amendments to Sale Tax Special Procedure Rule, 2007 and the proposed amendments were submitted to the Law and Justice Division for vetting.

The Prime Minister, sources said, had allowed the Revenue Division to submit the summary for amendments to Sales Tax Special Procedure Rules, 2007 directly before the federal cabinet for approval instead of filing it through Cabinet Committee for Disposal of Legislative Case (CCLC).

The government has approved exclusion from two percent extra tax chargeable under Rule-58T of Sales Tax Special Procedure Rules 2007 on supply of lubricants to and by lubricating oil marketing companies registered with the OGRA to registered manufacturers for in-house consumption.



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