Threats, price hikes likely to haunt fertiliser sector in 2022-23

LAHORE: Fertiliser sector mutually agreed to fix prices on Tuesday, but the sector might undergo a turbulent year ahead on account of underlying threats, including price increase.

After stopping urea fertiliser supply for about a week over what manufacturers called unrealistic cut by the incumbent government in the soil nutrient’s price, both parties reached an agreement over an upwards revision in price and an immediate resumption of nitrogen compost sales.

The latest crisis of urea price hike and its shortage was recorded in the first week of May when manufacturing plants were closed due to diversion of natural gas for power generation. Gas management later streamlined, but disruption and other factors like swelling transportation cost etc led to increasing cost of manufacturers, prompting producers to increase price.

According to an assessment made by the Punjab government, urea prices were increased by major players like Fauji Fertilizer Company (FFC) and Engro, followed by the other two producers. FFC increased Rs70/bag once from earlier Rs1,768/bag, and again when Engro raised the price load, by another Rs80 with Rs15 dealer margin to market at Rs1,933 (prilled) Rs1,953 (granular) and Rs1,983 (neem coated). On the other hand, Engro increased Rs150/bag once and again Rs100 to reach at Rs2,018/bag.

Punjab asked Ministry of Industries to act for reversal of price raise and to ensure urea plants were working to avoid shortage to avoid the nutrient’s imports in the next fiscal.

The sector has been giving mixed signals about demand and supply in the financial year 2022-23. Moreover, heat and water stress have also pushed urea demand up. This trend might continue for the next few months. Also, cotton crop area has been set to increase in Punjab this year, and its nitrogen consumption would remain high, but on the other hand, hybrid rice and maize acreage could fall, requiring less urea.

On overall basis, Punjab government warned that shortage could continue next fiscal primarily due to less availability of feedstock, and choking fertiliser supply chain especially in Rabi 2022-23.

On account of persistent demand-supply friction, manufactures had demanded government support. Instead, a crackdown was announced by the Punjab government on Tuesday against hoarders, smugglers, and profiteers.

According to an official announcement issued by chief secretary to all deputy commissioners, strict action should be taken against the hoarders and profiteers of fertilisers, and confiscated stock should be sold in the market at the officially-fixed price.

The chief secretary said that only declared stock would be permitted in warehouses and stocks would be seized in case of hoarding. He clarified that conditional sale of urea with DAP and sale of fertilisers after 8:00pm would not be allowed. Duties have been assigned to the special branch to provide information to the administration regarding fertiliser, wheat smuggling and hoarding.

A representative of manufacturers said government officials “are acting beyond the scope of their work and have started sealing fertiliser”. He feared disruption in supply chain due to such coercive measures.

Budget proposals

Fertilizer Manufacturers of Pakistan Advisory Council (FMPAC) in a letter written on May 30, 2022 to federal finance minister on budget proposals, observed that issues haunting fertiliser industry arising from the Kissan Package 2016-2018 were yet to be resolved. The industry having passed on the desired benefit to the farmers, was yet to receive Rs19.2 billion on account of the subsidy.

The second component of subsidy consisted of reduction of output GST to 2 percent on fertilisers without corresponding adjustment of the GST on various inputs, hence, the GST refunds have exceeded Rs60 billion.

“You are requested to kindly take cognizance of the agony of the fertilizer industry and address the following issues in upcoming budget, to avoid its financial impact being passed on to the farmers,” the letter read.

FMPAC said the rate of output GST on sale of urea was reduced during the period 2016-2018 to 2 percent, but without corresponding adjustment in the input tax rates, which in spite of repeated request were maintained at 5 percent to 17 percent.

The industry currently paid input tax of Rs100 to Rs213/bag of urea, which was much more than the output GST of Rs38/bag resulting in GST refund of Rs62-175/bag, with varying cost of inputs like natural gas, RLNG, steam and power. Similar mismatch exists in case of other locally produced fertiliser products, it said.

“Persistent mismatch between input and output taxes is adding to already outstanding huge refund of fertiliser industry (almost Rs7.8 billion per annum) and thus cash flow challenges and allied financial costs for the industry,” it said.

It also demanded to reduce GST to zero percent on natural gas/RLNG for all locally produced fertiliser products, and instead increase GST on fertilisers.

About disallowance of input GST for sales to persons not registered under the Sales Tax Act, 1990, FMPAC said the tax department was issuing notices to the companies against the spirit of SRO 1337. Regarding disallowance of expenditures under section 21(q) of the Income Tax Ordinance, 2001 on sales to sales tax unregistered persons, it was stressed by the manufacturers that the insertion of clause (q) to Section 21 of the Income Tax Ordinance regarding disallowance of business expenditure for sales made to unregistered persons has a devastating effect on the industry given the substantial part of its dealer network comprised of income tax filers who were unregistered under the Sales Tax Act, 1990. This provision was in continuation of similar provision introduced in the Sales Tax Act through Tax Laws Amendment Act 2020.

The combined impact of these amendments might result in significant increase in fertiliser prices ie Rs175-200/bag for urea and Rs300-335/bag for DAP, the industry warned.

It is pertinent to mention that the government would only be able to receive incremental revenue of around Rs1/bag of urea and DAP aggregating to around Rs180 million only from dealers as opposed to cost burden on the industry (net of tax impact of around Rs25 billion), which might ultimately have to be passed on to the farmers.

Based on the atypical case of fertiliser industry with regard to GST registration, FMPAC would like to submit that the legislation was unfair to the fertiliser manufacturers. Therefore, an industry specific exemption for the fertilisers against the provisions of section 21(q) of the Income Tax Ordinance, 2001 and section 73(4) of the Sales Tax Act, 1990, was stressed in the letter.

About allocation funds for subsidy and GST refunds, it was emphasised that allocation of Rs19.2 billion for payment of pending subsidy of 2016-18 Kissan Package and Rs 60 Billion on account of GST Refunds in the upcoming budget be made. The finch impact of these receivables was around Rs100/bag of urea, FMPAC concluded.