KARACHI: The Federal Board of Revenue (FBR) has been urged to decrease the corporate tax rate for the sector as international oil prices have fallen massively.
Oil and Gas Exploration and Production sector, in its budget proposals for 2017-18, has recommended that higher corporate tax rate on the sector should be reduced and aligned to the rate of other corporate sector.
The applicable tax rate for the Oil and Gas Exploration and Production sector is 40 percent. Before the promulgation of Income Tax Ordinance, 2001, the tax rate was 50 percent to 55 percent, however, the royalty payment to the government was adjusted against the tax liability, resulting in effective tax rate of approximately 35 percent or less.
Applicability of effective 40 percent tax rate has in fact increased the tax expense of the Oil and Gas Exploration and Production Companies, as against the incentives given to other sectors of the economy, whereby the tax rate will be gradually reduced to 30 percent.
To incentivize oil and gas exploration in the country especially after the massive reduction in the international oil prices, the corporate tax rate on E&P sector should be reduced from the current 40 percent to the rate applicable to other corporate sector by making necessary amendments in the ordinance and Regulation of Mines and Oilfield and Mineral Development (Government Control) Act, 1948.
Foreign investment will be encouraged in the country, which will eventually increase the tax collection of the Government and will also greatly help to overcome the energy crises in the country.
The rate of tax applicable on E&P companies on their Oil & Gas profits are given in their respective PCAs signed with Government. Under Rule 4AA of Part I of the Fifth Schedule to the Income Tax Ordinance, Super tax has been imposed at 3 percent for E&P companies earning Rs 500million (equivalent to US$ 5 million).
It is critical for E&P sector and recommended that the tax applicable should be calculated strictly in accordance with the provisions of the respective PCAs signed between Government and each E&P company & are legally binding, without changes throughout the full Lease period.
This will remove the negative investment scenario, and potential for litigation – due to the varying interpretations by the FBR from time to time (despite the signed PCAs with Government)
Tax credits under section 65A and 65B are not currently being allowed to E&P companies by the tax authorities despite the fact that appellate Tribunal decided the matter in favour of E&P companies.
It is suggested that necessary clarification needs to be provided by tax authorities to assessing authorities.
