The Pakistan Tehreek-e-Insaf government has recently waived off approximately 208 billion rupees in Gas Infrastructure Development Cess, more famously known as GIDC, to ‘influential’ industrialists through a presidential ordinance. Account for the accumulated interest, and this amount goes up by another 92 billion rupees to a whopping 300 billion.
The GIDC scandal has been the talk of the town. In essence, the Prime Minister and his cabinet approved an ordinance and sent it to the President for signature. After the hue and cry over the GIDC ripping off taxpayers and giving breaks to large industrialists, the PM decided to ‘withdraw’ the ordinance and asked the Attorney General to take the matter off the government’s hands and into the lap of the Supreme Court.
The ‘details’ and ‘theories’ surrounding the matter have made the rounds on whatsapp, been hotly debated on television and labelled a great betrayal of the Pakistani people. TV personality and journalist Rauf Klasra went so far as to say that Prime Minister Imran Khan has ‘robbed’ the nation of almost 300 billion rupees.
The accusation is eerily similar in its wording to the Prime Minister’s own complaints against his opponents whom he wants to so badly hold accountable. What makes the matter so serious, however, is that for once, everyone seems to be agreeing with Rauf Klasra.
In the process of this media outcry reflecting the public outrage, however, many of the nuances surrounding the ordinance and the GIDC have been lost. Have taxpayers actually been robbed off Rs 300 billion? Many might not even have known what in the world the GIDC is until the news of the ordinance and its eventual withdrawal broke.
And before we jump to conclusions, the bigger question here is, did we, the general public of Pakistan, really pay a cess? And if so, are these big firms not paying up because they just don’t feel like it, or is there another side to the story that we don’t yet?
The cess business
Before we go any further into this debate, what even is a cess? There may be a general understanding that it is a kind of tax, but what is the difference between a cess and any regular tax? And what exactly is the GIDC anyways?
A cess is a tax on top of a tax, levied by the government for a specific purpose. For example, GIDC, which stands for Gas Infrastructure Development Cess, is a tax specific for gas related development work throughout Pakistan. In simpler words, the government collects money on top of the tax you already pay to raise funds for specific projects etc.
The Gas Infrastructure Development Cess (GIDC) was introduced by the Pakistan Peoples’ Party government under the leadership of former president Asif Ali Zardari back in November 2011 after the agreement with Iran for the Iran Pakistan gas pipeline.
This cess was initially introduced on 25th November 2011 as a Money Bill. A money bill, or supply bill as it is also known, is a bill that solely concerns taxation or government spending, as opposed to changes in public law.
The main objective of levy of GIDC was to raise funds for undertaking development of infrastructure related to transnational gas pipelines. This would include pipelines extending or operating across national boundaries such as the Iran Pakistan Gas Pipeline and TAPI project – the Turkmenistan–Afghanistan–Pakistan–India Gas Pipeline, and Liquefied Natural Gas (LNG) projects such as the terminals operated by Engro Elengy Terminal Private Limited and Pakistan Gas Port Corporation at Port Qasim in Karachi.
Who’s footing the bill?
This cess was imposed on all industries, which includes the fertilizer sector, CNG sector, IPPs, Captive Power Plants and basically everyone that has an industrial gas connection. Hence it was in no way imposed on the general public or directly collected from the people.
But then how did the general public end up paying this cess? Well, the government imposed this cess on industrial gas connections and this amount was to be collected from these industries in terms of increased gas bills. And as any business would do, these businesses adjusted their prices according to the increase in cost of production. If they had to pay Rs13 per unit of gas before, and now had to pay Rs100 to Rs300, then they would just adjust their prices accordingly.
But contrary to popular belief, these businesses did not increase their selling prices in relation to the increase in gas prices, just because of basic economics. Principles of economics state that an increase in price directly correlates with a fall in demand. In short, if these businesses passed on the impact of the cess on to the consumer then they would lose customers resulting in lower sales and naturally lesser profits.
And so these businesses declared this cess unconstitutional because it was introduced via a money bill and unreasonable because the cess was simply too much.
Nonetheless, this money bill was challenged in various courts including the Sindh High Court and Peshawar High Court for being unconstitutional, only later to be challenged in the Supreme Court of Pakistan. These very courts issued stay orders in favour of the companies that were supposed to collect funds on behalf of the government from consumers and deposit them into the national exchequer.
Now these companies lost a case in the Sindh High Court over the increase in the rate of GIDC from Rs13 per MMBTU to Rs100 per MMBTU and subsequently also filed appeals obtain stay orders against this increase. Then the government once again enhanced the cess to Rs200 per MMBTU for captive power plants with effect from July 1, 2014.
Fast forward a few years, and the Supreme Court upheld the judgment of the Peshawar High Court, and in its judgment dated 22nd June 2014, maintained that the GIDC is a fee and it could not have been introduced through a money bill and hence it was not validly levied in accordance with the Constitution of Pakistan. In short, it was rendered unconstitutional.
Subsequently, three months later, on 24 October 2014 the government promulgated the GIDC Ordinance, 2014. However, it was once again challenged in various courts of law. Upon this, the government, with the approval of parliament in May 2015, promulgated the GIDC Act, 2015.
But that did not stop the law from being challenged again. The consumers once again challenged the GIDC Act, 2015 and the courts once again granted stay orders against billing as well as collection of this controversial cess from consumers. As a result of all this legal back and forth, the government was not able to retrieve the funds and the arrears amounts of GIDC have since been accruing from the inception of GIDC which was back in January 2012 till December, 2018.
Now, there is one judgement that is in favour of the government and one judgement against the government, with some 200 plus cases on which various companies have obtained stay orders.
For the judgment that was passed in the industries’ favour, Sui Southern Gas Company Limited (SGCL) and Oil and Gas Regulatory Authority (OGRA) had filed an appeal against Century Papers Ltd and got the judgment suspended. And according to the legal counsel of these firms, subsequently fresh notices have been issued to more parties but those parties were successful in obtaining favourable interim orders in these subsequent proceedings, hence the 200 plus cases.
So, what’s happening now and why are we talking about it?
The PTI government through a Presidential Ordinance dated August 28, 2019 waived 50 per cent of the GIDC, 100 per cent of the accumulated interest and offered payment of arrears in two trenches along with the facility for big corporations to adjust the amounts against sales tax refunds. Sounds fairly simple and straightforward.
According to this Presidential Ordinance, the CNG sector, the fertilizer sector (including feed and fuel), captive power industry, Karachi Electricity Supply Company (KESC), generation companies (GENCO) and Independent Power Producers (IPPs), after entering into an agreement with Sui Northern Gas Pipeline Limited and Sui Southern Gas Company Limited within 90 days of the commencement of the Gas Infrastructure Development Cess (Amendment) Ordinance, 2019, shall be able to pay half of the outstanding cess levied or charged from the May, 22, 2015 to December, 31, 2018.
And, the payment of outstanding cess shall be made in two tranches, first within thirty days and second within three months of the signing of the agreement. Also, the reduction in the rate of cess shall be applicable from the date of payment of arrears and withdrawal of litigation.
Now, the fertilizer sector divides it’s gas usage in to feed and fuel at an 80/20 ratio. The fertilizer sectors uses 80 percent of gas feed, which basically means the feed produced by the sector and 20 percent of the gas is used as fuel to run the production plants.
The Presidential Ordinance also declared that the rate of cess for new fertilizer plants, namely Engro and Fatima fertilisers which were built after the cess had been imposed and through billions in direct investment into the country, shall be reduced to zero and for old fertilizer plants, CNG sector, IPPs and K-Electric and other GENCOs shall be reduced to half. Moreover, the rate of cess for zero rated industry (export) and its captive power shall be reduced to zero.
By now you know what the GIDC is and where it all started. But exactly how much did everyone have to pay and why aren’t they paying up?
The total outstanding GIDC amount before the GIDC Act 2015 was introduced with various companies and sectors stood at a whopping Rs147.2 billion. But keep in mind that this was before the Money Bill became an Act of the constitution. Now, after the GIDC Act 2015, outstanding payments under GIDC till December 2018 stand at a ‘modest’ Rs269.1 billion, bringing the grand total to Rs416.3 billion in unpaid dues.
Before the GIDC Act 2015 came into being, the total outstanding amount with fertilizer companies for fuel was Rs0.9billion, Rs15.1 billion for old fertilizer plants and Rs8.5 billion for new fertilizer plants.
Meanwhile, Pakistan’s industry owed Rs20.7 billion, Independent Power Producers or IPPs owed Rs9.6billion, Karachi Electric Supply Company, now known as K-Electric owed Rs25.3 billion, while captive power plants owed Rs28 billion, CNG stations in Region-1 owed Rs21.2, and CNG stations in Region-2 owed Rs18 billion.
However, outstanding amounts post-GIDC Act 2015 up till December 2018 with fertilizer companies under fuel stand at Rs1.5 billion, old fertilizer plants at Rs57.5 billion, new fertilizer plants at Rs54.5 billion, Pakistani industry at Rs21.8 billion, IPPs at Rs2.5billion, K-Electric at Rs32.1 billion, captive power plants at Rs63.4 billion, CNG Region-1 at Rs22.6 billion and CNG Region-2 at Rs18.3 billion.
Once again bringing the pre-GIDC Act 2015 total to Rs147.2 billion and post-GIDC Act 2015 total to 269.1 billion, with a grand total of Rs416.3 billion.
As per the official documents, from January 2012 up till December 2018, some Rs701 billion was to be collected from the masses yet, only Rs285 billion was deposited to the national exchequer.
This is despite the fact that the government had imposed a surcharge worth Rs300 per Metric Million British Thermal Unit or in short MMBTu on the gas used in fertilizer plants as feed while Rs150 per MMBTu on the gas used as fuel in fertilizer plants. Likewise, the government had imposed a surcharge of Rs200 per MMBTu on Captive Power Plants and Rs100 per MMBTU on other industries.
These companies eventually ended up collecting cess from the general public under GIDC and at rates up to Rs400 per bag of fertilizer from farmers, or so we have been told so far. Yet only a small chunk of this money was being deposited to the national exchequer, because let’s face it, these big sharks didn’t want to give up the money. Hence the plethora of court cases and stay orders that they are more than happy to slug it out in.
Well, not exactly. As mentioned earlier, the industry of Pakistan declared this cess unconstitutional, unreasonable and discriminatory. And more importantly, this cess was never imposed on the general public to begin with, unlike what we have been told.
For one, the fertilizer sector states that the government jacked up the cost of production considerably, as fertilizer sector was levied GIDC at much higher rates of Rs300 per MMBTU – triple that of the power sector at Rs100 per MMBTU, and double the rest of the industrial sector at Rs150 per MMBTU. In spite of this clear discrimination, the fertilizer sector has probably been the only sector that paid a significant amount of Rs129 billion as GIDC to the national exchequer.
The sector further argues that urea was selling at Rs1580 per bag before the GIDC was imposed initially in January 2012. Thereafter, gas prices increased twice and led to an impact of Rs168 and another Rs210 on July, 1, 2019, which would sum up to price of Rs1958 per bag. Now, if the GIDC impact of Rs405 per bag was fully passed on, urea should have been selling at around Rs2363 per bag, the impact of change in sales tax and inflation notwithstanding. So, the mere fact that urea is presently selling at Rs1840 per bag is reflective of the inability of the fertilizer industry to pass through the full impact of GIDC.
Once again, basic principles of economics hold that increase in price leads to lost demand and less sales.
Moreover, back in PML N’s government, former prime minister Shahid Khaqan Abbasi gave concessions to the CNG sector on GIDC and recovered some funds. And following this very precedent PTI’s government announced the GIDC (Amendment) Ordinance 2019 or in short, an amnesty scheme for industrialists, to recover ‘stuck’ government funds.
The basic argument for this was that if the government tries to recover funds by litigation, the decision can go either way, in favour or against the government hence recovering even 50 per cent of the money is good enough. Because there are judgements in favour of and against the government.
But wait a minute, if you thought waiving off 50 per cent or Rs208 billion was bad enough, industrial tycoons wrote letters to the Ministry of Finance, asking for further relief of Rs100 billion.
Mind blown? – Well ours too. But after what you have just learned, doesn’t this cess seems a bit unfair to begin with? Thankfully, the public and the opposition parties didn’t buy the ordinance introduced by the PTI government.
Over the last one week since the presidential ordinance was announced, Imran Khan and his government has faced some intense criticism, some even going to lengths of declaring this move as a robbery by Imran Khan and his government.
Others have highlighted it as a policy to favour the blue-eyed boys of this government and praised the former PML-N and PPP governments for not giving in on the demands of these industries and businessmen.
But wait a minute, didn’t former PML-N prime minister Shahid Khaqan Abbasi give the same concession to the CNG sector? And was it not the PPP government that introduced the cess without proper consultation and legislation?
The PTI has made several efforts to somehow undo the damage, and over the last few days, has held various press briefings, meetings, issued clarifications and what nots to change the public’s perception about the bill. Even more, Imran Khan himself has categorically denied that this ordinance was not to favour any ‘individuals.’ The latest explanation was that the government exempted the taxes only in a bid to recover 50 per cent of the “stuck revenue by way of an out of court settlement after consultation with the industry”.
Nonetheless, after great criticism and in yet another historic u-turn, Prime Minister Imran Khan has decided to retract the ordinance. Other than the pesky issue of the Prime Minister being constitutionally unable to withdraw an order of the President, the retraction has been a move towards undoing some of the damage.
According to a statement issued by the Prime Minister’s Office, Imran Khan decided to withdraw the presidential ordinance regarding the GIDC and since has directed the Attorney General of Pakistan to “approach the Supreme Court for urgent hearing of the matter”.
The government says that the decision to go to the apex court has been taken so that the matter can be decided at the earliest, strictly in accordance with the law and the constitution, because Pakistan needs the money.
Yet, the government is concerned over going to the Supreme Court, saying that the decision could go either way and then the government would even lose the rest of the money under the GIDC head.
According to the statement, “Going to court carries a risk because the decision could go either way. This means that the government could get the whole amount or could lose it all and possibly forgo any prospect of future revenue collection under the head.”
“Also, on top of this, the government could be saddled with the burden of administering refunds of approximately Rs295 billion of the principal amount,” the statement added.
Nonetheless, according to the opposition parties, the problem doesn’t lie in the waiver of GIDC primarily but the fact that the PTI government treated this ordinance as an inside job and was kept super hush hush, and finally imposed by a presidential ordinance, essentially bypassing the parliament, and the very essence of democracy.
The truth is that even from the billions collected by the government under the GIDC, none of them have been used for any gas infrastructure development up till now, and it is highly unlikely that the funds from the GIDC will ever be used for that. The LNG terminals at Port Qasim we see today have been set up using private investment, and hence the GIDC becomes useless in retrospect.