The current distortion in liquefied petroleum gas (LPG) prices may continue as the proposed regulatory duty on LPG imports has been withdrawn at the last moment from the new LPG policy draft. At the same time, domestic LPG producers continue to pay the petroleum levy.
Earlier, the government imposed regulatory duty on LPG imports, which was later withdrawn.
A major quantity of LPG is being imported, which is cheaper compared to domestically produced LPG, which becomes uncompetitive in the country’s market. In the initial draft of the new LPG policy, a sub-body of the Cabinet Committee on Energy proposed the imposition of regulatory duty on LPG imports via land route.
However, it recommended that regulatory duty should not be levied on LPG imports through sea. However, in the final policy draft submitted to the cabinet committee, which is meeting on Wednesday, the sub-body withdrew the proposal of imposing regulatory duty on imports via land route.
In the draft, the sub-body suggested that the petroleum levy, currently being applied to keep a balance between prices of domestically produced and imported LPG, should be phased out gradually as the market was moving towards a deregulated and competitive regime. In the meantime, it said, the petroleum levy should continue to be used as a balancing factor to equalise the cost of local and imported LPG.
It said that the Petroleum Division should devise a transparent mechanism to periodically determine the level of petroleum levy. So, in its recommendations, the sub-body acknowledged that at present there was no competitive regime.
Taxation According to market players, LPG importers have got a benefit of around Rs15 billion over the past two and a half years due to the reduced rate of general sales tax (GST). Domestic LPG industry pays 17% GST whereas the importers pay 10% GST.
However, in the upcoming new policy, the sub-body recommended the application of a uniform GST on sale of both imported and local LPG.
The sub-body recommended the removal of advance income tax on LPG imports.
However, it said there should be a similar advance income tax – withholding tax (WHT) – treatment for both imported and local LPG.
The committee suggested that government’s intervention should be minimal in setting consumer prices of LPG and in fact they should be determined by a completely deregulated market and competitive market forces. It asked the Petroleum Division to move a summary to the Council of Common Interests (CCI) for the deregulation of LPG supply chain.
It called for encouraging investment in the development of domestic production capacity and additional storages through fiscal incentives, like zero-rated imports of machinery and equipment as well as tax holiday.
The Petroleum Division, in consultation with exploration and production (E&P) companies, refineries, industry, Oil and Gas Regulatory Authority (Ogra), Federal Board of Revenue and Finance Division, would come up with concrete proposals for the incentive package in two months, it said and recommended incentivising the extraction of LPG from liquefied natural gas (LNG).
Monthly review committee
A demand review committee may be formed to assess the demand-supply situation, determine the import requirement and publish the monthly market situation. The committee should comprise key stakeholders.
The Petroleum Division, in consultation with Ogra, will formulate the terms of reference (TORs), reporting requirements and rules for the review committee in two months.
The committee recommended that domestic producer price discovery be made through a competitive monthly/quarterly auction/bidding process. Ogra will establish the process for an efficient and transparent auction/bidding.
The regulator will also define non-discriminatory technical pre-qualification criteria for the shortlisting of eligible firms for the bidding/auction process.
The process will be finalised by Ogra within three months and the new process should be implemented within three months of finalisation.
It recommended discontinuing the signature bonus by producers with the introduction of competitive auction/bidding. Producers will settle the existing signature bonus contracts and move to auction and bidding within six months. I
t proposed direct subsidy for target areas through cash transfers, like the Ehsaas programme.
The programme should be designed for direct cash transfers to the targeted households/citizens, linked to their LPG consumption. The Petroleum Division, in consultation with the Finance Division and Poverty Alleviation and Social Safety Division, should present the design of the programme in six months.
It was recommended that the Petroleum Division would evaluate an appropriate procedure for the reduction in response time and relaxation in waiting period for the award to state-owned enterprises in four weeks under PPRA rules.
Demand side management It recommended discouraging new development of LPG Air-Mix plants on government expense, however, privately-owned/operated LPG AirMix plants for the new housing societies and high-rise buildings in the cities may be encouraged.
Development of LPG switching kits for natural gas based domestic appliances should be encouraged and marketed by the gas utility companies.
The committee recommended that Ogra will conduct performance audit through reputable third-parties, of existing marketing companies to be carried out in six months and cancellation of license proceeding to be initiated against non-compliant companies.
Ogra will review the existing licensing regime within three months and include clear investment requirement and other necessary conditions for consolidation of the market. Ogra may consider imposition of licensing and investment requirement both the importers and the marketing companies. It may also allow petrol pumps to be used as selling points for LPG cylinders, subject to safety consideration and other codal formalities. T
he regulator will develop the digitisation strategy for LPG inventory/ stocks in three months. The database will be used for monitoring, data recording, and transparent reporting of the LPG statistics for the industry.
The efficient utilisation of gas/ LPG in the domestic cooking/ heating appliances is imperative and requires standards along with an enforcement mechanism. The National Energy Efficiency & Conservation Authority (NEECA) is currently reviewing the Pakistan Standard & Quality Control Authority (PSQCA) standards for gas-based domestic appliances for energy efficiency improvement. NEECA should submit a framework for definition of efficiency standards and enforcement mechanism for the gas-based domestic appliances in six weeks.