Tax Managers Propose Removal of E&P Depletion Allowance

Tax Managers Propose Removal of E&P Depletion Allowance – The tax managers of Federal Board of Revenue (FBR) have recommended a significant policy change that could impact the Exploration and Production (E&P) sector.

In their proposals for the upcoming budget 2024-25, FBR tax managers have recommended the removal of the depletion allowance, a move aimed at adjusting the fiscal incentives provided to this sector.

The depletion allowance currently allows companies in the E&P sector to deduct a portion of their income for the exhaustion of natural resources. However, the FBR tax managers argue that the sector has already benefited from various forms of relief and concessions. These include deductions for decommissioning costs, depreciations, initial allowances, expenses for drilling dry holes, and exploration costs.

According to the FBR, the E&P sector’s practice of claiming depletion allowance on a gross basis (including royalty) has led to excessive deductions, resulting in lower tax revenues. The tax managers highlighted that the allowance has been applied in a manner that reduces the taxable income of these companies more than intended, thereby diminishing the overall tax intake from this sector.

Furthermore, the FBR emphasized that natural resources are the property and assets of the state of Pakistan. The depletion allowance, which is meant to account for the diminishing value of these resources, should not unduly benefit private companies at the expense of public revenue. Given these factors, the tax managers have proposed to withdraw the depletion allowance entirely.

The proposed removal of the depletion allowance is part of a broader effort by the FBR to rationalize tax benefits and enhance revenue collection. The E&P sector, while vital to the country’s energy needs and economic development, has been identified as an area where tax policy can be adjusted to better reflect the interests of the state and ensure fair taxation.

Industry experts and stakeholders are closely monitoring this proposal, as its implementation could have significant financial implications for the E&P companies operating in Pakistan. The removal of the depletion allowance would likely increase the tax burden on these companies, potentially affecting their profitability and investment decisions.

As the budget discussions progress, the FBR’s recommendations will be scrutinized by policymakers and industry representatives. The final decision will reflect a balance between maintaining an attractive investment climate for the E&P sector and ensuring that the state derives appropriate revenue from the exploitation of its natural resources.

The proposed changes underscore the FBR’s commitment to revising tax policies in a manner that promotes fiscal responsibility and equitable tax practices. Stakeholders are advised to stay informed about the developments and prepare for potential adjustments in their tax planning strategies.