KARACHI: The exploration and production companies are subject to tax rate at 40-50 per cent instead the prevailing rate of 29 per cent, which should be aligned with the tax rate applicable on other sectors.
Overseas Investors Chamber of Commerce and Industry (OICCI) in its proposals for budget 2022/2023 submitted to the Federal Board of Revenue (FBR) said that as per the Fifth Schedule of the Income Tax Ordinance 2001, the applicable tax rate for the E&P sector ranges from 40 per cent and 50 per cent – 55 per cent, whereas the general corporate tax rate is 29 per cent.
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The corporate tax rate for E&P Companies needs to be aligned with general corporate tax rate of 29 per cent.
As per Rule 3 of Part 1 of Fifth Schedule, depletion is calculated @ 15 per cent of the gross receipts representing well-head value of production, but not exceeding 50 per cent of taxable income. E&P industry interprets above by calculating depletion at 15 per cent of Gross Revenue before royalty deduction. Tax authorities calculate depletion at 15 per cent of Gross Revenue after deduction of royalty.
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It is recommended that definition of Wellhead Value in Rule 6 (8) be deleted and Rule 3 rephrased as “depletion allowance to be calculated @ 15 per cent of gross receipts, before royalty deduction”.
Through the Tax Laws (Second Amendment) Ordinance, 2021, an amendment is introduced in the Third Schedule of the Income Tax Ordinance, 2001 whereby entry related to 100 per cent tax depreciation in respect of “Below Ground Installations” has been omitted. E&P industry is capital intensive and high-risk industry, as such 100 per cent tax depreciation was allowed in respect of Below Ground Installations (entry in third schedule specific to E&P companies since 1979 in line with International best practices).
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It is recommended that changes introduced through the Tax Laws (Second Amendment) Ordinance, 2021 in the Third Schedule of the Income Tax Ordinance, 2001 should be reversed and previous position of allowing 100 per cent tax depreciation in the year of incurrence should be restored.
The OICCI said 10 per cent Tax credit u/s 65B on Investments made by Industrial Undertakings in Plant & Machinery for extension, expansion, Balancing, modernization, replacement. This incentive was introduced through Finance Act 2010 and was available until June 30, 2019.
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It is recommended that this incentive to be extended up to 2024. Clarification on definition of industrial undertaking to include E&P Companies assessed under Fifth Schedule of ITO 2001.