February 22, 2021: The domestic steel re-bar prices are feared to cross Rs150,000 per tonne on massive surge in global scrap rates, which have gone up from $350 per tonne in October to $455 per tonne, and recent 10pc increase in power tariffs for the energy-intensive steel industry.
The industry sources say the higher steel prices could jeopardize the government’s plans to encourage the construction sector in general and housing in particular unless it takes immediate measures to help the steelmakers bring down their prices through reduction in their electricity bills and decrease in turnover/minimum tax. The industry needs the government’s assistance on a war-footing to survive, they say.
The sources say the industry was struggling to cope with rising international scrap prices when the government raised the power tariffs by 10pc. “Global scrap prices are set to spike with growth in demand for ferrous scrap in China to 12 million tonne a year,” Wajid Bukhari PALSP Secretary General, said.
“The increase of Rs4 per unit in the electricity tariff for Pakistan’s nascent steel industry will prove to be the proverbial last straw on its back and detrimental to the government plans for affordable housing for the low-middle-income people.”
Further noted, that members of the Pakistan Association of Large Steel Producers are one of the major consumers of K-Electric. PALSP has lodged a severe protest over the recent increase in tariff through SRO No. 192 dated 12th February 2021. This increase is creating crisis like situation for the struggling steel sector of Pakistan.
Through this SRO Rs. 1.95 / kwh has increased in variable charges and Rs. 40 / kw / month increase in fixed charges. Fixed charges should be reduced instead of increasing it. If a consumer is using its connection and paying variable charges and should be levied only when variable charges are under certain threshold.
In Pakistan all cost of distribution system (grid, cable, substation, transformer etc.) has to be bared by consumer then why should customer pay heavy fixed charges for electricity connection. The Association is of the view that tariff change and regime should be reconsidered and properly aligned. In Bangladesh (DPDC) fixed charges are only 70.92 US cents for B4 customer whereas, its 250 US cents (after recent increase) in Pakistan, meaning the tariffs are over 350% of our regional competitors.
According to Pakistan Bureau of Statistics, the imports of iron and steel scrap into Pakistan rose by 13.5pc in 2020 as compared to the previous year with annual iron and steel scrap imports rising to 4.57 million tonne from 4.02 million tonne.
The industry has long been pleading for cut in the turnover tax of 1.5pc on the steel industry to 0.25pc to provide it a breathing space. “We’ve been pursuing the matter for long and in principal there has been broad consensus that this is an unfair tax on the documented sector, which is already bleeding. The authorities say the issue will be addressed in the upcoming budget, which is not justifiable because it will be too late for the industry by then,” PALSP argues.
The government has already slashed through an ordinance the minimum tax for dealers and sub-dealers of sugar, cement and edible oil to 0.25pc whose names are on the active taxpayers’ list issued under the provisions of the Sales Tax Act, 1990 and the Income Tax Ordinance, 2001.
Now, as a special favour the wholesalers and retailers of fast moving consumer goods, fertilizer, sugar, cement and edible oil have also been included in this category.
“The steel industry operates on very thin margins. Thus, the existing rate of minimum tax is not only a burden on the cash flow of manufacturers but will also discourage future investment in the industry. It also discourages documentation of steel transactions. The FBR also makes only a little revenue from it because the downstream sector of the long steel industry remains undocumented,” concludes Bukhari.
Another major issue facing the documented steel sector is the tariff anomalies which are creating unfair competition in this sector and making the documented sector to bleed money.
For example, the abuse of some concessions given to erstwhile FATA/PATA is resulting in loss of Rs10-15bn annually to the national exchequer and killing the entire steel sector. Similarly, lacunas in the customs rules allow large-scale tax evasion through mis-declaration of brand new steel as re-rollable scrap. “All factors have created a crisis for the steel sector,” Bukhari says.
“In the budget 2019-20 the FBR abolished special regime for collection GST from the steel sector to the normal ad-veloram, opening the floodgates of tax evasion and giving tax evaders advantage over the documented sector. Further, in order to make the Naya Housing Project a success, the government should abolish 17 per cent sales tax on this project.” noted Hussain Agha, Chairman Media PALSP.
“Our ultimate focus is to support Pakistan and become the ignition and driving force for Naya Pakistan Housing, however, with abnormally highest energy tariff prices regionally and tax rates for steel products double to other nations, it will become a struggle. We must be forward looking and aim to seek a win-win solution otherwise we fear that prices will spiral out of control.”