There is a massive outcry in the steel industry due to fear of the possible rise in domestic steel re-bar prices. The prices are expected to cross Rs150,000 per tonne. This is because of the rising prices of the scrap globally coupled with the additional 10 percent power tariff government has imposed on the energy-intensive industry.
According to industry sources, the higher steel prices could derail the government’s plan to provide low-income affordable housing under Naya Pakistan Housing Scheme. On a more general level, this will curb the construction sector in the economy that the premier has been talking about promoting. The prices would be higher unless the government helps the already-struggling industry by lowering their production cost via reducing electricity cost and decreasing turnover/minimum tax.
Secretary-general of the Pakistan Association of Large Steel Producers (PALSP) said, “Global scrap prices are set to spike with growth in demand for ferrous scrap in China to 12 million tons a year.” The industry was already struggling due to the increase in scrap price when the government imposed the tariff.
“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.”
It must be noted that the large steel producers are the biggest consumers of K-electric. This means the burden would be great as well. PALSP has lodged a severe protest over the recent increase in tariff through statutory regulatory order (SRO) No. 192 dated 12th February 2021.
This SRO was for informing of Rs. 1.95 / kwh has increased in variable charges and Rs. 40 / kw / month increase in fixed charges. The steel industry is one of the documented industries of Pakistan, thus the consensus among them is that government should support them by decreasing these fixed prices.
In Pakistan, the consumer bears the entire of the cost of distribution (grid, cable, substation, transformer, etc). Thus, bearing other high fixed connection charges is only disincentivizing for the industrialists.
According to the association, Pakistan should do a review of the recent tariff levied on the industry. In Pakistan, the tariffs are 350% of what industry in regional competitive countries like Bangladesh bears.
Pakistan Bureau of Statistics shows that 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 tonnes from 4.02 million tonnes.
PALSP said, “We’ve been pursuing the matter for long and in principle, there has been a 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.” The industry has long been pushing for a cut in the turnover tax on the steel industry from 1.5pc to 0.25pc to provide it with a fair opportunity to do business.
The government has already reduced the minimum tax for the dealers and sub-dealers of sugar, cement, and edible oil to 0.25 percent, through an ordinance. This option is for those who are on the taxpayer list, meaning documented.
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However, the highly regulated steel industry suffers from high taxes.
Lastly, general secretary PALSP said, “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,” thus higher taxes are harmful to the state and the industry both in the long term.
There is another factor that is causing loss to the steel industry. The government’s tax concessions to former FATA/PATA are being abused by some, causing the regulated industry loss. Similarly, the loopholes in the custom rules allow some to misdeclare the brand-new steel as re-rollable scrap. These factors cause the documented companies and industry to incur losses.
Hussain Agha, Chairman Media PALSP said, “In the budget 2019-20 the FBR abolished special regime for collection GST from the steel sector to the popular ad-valorem, 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 percent sales tax on this project,”
He further said, “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.”
About the industry
Pakistan Steel Industry produces three types of products: round, flat, and long. Round is used in making pipes, flat one is used as a raw material used in car manufacturing and the long one is used in construction. 60% of Pakistan’s steel industry is focused on the long type of steel.
The steel sector of Pakistan is made of some 300 companies that manufacture over six million tons of steel annually. In the last few years, some have declared losses; some are selling below the construction costs, just to avoid a complete shutdown, while some have shut down altogether.
The companies that are still operational employ more than 100,000 people and contribute approximately Rs. 150 billion to the state treasury. According to the Pakistan Association of Large Steel Producers (PALSP), the local production of steel also accounts for import substitution of $1.2 billion.
It must be further noticed that steel is a product that is interlinked with so many other industries. To mention a few, for the new automobile industry settling in Pakistan, the Naya housing project Prime Minister has taken up, and the overall construction sector.