Problems of interpretation: LPG royalty issue still not resolved

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The issue of royalty on Liquefied Petroleum Gas (LPG) supplied to the provinces remains unresolved even after six years due to differences between the Ministry of Law and Ministry of Petroleum and Natural Resources.

An official source said that the latest reply from the Ministry of Law had given a vague explanation and the Petroleum Ministry may seek another interpretation to settle the issue.

The Ministry of Law has opined that the payment of royalty on LPG can be made to the provinces only if the federal government makes appropriate amendments in the Pakistan Petroleum Exploration and Production Rules 2013 or the existing exploration and production policy or the Petroleum Concessions director general issues guidelines for payment of royalty on LPG.

The Petroleum Ministry had sought the opinion of the Ministry of Law in August 2015. As the DG Audit Customs and Petroleum pointed out in the Audit Report 2008-09, the exploration and production companies were paying royalty on the shrinkage value of deemed sale of natural gas instead of sale value of LPG.

The issue was discussed in the meeting of the Public Accounts Committee and an independent single member committee was formed. Eminent energy sector expert Dr Gulfaraz Ahmed was nominated to resolve the matter. The committee decided that the royalty on LPG was applicable. Accordingly the companies were advised to make the payments.

However, the Petroleum Ministry, instead of implementing the decision of the Dr Gulfaraz, approached the Ministry of Law for guidance saying that the companies were reluctant to pay royalty on LPG at the sale value.

The Law Division supported the view of the companies and opined that the royalty on LPG was not applicable.

“In view of Article 161 of the constitution, the point of view of the companies appears to be correct in as much as the royalty should be taken on the value of gas (natural form) and not on the basis of sale value after the product has been refined. The method of levying of royalty must be the same as the method of calculations for excise duty as per Article 161 (1) (a) of the constitution,” the Ministry of Law said.

The audit authorities disagreed with the interpretation of the Ministry of Law and said that the issue involved was to determine royalty on LPG i.e. either on the sale value (well head value) or on values of gas consumed in LPG production.

“The decision of the Ministry of Law is not in line with the case as according to Article 161, net proceeds of federal excise duty and royalty on natural gas collected by federal government will not form part of the federal consolidated fund and will be paid to the province in which the natural gas well’s head is located,” the Petroleum Ministry said.

The Petroleum Ministry again sought legal opinion from the Ministry of Law. However, their opinion has further confused the officials. The source said that further explanation was required as the royalty issues were constitutional and could not be settled with amendment in rules.