The withdrawal of tax-free benefits from the depletion allowance for oil and gas extraction companies, starting from the fiscal year 2024-25, may further hinder extraction efforts and increase dependency on costly LNG imports, exacerbating the foreign exchange crunch in the country.
According to the proposed budget and the Finance Bill 2024, the government plans to remove the existing tax-free provision on the depletion allowance for oil and gas extraction companies from FY25. This move is expected to increase the tax burden on these companies.
Industry insiders have expressed concerns that if parliament passes the bill, it will affect the government's extraction plans, leading to a greater dependency on LNG imports to meet the growing demand for gas amid an already significant foreign currency shortage. LNG imports are already putting extra pressure on the country’s macroeconomic stability.
The government currently has contracts with several international extraction companies under two different agreements- rental payment and Production Sharing Contract (PSC).
On the other hand, officials from the National Board of Revenue (NBR) stated that if parliament approves this proposal, it would enable them to collect an additional Tk 3,000 crore in revenue from this sector, which is currently exempt from taxes. They also mentioned that there is pressure to increase the tax-GDP ratio to meet conditions set by the International Monetary Fund (IMF) for its $4.7 billion loan.
Petrobangla’s former director of planning Ayub Khan Chowdhury said, "We have no idea why the tax benefit is being withdrawn from the depletion allowance for oil and gas extraction companies," adding that it seems there is a lack of support for this sector.
He further stated that if parliament approves this proposal, it will double the extraction costs.
There is also the issue that all companies are operating under government contracts. Since these contracts exclude the liability of paying corporate tax on the depletion allowance, there is a possibility that the tax burden will fall on the Bangladesh Oil, Gas and Mineral Corporation, commonly known as Petrobangla, which already owes Tk 37,549 crore in corporate tax, VAT, and import duties to the NBR.
Snehasish Mahmud, founding partner of Snehasish Mahmud and Co., said, Snehasish Mahmud, founding partner of Snehasish Mahmud & Co. said, “In the Income Tax Act 2023, depletion allowance for oil and gas has been withdrawn.”
“Now depletion allowance is calculated from lower of the two- 50 per cent of profit for the year or 15 per cent of well head value. Well head value is calculated by multiplying total delivered quantity multiplied by the unit price for that year,” he said.
“Most of the companies are either owned by the government or tax payable to the government by the private oil and gas companies are borne by the government. So, it seems Petrobangla will be more burdened with this additional tax,” he added.
Russia’s Gazprom (OGZPY) with Bangladesh Petroleum Exploration and Production Company Limited at Bhola, and the Chinese company Sinopec with Sylhet (Bangladesh Gas Fields Company Limited and Sylhet Gas Fields Limited) are extraction companies under rental payment contracts.
Meanwhile, America’s Chevron (CVX) at Sylhet, India’s Oil and Natural Gas Corporation Limited (ONGC) at the Bay of Bengal, and the British company Tullow Oil plc Block 9 surrounding the Bakhrabad gas field operate under Production Sharing Contracts (PSCs).
Petrobangla already in debt
According to Petrobangla, it has fallen behind on tax payments because its income is low and the liquidity crunch continues. The company imports expensive liquefied natural gas (LNG) with subsidies and incurs significant annual losses due to system loss and corrupt officials.
The NBR has repeatedly requested Petrobangla and other concerned companies to resolve this matter quickly. Petrobangla is the country’s main authority that explores, produces, imports, transports, manages, and sells all types of mineral resources through its entities and international oil companies, while the Bangladesh Petroleum Corporation (BPC) imports, distributes, and markets oil and petroleum products.
Officials say Petrobangla has failed to pay VAT and other taxes to the NBR due to the financial pressure from importing LNG since 2018. The company emptied its funds by importing LNG, and now the finance ministry is subsidising import costs.
NBR officials stated that the country faces a huge revenue deficit every year due to Petrobangla’s negligence, and this issue needs to be resolved as soon as possible.
