KARACHI: The increase in Gas Infrastructure Development Cess (GIDC) for different sectors went into effect from Tuesday (July 1) which the government believes would help it collect Rs145 billion through the cess during this fiscal year, a rise of Rs57bn compared to Rs88bn last year.

The cess is, however, at the centre of protests by companies led by the fertiliser sector.

The government had lifted maximum ceiling on GIDC via the Finance Act 2014. Yet, it has caught new fertiliser plants, such as Engro Corporation’s Enven and Fatima Fertiliser, by surprise as they were given to understand that the new fertiliser players would be exempt from the cess.

In a research report released on Tuesday, Mahad Farrukh, analyst at Foundation Securities, stated that the government has issued Finance Act 2014-15, which implements all the measures proposed in the budget 2014-15. “From the stock market perspective, details on GIDC are intriguing and warrant further attention”.

The analyst added that the act specifically introduces two major surprises: First, the government has decided to do away with the exemption granted to new fertiliser plants from any tax/cess on concessionary gas prices (for 10 years) for feedstock gas promised to sponsors at the time of investment. Second, higher cost of fuel stocks which has now been increased to Rs150 per million British thermal units (mmBtu).

Analysts say the government had originally proposed to raise GIDC by substantially higher amount on various sectors in the budget 2014-15 presented on June 3. However, after the protest of industries the rates in the amended budget proposals were significantly toned down.

“While higher fuel stock gas prices will likely impact all major manufacturing sectors, which include cement, chemicals, textile and petrochemicals, most sectors either have the pricing power to pass down the impact or the actual increase in cess rate is not significant to warrant earnings revision,” several analyst asserted.

Fertiliser companies with newer plants are sore about broken promises: “By imposing the GIDC, the gas price will increase by a significant 4.4 times to Rs369 per mmBtu from current Rs69 per mmBtu on those plants,” calculates Tahir Abbas, analyst at Arif Habib Limited.

Brokerage Shajar Capital stated that the fertiliser companies were already paying Rs300 per mmBtu on feed stock except Enven (new plant of Engro Fertiliser) and Fatima Fertiliser. In order to stave off hit on the bottom-line, sector analysts believe that the fertiliser companies may have to increase the urea prices by around Rs60 per bag.

People in the know say the fertiliser units that would suffer the brunt are already engaged in talks with the finance ministry, arguing that the government could not apply GIDC on new plants as they were exempted from it under the fertiliser policy 2001.

Some sector experts believe that the matter can blow up if the affected new units decide to drag the matter to the court. Brokerage houses have, meanwhile, downgraded the Engro Fertiliser in terms of earnings and price objectives, which would lead to downgrading Engro Corp as well.

Investment analyst Zeeshan Afzal at Topline Securities argues that due to imposition of GIDC on feedstock, either urea price could be expected to increase or Engro Fertiliser and Fatima Fertiliser would seek stay order from the court against the GIDC hike.

“To recall, it has been clearly mentioned in their respective agreements that no tax will be imposed on the gas supply price. Cost effect of higher GIDC is estimated at Rs330 per bag. Considering companies’ low ability to fully pass on the cost, urea bag prices may actually increase by Rs150 per bag,” Zeeshan stated in a detailed report.

Published in Dawn, July 2nd, 2014