The Oil Marketing Association of Pakistan (OMAP) has raised concerns regarding the recent budget announcement and its implications for the petroleum industry, a crucial component of the nation’s economy.
In a letter to the Chairman of the Federal Board of Revenue (FBR), OMAP Chairman Tariq Wazir Ali stated that the FBR should play its role in preventing the collapse of the petroleum industry, which is vital for Pakistan’s economic stability and development. “We hope that the FBR will take our concerns and recommendations into serious consideration,” he added.
Discussing the sales tax on petroleum products, Tariq Wazir further wrote that the recent declaration that POL products—specifically MS (Petrol), High-Speed Diesel Oil, Kerosene, and Light Diesel Oil—are now classified as exempt goods rather than being charged at the standard rate of tax will have significant ramifications on the operational expenses of the OMC sector. This move will have major implications for the operating expenses of the OMC sector, as previously the sales tax on freight and capital goods was adjustable. In addition, general expenditure will also rise due to the unclaimable sales tax of 18%.
For freight, the unclaimable sales tax of 15%, and for capex, the unclaimable sales tax of 18% will become part of the cost, hence requiring additional funds. This will cut into the working capital of the already cash-strained OMC sector. For general operating expenses, the overall impact will be a rise in cost by 18%.
In light of these facts, if zero-rating is necessitated, the supplies and services to oil marketing companies should also be zero-rated in the sales tax.
Another important issue of turnover tax was also raised in the letter. Chairman OMAP stated that the application of a minimum tax rate of 0.50% or turnover tax on Oil Marketing Companies (OMCs) has a detrimental impact on their profitability and cash flow. This is particularly problematic for OMCs with thin margins or disproportionately low profits compared to revenue, as the minimum tax rate is not suitable for these companies. Currently, the turnover tax equates to Rs. 1.02 per liter, which is unjustified in a regulated margin environment.
“Therefore, we request a reduction in the turnover tax to 0.25%, so the OMCs can retain a greater portion of their margins, enabling them to better navigate the current economic challenges. In light of the aforementioned concerns, we respectfully request the Federal Board of Revenue to reconsider the proposed decisions. A balanced approach that considers the health of the oil marketing sector, consumer interests, and economic stability would be in the best interest of all stakeholders. We urge consideration of this issue and potential revisions to the tax policy to mitigate the adverse effects on OMCs,” the letter added.
Conversely, if the government insists on charging a turnover tax of 0.50%, then it must be charged on the margin instead of gross sales.
He also raised concerns regarding the proposed increase in the petroleum levy. “The recent budget proposal to increase the petroleum levy by Rs. 20 per liter, raising it from Rs. 60 to Rs. 80 per liter, will have several detrimental impacts on oil marketing companies (OMCs) and the broader economy, which warrant careful reconsideration,” he said.
The immediate increase in the petroleum levy will substantially elevate the cost of petroleum products. Given the competitive nature of our industry, OMCs foresee a significant drop in demand. This scenario is likely to compress profit margins severely, leading to reduced financial stability and investment capabilities for OMCs. The elasticity of demand for petroleum products suggests that significant price hikes can lead to lower consumption volumes.
The proposed levy increase also brings potential macroeconomic repercussions. Higher transportation costs can lead to increased prices for goods and services across the board, contributing to inflationary pressures. This can adversely affect the purchasing power of consumers and potentially slow down economic growth. It is requested to either keep it as zero-rated instead of shifting to exempt goods or allow suppliers to charge zero percent sales tax to OMCs.
