OMCs fear cut in profit margins on Sindh’s infrastructure cess on imports

KARACHI: Oil marketing companies (OMCs) have raised concerns over a recently reimposed infrastructure cess in Sindh on imports, saying the 1.25 percent additional tax would slash their profit margins as it was not included in the existing price mechanism formula, a letter revealed on Friday.

The Oil Marketing Association of Pakistan (OMAP) wrote the letter to the Oil and Gas Regulatory Authority (OGRA), mentioning that OGRA plays a crucial role in regulating oil prices.

"The recent imposition of the Sindh Cess has not been factored into the existing price mechanism formula. Consequently, this tax is significantly eroding the margins of OMCs," the letter read.

OMAP stated that the burden of the tax would exacerbate the challenges being faced by OMCs, which are already struggling to survive in a competitive industry. "The absence of an inclusion mechanism for this tax in the pricing formula has resulted in a substantial portion of OMCs' margin being consumed. This situation further adds to the difficulties and hardships faced by OMCs," the letter stated.

OMCs explained that in accordance with the Sindh government's Infrastructure Cess Tax, a levy of 1.25 percent would be imposed on all imports made through Karachi Port. "This matter holds significant magnitude and carries the potential to directly impact the profit margins of OMCs by nearly 40 percent in the event that the Cess Tax is enforced."

According to the letter, OMCs have obtained stay orders from both the Sindh High Court and the Supreme Court of Pakistan, which mandate that the release of products is contingent upon the provision of bank guarantees equal to the amount of Cess Tax. Furthermore, the requirement to furnish bank guarantees for the tax will pose challenges for the OMCs as it will affect their working capital.

OMAP stressed in the letter that due to the regulated formula governing the determination of prices for diesel, gasoline, and other products, the incorporation of any new component necessitates its inclusion in the pricing formula. The association sought prompt measures to address the issue at the earliest.

In response, OGRA asked the OMAP to approach relevant government forums, saying, "OGRA has nothing to do with additional tax/cess as it is a taxation matter of a provincial government on the goods entering in the province." However, OGRA said it was sending the matter to the federal government for information and review.