Saturday July 13, 2024

OMAP raises concerns over impact of taxes on petroleum industry

Chairman OMAP Tariq Wazir Ali said FBR should play role in preventing collapse of petroleum industry

By Our Correspondent
July 08, 2024
A representational image showing oil pump jacks can be seen operating at an oil field. — AFP/file
A representational image showing oil pump jacks can be seen operating at an oil field. — AFP/file

LAHORE: Oil Marketing Association of Pakistan (OMAP) has raised concerns regarding the taxation measures for the current financial year and its implications for the petroleum industry, which is a crucial component of national economy.

In a letter to Chairman Federal Board of Revenue (FBR), Chairman OMAP Tariq Wazir Ali said that FBR should play its role in preventing the collapse of the petroleum industry, which plays a vital role in the economic stability and development of Pakistan.

“We hope that the FBR will consider our concerns and recommendations seriously,” he added.

About 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 exempted goods rather than being charged at the standard rate of tax as it will have significant ramifications on the operational expenses of the OMC sector.

The move will have major implications on the operating expenses of OMC sector as previously the sales tax on freight and capital goods is adjustable.

In addition, general expenditure will also rise due to the unclaimable sales tax of 18 percent. For freight, the unclaimable sales tax of 15 percent and the unclaimable sales tax of 18 percent will become part of the cost hence would require additional requirement of funds. It will cut the working capital of already cash-strained OMC sector.

Keeping in view the above narrated facts, the supplies and services to oil marketing companies should be zero rated in the sales tax.

Another important issue of turnover tax was also raised in the letter.

Chairman OMAP said that the application of a minimum tax rate of 0.50 percent or turnover tax on 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 Rs1.02 per litre, which is unjustified in a regulated margin environment.

The letter said, “Therefore, we request to reduce the turnover tax to 0.25 percent so the OMCs 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 takes into account 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. If contrary, the government insists to charge turnover tax 0.50 percent, it must be charged on margin instead of gross sales.”

OMAP chairman also raised concerns over the proposed increase in petroleum levy. ‘In the recent budget proposal to increase the petroleum levy by Rs20 per litre, raising it from Rs60 to Rs80 per litre will have several detrimental impacts on oil marketing companies (OMCs) and the broader economy, which warrant careful reconsideration.

He said that the immediate increase in the petroleum levy will substantially elevate the cost of petroleum products. Given the competitive nature of the 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.

He said that 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 supplier to charge zero percent sales tax to OMCs.