Proposal for 2-3pc sales tax on POL products to remove exemption

KARACHI: The country’s oil sector has proposed that the government impose a sales tax of two to three percent on petroleum products in lieu of the current sales tax exemption. Industry insiders indicate that if the government accepts this proposal, retail prices for petroleum products will rise.

The Oil Companies Advisory Council (OCAC), which represents refineries and oil marketing companies (OMCs), recently submitted this proposal in a letter to the Petroleum Division of the Ministry of Energy.

The exemption of sales tax outlined in the Finance Bill 2024 has sparked strong criticism from the oil sector, which argues that it negatively impacts the industry. According to the oil body, the annual adverse effect of this exemption on OMCs is estimated to be Rs30-35 billion, encompassing both operational and capital expenditures.

The oil body noted that while the Oil & Gas Regulatory Authority (Ogra) has incorporated the freight-related portion of this impact into the inland freight equalization margin (IFEM), approximately 50 percent of the cost remains unadjusted and directly burdens OMCs.

The issue of the sales tax exemption on petroleum products has been brought before the Special Investment Facilitation Council (SIFC), which has discussed the oil sector’s concerns. Following a meeting of the SIFC’s working group, the director-general of oil at the Petroleum Division has been tasked with preparing a working paper in consultation with the oil sector.

According to industry sources, the problem emerged after sales tax was exempted in the current budget, whereas it had been zero-rated in previous years. Previously, zero-rating allowed companies to reclaim input taxes on production-related services and equipment.

The sector also noted that reintroducing a sales tax of two to three percent would likely necessitate a mini budget, which the government seems reluctant to consider. The Rs2 per litre recovery from IFEM is making slow progress because Ogra is hesitant to take on the additional workload of calculating and reimbursing this amount to refineries.

The refining sector, in particular, has expressed significant concerns about the sales tax exemption, which it claims threatens its plans to invest $4-5 billion in upgrades under the refining policy. Attock Refinery Limited has even refused to sign an upgrade agreement until the sales tax exemption is removed.