LAHORE: The Oil Marketing Association of Pakistan (OMAP) has expressed concerns about the recent budget announcement and its effects on the petroleum industry, a vital component of the national economy.
In a letter to the Chairman of the Federal Board of Revenue (FBR), OMAP Chairman Tariq Wazir Ali highlighted concerns regarding the sales tax on petroleum products, specifically the classification of POL products as exempt goods, which will significantly impact the operational expenses of the OMC sector.
The move will increase operating expenses and general expenditure, reducing the working capital of already cash-strained OMCs. Another important issue of Turnover Tax was also raised in the letter.
PM, OMAP official discuss key issues of oil marketing companies
Chairman OMAP said 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 PKR 1.02 per liter, which is unjustified in a regulated margin environment. Therefore, we request to reduce the turnover tax to 0.25%, 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.
In contrary if government insists to charge turnover tax 0.50% then it must be charged on margin instead of gross sales. He also raised concerns regarding the Proposed Increase in Petroleum Levy. ‘In the recent budget proposal to increase the petroleum levy by PKR 20 per liter, raising it from PKR 60 to PKR 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 supplier to charge zero percent sales tax to OMCs.
OMAP urged the FBR to reconsider the proposed decisions and adopt a balanced approach that considers the health of the oil marketing sector, consumer interests, and economic stability.
Copyright Business Recorder, 2024
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