KARACHI: Pakistan’s oil industry is expected to incur an additional Rs25 billion in operational costs during the current fiscal year due to a sales tax exemption introduced in the Finance Act 2024.
The Finance Act exempts sales tax on petrol, high-speed diesel oil, kerosene, and light diesel oil. This exemption has resulted in the disallowance of proportionate input tax claims, increasing operational expenses, according to the Oil Companies Advisory Council (OCAC) in a letter to Petroleum Minister Dr. Mussadik Malik.
The OCAC stated that the policy change negatively impacts the financial viability of upgrade projects, infrastructure development, and operations. It warned that continuing the exemption will reduce profitability and create financial challenges, potentially delaying critical capital-intensive projects necessary for maintaining the petroleum supply chain.
A standoff between Petroleum Minister Dr. Mussadik Malik and Secretary Petroleum Momin Agha has compounded the issue, delaying oil-sector projects, including refinery upgrade agreements and the Shell Gas policy. Industry officials have attributed the delays to disagreements between the two senior officials, prompting Prime Minister Shehbaz Sharif to intervene to resolve the matter.
The OCAC has requested a meeting with the petroleum minister to address the issue of margins for oil marketing companies (OMCs) on petroleum products. In September 2023, the OMC margin was revised to Rs7.87 per litre, with another revision due in September 2024. However, the latter revision has not been implemented. The OCAC proposed an increase of Rs4.78 per litre in June 2024, citing factors such as financing costs for stock cover, turnover tax, handling losses, demurrage charges, and other expenses.
In response, the Oil and Gas Regulatory Authority (OGRA) proposed a smaller increase of Rs1.35 per litre, including Rs0.5 per litre for digitising and automating fuel pumps. The total cost of digitisation exceeds Rs120 million, making Rs0.5 per litre insufficient. Excluding the digitisation allocation, OGRA’s proposal offers an effective increase of Rs0.85 per litre, significantly less than the OCAC’s recommendation and reflecting only an 11 per cent rise.
The OCAC highlighted challenges facing the oil industry, including petroleum product smuggling, high financing costs, sales tax exemptions, elevated turnover taxes, and insufficient OMC margins.
