OMCs pay significantly higher than corporate tax rates

Oil marketing companies (OMCs) are paying significantly higher than the 29 percent corporate tax rate in the country because of anomalies in turnover taxation, an independent think-tank said on Tuesday.

In a report, Islamabad Policy Institute (IPI) said the turnover tax is effectively negating the provisions of Section 57 of the Income Tax Ordinance, 2001 and is putting a significant additional financial burden on the long-term viability of the regulated petroleum sector.

“Although the profit margin of petroleum dealers, petroleum agents and distributors is higher than that of OMCs, the petroleum dealers operating petrol pumps are exempt from this tax and petroleum agents are enjoying low rate of 0.25 percent,’ IPI said in a report. “This is discriminatory, arbitrary and absurd as in similar sector the persons with high profit margin pay no/lesser percentage of tax on turnover while the OMCs having fewer profit margins suffer higher rates.”

Citing examples of other sectors like dealers, sub-dealers, retailers and wholesalers of fast-moving consumer goods, sugar, cement and edible oil that have been allowed discounted rate of 0.25 percent under Clause (24D) of Part II of the second schedule to the Income Tax Ordinance, 2001, the IPI said petrol and HSD also fell in the definition of fast-moving consumer goods and needed to be treated at par with regards to rate of turnover tax.

IPI proposed a review of the turnover tax on the oil marketing companies in the upcoming federal government’s budget for FY2021/22. “The tax is affecting the viability of petroleum industry’s downstream sector. The tax is discriminatory, arbitrary and against the spirit of tax laws.”

Ilyas Fazil, who authored the report, said OMCs, are already operating in a very challenging fiscal environment. Turnover tax is currently levied on the OMCs at the rate of 0.75 percent as the minimum tax under Section 113 of the Income Tax Ordinance 2001.

Turnover over tax is applied on the cumulative per liter price of petrol and HSD, which comprises taxes like petroleum levy and sales tax, besides distribution costs. Only fixed margin is the turnover/revenue of the OMCs. For the purpose of minimum tax u/s 113 of the Ordinance, only fixed margin needs to be considered, he said.

The fixed margin for OMCs on petrol and HSD in Rs2.97 against retail prices of Rs108.56 for petrol and Rs110.76 for HSD. The rate of 0.75 percent of turnover is excessive as the OMCs are bound to sell the goods on fixed margin which constitutes less than 3 percent of the turnover and where margin is less than 3 percent of the turnover (meaning gross profit lesser than 3 percent of turnover) imposition of minimum tax at the rate of 0.75 percent of the turnover is harsh and exorbitant. The objective of minimum tax is to require the companies which suffered loss or made low profit during a tax year to contribute reasonable amount in relation to their respective turnover towards the government exchequer during that year – something they would be entitled to adjust against normal tax liability of subsequent years.

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