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New oil pricing mechanism to cut OMCs, refineries profits

By Sajid Chaudhry

ISLAMABAD: Economic Coordination Committee (ECC) of the Cabinet in its next meeting will review the oil pricing mechanism to reduce the profit margins of oil marketing companies (OMC), refineries and inland freight margins.

This would help reduce the taxation burden on consumers as well as block the undue gains being enjoyed by such companies on the expense of national exchequer, Farrukh Qayum, secretary Ministry of Finance told Senate Standing Committee on Finance and Revenues Monday.

The profit margins were fixed when the oil prices were low and the gains of said companies were lower also on lower side. Now the oil prices have increased from $ 60 per barrel to $ 132 per barrel. This requires us to rationalize their profit margins to save the consumers as well as the national exchequer from losses.

He was of the view that rate of oil marketing companies would remain intact at 3.5 percent but the basis of its determination would be reduced from existing $100 per barrel to a level to be agreed in ECC meeting to benefit the consumers.

He clarified that Deemed Duty was levied in the year 2002-03 to provide proper rate of return on investment to the refineries and to increase their production locally from crude boil.

In the initial years Deemed Duty's impact was only Rs 2 billion and now with the increase in oil prices in the international market, refineries are getting the benefit of deemed duty to the tune of Rs 27 billion in July-April period of this fiscal.

Secretary Finance informed that Ministry of Finance has already initiated a process of review of the oil pricing mechanism and in this regard a presentation with the option of revenue neutral or with revenue would be given to the Minister of Finance before the ECC meeting.

Dr Ashfaq Hassan Khan, special secretary Finance opposed the elimination of all taxes on POL products and informed the committee that around the world taxes on POL products are being increased to limit their use and imports.

The use of POL products would further increase in case the government would continue to subsidize such in future. The government should be allowed to phase out POL subsidies so that the amount saved from this head could be spent on other useful purposes.

Ministry of Petroleum and Natural Resources and Federal Board of Revenue (FBR) expressed conflicting views on elimination of Deemed Duty of Rs 27 billion proceeds, which are being provided to the refineries as guaranteed rate of return on their investment.

During the meeting of Senate Standing Committee on Finance and Revenues, chaired by Senator Ahmed Ali, Abdullah Yusuf, Secretary General FBR proposed to the meeting that rate of Deemed Duty be reduced from 10 percent to 5 percent and the government be allowed to impose 5 percent duty on crude oil.

In this way a heavy rate of return being given to the refineries would be reduced by 50 percent and consumers would benefit. However, the refineries would be required to sacrifice for the benefit of consumers.

Implementing this proposal would protect the revenues of the government. Chairman FBR strongly defended the GST on import of POL products and said huge revenues were being generated from this head and this tax could not be exempted without any alternate source of revenue generation, which was not available.

G A Sabri, director general oil, Ministry of Petroleum and Natural Resources, while opposing the idea floated by chairman FBR, informed the committee that the refineries would be receiving less amount in the head of Deemed Duty, however, the revenues of the FBR would shoot up to over Rs 100 billion from customs duty, sales tax.

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