ISLAMABAD: The Oil Companies Advisory Council (OCAC) has sought increase in OMC margin by 27 percent to Rs10/litre from Rs7.87/litre to sustain operations in at least the short run.
In a letter to the Ogra chairman, OCAC Secretary General Syed Nazir Abbas Zaidi has requested immediate support of oil sector regulator for the long-overdue revision of OMC margin and recovery of sales tax-related costs, which is critical for ensuring the sustainability and viability of the oil marketing companies.
According to the OCAC, the industry is under severe stress due to multiple unresolved issues, most notably OMC margin revision since September 2023, unadjusted sales tax amounting to approximately Rs73.48 billion (April 22 to June 2024) and the exemption of sales tax on petroleum products, which continues to have a profound and detrimental impact on the industry’s financial health.
Despite repeated representations to the relevant quarters, this issue remains unaddressed.
The impact of sales tax exemption from July 2024 is estimated to increase the cost base of the industry by approximately Rs33 billion in FY 2024-25. This substantial cost escalation, without a corresponding recovery mechanism, is further eroding the financial viability of the industry and is hampering its ability to invest in infrastructure, maintain operations, and meet regulatory requirements.
Additionally, the Industry continues to face challenges due to smuggling, high turnover tax, insufficient margins, and other cost pressures. Given these challenges, it is imperative that the OMC margin be aligned with actual costs, as proposed by OCAC and discussed extensively with Ogra and Petroleum Division
According to the revised proposal OCAC has to sustain our operations in at least the short run.
According to OCAC, current margin of Rs3.01 per litre on 20 days’ stock cover- financing cost be increased by Rs0.21 to Rs3.22/litre. Handling loss be increased by Rs0.55 per litre from Rs0.27 to Rs0.82 per litre and operating expenses be increased 1.17 per litre to Rs4.09 per litre from 2.92 per litre. This implies that current margin be raised by Rs1.93 per litre to Rs8.13 per litre from Rs6.20 per litre.
The OCAC has further stated that gross profit % (based on CPI) be fixed at 23 per cent from existing 27 per cent. This indicates that current margin of gross profit will be increased by Rs0.20/litre from Rs1.67/litre to Rs1.87/litre.
The proposal is based on PSO’s cost, as approved by the ECC in September 2023. All items included in the proposed margin are already part of the current margin, however, the item –wise justification is as follows: (i) maintaining a 20-day stock over a licencing requirement, however, it ties up funds, leading to financing costs. These financing costs have been incorporated into the margin, average 1-month Kibor during July 2023 to June 2024(21.9 per cent) has been used for computation; (ii)handling losses occur during the storage and movement of motor fuels and are currently being recovered through margin; (iii) operating expenses are an integral part of the total cost structure and have been included in margin to ensure fair cost recovery and; (iv) the Consumer Price Index (CPI) for Jul 23 - Jun 24 over Jul 22 - Jun 23 was 23.41 per cent as published by Pakistan Bureau of Statistics.
Accordingly, a profit of 23 percent has been incorporated in the margin.
The OCAC is also of the view that recovery of costs attributable to sales tax exemption (July 2024 onwards), financing cost of unadjusted sales tax (April 2022 to June 2024) and demurrages on actual basis through IFEM for both OMCS and refineries.—MUSHTAQ GHUMMAN
