Govt turns down additional freight charges proposal

Oil industry is seeking adjustment to inland freight to reduce financial strain

Listen to article

ISLAMABAD:

The federal government has scrapped the proposal of collecting additional freight charges to ease financial pressure on the oil industry by raising the petroleum levy on oil products to fund canal and road projects in Balochistan.

The petroleum levy has been recently increased on petrol by Rs16.66 per litre and on high-speed diesel by Rs15.65 per litre to collect funds for implementing road and canal projects worth Rs370 billion in Balochistan.

Now, the total levy on petrol is Rs86.66 per litre and on diesel it is Rs85.65 per litre. Among other petroleum products, the levy stands at Rs80.17 per litre on high octane blending component, Rs18.95 per litre on kerosene oil, Rs15.37 per litre on light diesel oil and Rs60.17 per litre on E-10 gasoline.

According to sources, oil refineries and marketing companies have estimated that they will suffer a Rs34 billion loss during the current financial year due to sales tax exemption.

To reduce pressure, the Oil Companies Advisory Council (OCAC) – an industry lobby – has called for addressing the sales tax exemption issue.

In its proposals to the Federal Board of Revenue, the OCAC pointed out that the Finance Act 2024 had introduced sales tax exemption on petrol, high-speed diesel, kerosene oil and light diesel oil. These fuels were previously zero-rated that allowed input tax claims. However, with the exemption, the input tax has started accumulating.

Since prices of these petroleum products are regulated by the government, the denial of input tax has increased the industry's operating and infrastructure costs. Its impact for tax year 2025 is estimated at more than Rs34 billion.

Sources said that the oil industry, in consultation with the Petroleum Division, had worked out a proposal, according to which Rs4 per litre would be adjusted in the inland freight equalisation margin (IFEM), which would be passed on to refineries to offset the loss caused by sales tax exemption.

The Petroleum Division also prepared a summary for presentation to the prime minister and other relevant forums for approval. However, the government turned down the proposal of Rs4-per-litre adjustment in IFEM, prompting an outcry from the oil industry.

The industry has also approached the government for abolishing the super tax and other levies. It underlined the need for addressing the sales tax exemption matter in the federal budget for 2025-26 to help the sector operate smoothly.

OCAC proposed that petroleum products should be again placed under the taxable regime to ease the burden. It argued that global and domestic economic pressures had already strained formal businesses. The super tax, originally a one-off levy, has continued to remain in place, which threatens the viability of documented companies. OCAC called for its removal in 2025-26.

The industry body also objected to the minimum tax levied under Section 113 of the Income Tax Ordinance, citing that prices and margins for petroleum products were fixed by the government. These margins encompass establishment, development and operating costs, yet the current minimum tax consumes roughly 16% of the fixed margin of oil marketing companies. It recommended reducing the minimum tax applicable to refineries and OMCs to 0.25%.