The week in focus

The high turnover tax is likely to deal a blow to the earnings of oil marketing companies, which are demanding a reduction in the tax rate. Some offshore firms are even threatening to pull out of the country, say experts.

The government, in the budget for fiscal 2010-11 announced in June, enhanced the turnover tax rate from 0.5 to one per cent. Energy sector companies had already been groaning under the burden of inter-corporate debt for the past few years and this increase in turnover tax has added to their woes.

However, the tax is likely to contribute much-needed tens of billions of rupees to the Federal Board of Revenue, which has already hinted that this year’s tax collection target of Rs1,667 billion will not be met. It has prepared a report asking the government to revise downwards the tax collection target to Rs1,604 billion, as the floods have compounded its problems.

On August 19, oil marketing companies broached the turnover tax issue with the government, but the meeting ended inconclusively. To reach a solution, another meeting has been scheduled for August 26 in Karachi, where representatives of the oil marketing companies (OMCs) will take up the matter with FBR Member Direct Taxes, Asrar Rauf. The industry hopes that a solution will be found eventually.

Low margins

“OMCs have low and fixed margins, set by the government, and the one per cent turnover tax will swallow 55 to 60 per cent of their profits,” commented Atif Zafar, an analyst at JS Global Capital Limited.

“Low margins mean they have to bear a heavy burden and that is why they demand deregulation of margins so that they can set the rates according to their needs,” he added.

During the last financial year, OMCs were paying either the 0.5 per cent turnover tax or 35 per cent corporate tax on profits, whichever was higher. However, these two almost remained the same.

Zafar said OMCs make sales in billions and the one per cent tax on turnover turns out to be a very large amount. “They face high sales, but low profits.”

Sales of Pakistan State Oil (PSO), the oil marketing giant, were Rs877 billion in the financial year 2009-10.

Chevron and Shell have threatened to withdraw from Pakistan if the tax rate is not slashed to 0.5 per cent.

Financial cost

A PSO official highlighted the company posted profits of Rs9.05 billion, which could have risen to Rs11 billion had turnover tax not been increased.

“The one per cent turnover tax will cause a dent of approximately 50 per cent to the profits and shareholders will have to bear the burden,” the official explained. Earlier, PSO paid 35 per cent tax on profits.

The official explained that the total financial cost of PSO was Rs9 billion in the last financial year, which was almost equal to the profits made by the company. “High inter-corporate debt has forced PSO to go for borrowing from banks, which swells the financial cost because of interest payments.”

PSO’s receivables stood at Rs135 billion, which was mainly owed by power producers. Its payables to refineries and international fuel suppliers totaled Rs110 billion.

On the other side, the FBR is hard pressed to boost its revenues. Last financial year, it missed the tax collection target of Rs1,380 billion, bagging around Rs1,330 billion.

Pakistan’s tax-to-gross domestic product ratio of 9.3 per cent is also said to be the lowest in the region and international creditors have stepped up pressure on the government to take measures for increasing the revenues.

the writer is incharge Business desk for the Express tribune

Published in The Express Tribune, August 23^rd, 2010.