OMCs welcome reversal of tax rate
Finance ministry announces reversal of the turnover tax rate to 0.5 per cent.
KARACHI:
Cash-strapped oil marketing companies (OMCs) breathed a collective sigh of relief after the finance ministry announced the reversal of the turnover tax rate to 0.5 per cent. In the fiscal budget 2010-11, the government had increased the rate from 0.5 per cent to 1 per cent.
OMCs had been pursuing a reversal of the tax rate to the previous half a per cent, arguing that their profitability had been severely jeopardised. In an interview to The Express Tribune MD Pakistan State Oil (PSO) Irfan Qureshi had said: “If the margins of OMCs are fixed by the government, then it should not tax gross revenues.”
PSO officials reacted positively to the decision. “The turnover tax had significantly impacted profitability and taxes peaked as high as 72 per cent of profits when the rate was increased to one per cent,” said the company’s spokesperson. “Second quarter results will improve as a consequence of the downward revision as taxes already paid will be returned.”
However, the official contended that even though profits would go up, there will be no impact on liquidity.
“This is a very positive step that will hopefully improve profitability,” Shell spokesperson Abid Ibrahim said, though he was quick to point out that margins were still fixed for all OMCs.
Ibrahim contended that deregulation of prices must be implemented to provide incentive for further investment and to foster competition in the industry.
“High financing costs had to be incurred due to the higher tax rate and these expenses will now come down,” said Ibrahim.
Analysts expect the reversal to bode well for equity prices of the two giants of the oil marketing sector.
The reversal in turnover tax rate will “have a significant impact on PSO and Shell while our assumption for Attock Petroleum Limited (APL) remains unchanged as its corporate tax expense stands higher than its turnover tax expense,” commented Ali Taufiq, analyst at BMA Capital.
Khurram Shehzad, Research Head at InvestCap, described the change as a prudent measure, and possibly the first of its kind.
“The high turnover tax was a disincentive for fresh investments from OMCs and gave the government limited help at the cost of consumers,” he explained.
Although analysts have touted the reversal in tax rate as a beneficial move for oil marketing companies, the OMCs are already eyeing deregulation of fuel prices as the next bone of contention with the government.
Published in The Express Tribune, November 3rd, 2010.
Cash-strapped oil marketing companies (OMCs) breathed a collective sigh of relief after the finance ministry announced the reversal of the turnover tax rate to 0.5 per cent. In the fiscal budget 2010-11, the government had increased the rate from 0.5 per cent to 1 per cent.
OMCs had been pursuing a reversal of the tax rate to the previous half a per cent, arguing that their profitability had been severely jeopardised. In an interview to The Express Tribune MD Pakistan State Oil (PSO) Irfan Qureshi had said: “If the margins of OMCs are fixed by the government, then it should not tax gross revenues.”
PSO officials reacted positively to the decision. “The turnover tax had significantly impacted profitability and taxes peaked as high as 72 per cent of profits when the rate was increased to one per cent,” said the company’s spokesperson. “Second quarter results will improve as a consequence of the downward revision as taxes already paid will be returned.”
However, the official contended that even though profits would go up, there will be no impact on liquidity.
“This is a very positive step that will hopefully improve profitability,” Shell spokesperson Abid Ibrahim said, though he was quick to point out that margins were still fixed for all OMCs.
Ibrahim contended that deregulation of prices must be implemented to provide incentive for further investment and to foster competition in the industry.
“High financing costs had to be incurred due to the higher tax rate and these expenses will now come down,” said Ibrahim.
Analysts expect the reversal to bode well for equity prices of the two giants of the oil marketing sector.
The reversal in turnover tax rate will “have a significant impact on PSO and Shell while our assumption for Attock Petroleum Limited (APL) remains unchanged as its corporate tax expense stands higher than its turnover tax expense,” commented Ali Taufiq, analyst at BMA Capital.
Khurram Shehzad, Research Head at InvestCap, described the change as a prudent measure, and possibly the first of its kind.
“The high turnover tax was a disincentive for fresh investments from OMCs and gave the government limited help at the cost of consumers,” he explained.
Although analysts have touted the reversal in tax rate as a beneficial move for oil marketing companies, the OMCs are already eyeing deregulation of fuel prices as the next bone of contention with the government.
Published in The Express Tribune, November 3rd, 2010.