OCAC Seeks increase in OMCs Margin
Staff Report
Oil Companies Advisory Council (OCAC) has asked the government to increase margins of oil marketing companies (OMCs) following losses due to sales tax exemptions.
“We are writing to seek your immediate support 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 (OMCS),” OCAC general secretary said adding that the Industry is under severe stress due to multiple unresolved issues, most notably OMC margins revision since Sept 2023, unadjusted sales tax amounting to approximately Rs 73.48 Bn (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.Petroleum Minister Refuses to Meet Refineries Representatives
The impact of sales tax exemption from July 2024 is estimated to increase the cost base of the Industry by approximately Rs. 33 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 MEPD. Please find below the revised proposal to sustain our operations in at least the short run:
- Revision of OMC margins as per ECC decision and aligned mechanics with OGRA;
The following table:
| Particulars | Current Margin | Proposed Margin | Difference |
| 20 days stock cover-financing cost | 3.01 | 3.22 | 0.21 |
| Handling loss | 0.27 | 0.82 | 0.55 |
| Operating Expense | 2.92 | 4.09 | 1.17 |
| Total Expense | 6.20 | 8.13 | 1.93 |
| Gross Profit % (based on CPI) | 27% | 23% | |
| Gross Profit | 1.67 | 1.87 | 0.20 |
| Margin | 7.87 | 10.00 | 2.13 |
Please note that the above proposal is based on PSO’s cost, as approved by the Economic Coordination Committee (ECC) in September 2023. All items included in the proposed margin are already part of the current margin; however, maintaining a 20-day stock cover is a licensing 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 (21.91%) has been used for computation.
Handling losses occur during the storage and movement of motor fuels and are currently being recovered through margin. Operating Expenses are an integral part of the total cost structure and have been included in margin to ensure fair cost recovery. The Consumer Price Index (CPI) for Jul 23 Jun 24 over Jul 22 Jun 23 was 23.41% as published by Pakistan Bureau of Statistics. Accordingly, a profit of 23% has been incorporated in the margin.
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. We also recommend that a formula for OMC Margin be developed jointly by OGRA, MEPD, and the Industry. Furthermore, future margin revisions should be conducted annually in July based on this formula.,” OCAC said.
