PAKISTAN STATE OIL

Contribution of OMCs in the Economy of Pakistan

SUMMER INTERNSHIP 2011

Jawwad Akhtar Tax Department

7/27/2011

Pakistan economy is growing gradually. This growth demands higher energy consumption and consequently putting high pressure on countries economy. POL consumption in the country was recorded to be 20.8 million tons, as compared to 19.2 million tons last year. The primary reason for this 8% growth has been the increased consumption of Mogas and Fuel Oil. Consumption of Black Oil grew to 9.3 million tons - an increase of 14% over the preceding year. Black Oil demand picked up owing to supply constraints for natural gas. Reduced hydro-electric potential also contributed to rise in Fuel Oil consumption. This trend in Fuel Oil consumption is expected to continue in subsequent years. White Oil reported a slight increase from 10.0million tones to 10.2 million tones. During FY10 consumption of HSD decreased by 3%. During 2010, demand for motor gasoline increased by over 27% over the preceding year mainly due to 50% increase in cars sales and 44% increase in motor cycles sales, gas shortage in winters, one day holiday of CNG per week and extraordinary increase in use of generators duet frequent power outages. Pakistan mainly depends upon oil and gas resources to fulfill energy requirements .Indigenous resources of Oil are not enough to quench energy thirst of the growing economy. As a result Pakistan has to import large quantity of oil and oil based products from Middle East countries.

The Downstream Oil Sector (Refining, Marketing, and Distribution) plays a very significant role in Pakistan's economic development, ensuring uninterrupted supply of petroleum product to the country in order to keep the wheels of the economy moving. With an annual sales of Rs. 1 trillion, direct employment of over 100,000 people, indirect employment (transport sector) of another 24,000 persons, capital investment of over 30 billion Pak Rupees

over last 5 years, annual generation of taxes around Rs. 200 Billion, a world class IT infrastructure, skill sets ranging from Technical, IT, Finance, Sales, Marketing & HR, and plans initiated for provision of better product and better service, the Downstream Oil Sector is a significant contributor to the national well-being. There are a number of the members of Oil Companies Advisory Committee (OCAC) which are contributing to the national economy. These include refineries, oil marketing companies and oil distribution companies. Last one is majorly involve in pipelines and transportation of oil. Our main focus is on oil marketing companies. And the OMCs that are the member of OCAC are:

1. PAKISTAN STATE OIL CO. LTD. 2. ASKAR OIL SERVICES(PVT.) LTD. 3. ATTOCK PETROLEUM LTD. 4.BAKRI TRADING COMPANY PAKISTAN(PVT.)LTD. 5.CHEVRON PAKISTAN LTD. 6. HASCOL PETROLEUM LIMITED 7.OVERSEAS OIL TRADING CO. (PVT) LTD. 8. ADMORE GAS (PVT.) LTD. 9.SHELL PAKISTAN LTD. 10.TOTAL-PARCO PAKISTAN LTD. 11. ZOOM PETROLEUM LIMITED

In Pakistan transport sector in the biggest user of the petroleum products which accounts about 48 percent followed by power generation which uses about 36 percent, and industrial sector which has a share of 12 percent while remaining is shared by the residential sector. So as stated before, this is a huge sector in Pakistan and thus the taxes and duties that government levies on it is also a significant one. There are a number of taxes and duties that are imposed on petroleum product. This includes custom duty, sales tax, federal excise duty, petroleum development levy (PDL), etc. As the major portion of oil i.e around 75% is by imports and thus charged by custom duty. Custom duty is 10%. Thus every drop of imported oil is levied 10% by the name of custom duty by the government of Pakistan. The huge amount of imports and 10% duty at the import stage contributes significantly on the economy of the country. Then revenue that government acquires is by huge tax that government takes by the name of sales tax. Sales tax is currently 17%. This implies on both imported and local oil. The method is calculating sales tax is the same as calculating income tax i.e output minus input. So the petroleum price that government charges includes 17% sales tax. FED is charged mainly on lubricants. One more type of tax that government levies on petroleum product is the petroleum development levy (PDL). This levy is very unstable and variable. As the prices in international market keep on changing and the government has to keep the price stable in the country, or the government needs to get its revenue target, this tool is very practical and useful. PDL is not charged as a percentage to the price but it is charged in rupee term on per litre basis i.e. Rs/litre. In last few years, PDL is recorded as high as Rs 17 / litre and as low as Rs 0.7 / litre.

PSO being the major Oil marketing company of Pakistan contributes significantly in the national economy. It holds the combined market share (Black Oil & White oil) of more than 71 %, meaning that the company is also the highest tax payer in the industry. During FY10, PSO contributed Rs.175 billion to the government exchequer in the form of corporate taxes, excise duty, sales tax, import duty and petroleum development levy (PDL).