ISLAMABAD: The government has firmed up a five-point revised oil pricing formula, envisaging a fixed rate of general sales, dealers’ commission and companies’ margin on all products at current levels and complete deregulation of high octane, light diesel and jet fuels.
The formula, worked out by a committee of experts constituted on the instructions of the Supreme Court of Pakistan, also suggests replacement of deemed duty on diesel with a fixed processing fee and elimination of inland freight equalisation margin on all petroleum products. Under this formula, product prices would vary by Rs4-6 per litre across the country – cheaper in Karachi and higher in the upcountry.
Sources in the petroleum ministry said the formula would be presented to the apex court bench led by Chief Justice Iftikhar Mohammad Chaudhry on Dec 31 for a final decision.
The committee, headed by Secretary Petroleum Mahmood Salim Mahmood, comprises senior officials of the finance ministry, the Planning Commission, Oil and Gas Regulatory Authority (Ogra) and Federal Board of Revenue and representatives of oil marketing companies and refineries, Islamabad Chamber of Commerce and Industry and former Senator Rukhsana Zuberi.
The sources said the committee had proposed a fixed annual rate of general sales on petroleum products to ensure revenue collection target set in budgetary proposals, instead of a variable 16 per cent GST currently applicable on product prices and fluctuating with the trend in the international oil prices.
Likewise, the committee has also suggested fixed rates of dealers’ commission and companies’ margin in rupee term per litre capped at the current level.
This will, however, be done after completely deregulating petroleum prices to be calculated by oil marketing companies under the price build-up formula provided by the federal government.
Under the formula, inland freight equalisation margin (IFEM) currently charged on all products to keep prices uniform across the country would be done away with.
As a result, the companies would be free to fix product prices on the basis of transportation cost. This would mean that prices would be low in Karachi and adjoining areas and high in Punjab, the NWFP and northern areas.
A separate mechanism would be put in place to ensure that all marketing companies provided a part of their products for strategic reserves required by the defence authorities in case of removal of the IFEM
The committee has proposed to abolish 7.5 per cent deemed duty on diesel being given to local refineries.
They would, however, get a processing fee of $2 per barrel to refine crude oil. The committee suggested that refineries should also be given a guaranteed rate of return over and above the processing fee to preclude losses.
Another meeting of the committee will be held on Wednesday to work out the guaranteed rate of return, but ranging between five and 40 per cent. The meeting on Wednesday will also decide if diesel prices should be linked to Arab-Gulf averages or Singapore average prices.
The committee also suggested deregulation of high-octane blending component (HOBC), light diesel oil and jet fuels as recommended by Justice Bhagwandas Commission.
The sources said that the petroleum ministry had no objection to withdrawal of petroleum levy on petroleum products but the proposal had been vetoed by the ministry of finance because it guaranteed revenue of billions of rupees to the government.
The sources said local refineries were currently suffering huge losses because import prices of some products, like furnace oil, were lower than the crude price and put local refineries at a disadvantageous position. They said refineries had earned huge profits over the past eight years but faced a cumulative loss of about Rs24 billion during the current year.
The committee was given a 30-day deadline to finalise the revised pricing formula that protected interests of consumers and the industry in a fair manner.
The committee would need to satisfy the apex court about, among other things, ex-refinery prices, inland freight equalisation margin, unusual profits of refineries and marketing companies, taxation, deemed duty on petroleum products, dumping and margins of dealers and companies.
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