In the absence of a viable and comprehensive plan to free the energy sector from the shackles of circular debt, the oil marketing companies would enjoy the little respite they can get from the abolishment of the turnover tax regime.
First, it makes sense to get rid of the turnover tax on the basis of the liquidity crunch of the OMC sector; the billions of rupees doled out as finance cost and razor thin profits, and sometimes losses, of the oil marketers are enough to term this levy excruciating. This is mainly because of slim margins on regulated petroleum products.
Second, the concept of turnover tax militates against general taxation rules. Tax is on profits; the idea of minimum taxation, whether there is a profit or loss, is flawed, as well as an additional burden on the entities.
Third, though it might look like a quick source of revenue with the rumours of FBR pushing for an increase in the turnover tax rate from 0.5 to one percent making rounds, what it fails to address is the main cause of low revenue collection - the narrow tax base.
With the fiscal budget 2013-14 coming up shortly, the real test of the policymakers begins. In ideal circumstances, turnover tax should be completely eliminated. However, the social and economical implications do not allow for an abrupt overhaul.
The government is cash strapped, and both common sense and rational thinking justifies a gradual transition in the minimum tax regime be it the rate cut or levying the tax on gross profits.
This will not only help the low-margin companies in the oil marketing sector combat the energy crisis, but will also allow them to invest in expansionary projects, restructure and hence report increase in pre-tax net profits.
Though a lot is riding on PML-Ns pro-business and pro-investment reputation, it is more about fixing the lacunae in the law and improving enforcement.
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