New oil refining policy awaits ECC approval

KARACHI: Secretary Petroleum Division has signed the Pakistan Oil Refining Policy for submitting before the Economic Coordination Committee (ECC) and the federal cabinet for approval, The News learnt on Friday.

The fiscal regime in the new refining policy envisages that there would be a custom duty of at-least 10 percent for six years on motor gasoline and diesel of all grades as well as imports of any other white product (finished products) used for fuel for any kind of motor or engine, effective from January 1, 2023 to December 31, 2028.

To give protection to the local refineries against the said products, they would be allowed to charge the prevalent custom duty in the prices of their products.

The baseline for calculating incremental revenue (over and above the existing tariff protection of 7.5 percent on diesel), would be based on Platts AG-FOB average price of previous week/fortnight for the respective product.

There would be no import duties/levies/regulatory duties and sales tax on import of crude oil with effect from July 1, 2023, the policy said.

Subject to the applicable regulations of State Bank of Pakistan (SBP) and fulfilling all procedural requirements, refineries would be allowed to open and maintain foreign currency accounts.

Exemption from levy of customs duties/levies, surcharges, withholding taxes, general sales tax, any other ad valorem tax or any other levies/duties on import of any equipment to be installed, or material to be used in the refinery without any precondition for certification by Engineering Development Board has also been granted. “Federal government shall facilitate for similar exemption of provincial and local taxes,” it submitted.

Exemption has also been granted to foreign contractors or sub-contractor from provincial or federal taxes with respect to execution of services for construction, operations and engineering performed in Pakistan from outside Pakistan, in relation to the project.

The refinery would be exempt from withholding tax requirements under the Income Tax Ordinance, 2001 on payments to be made to non-resident persons (including contractor or an associate of contractor) on account of purchase of machinery/equipment to be installed in the project.

“This exemption of withholding tax shall also be applicable on services for construction, operations and engineering performed in Pakistan by contractor or sub-contractor from outside Pakistan. These exemptions shall also be applicable for any withholding tax requirement, if any, under the provincial/local laws,” the signed policy said.

Under the policy, temporary imports by contractors/sub-contractors of all machinery, vehicles, plant and equipment, other materials and spares in connection with construction, setting-up, operation, maintenance and repair, which have to be repatriated after completion of the works, would be exempted from all customs duties, surcharges, sales tax, income tax or any other ad valorem tax/duties/levies on import, and would be released by customs authority on provision of a bond by the importer, for a defined time period of use.

It also laid down that existing refineries, to be eligible for the fiscal incentives provided in this policy for upgrade, should commit to upgrade within three (3) months after the approval of this policy.

The refineries should provide an undertaking to the Petroleum Division. The undertaking should include proposed timeline, potential configuration / units / size; the tentative product slate after up-grade (ensuring production of Euro-V motor gasoline/diesel; and minimising production of furnace oil), as well as all other relevant information required by the Petroleum Division to ensure compliance

Upon the receipt of undertaking, Petroleum Division would provide a waiver to the refinery to continue marketing its products, until the agreed completion date of the upgrade (not later than December 31, 2028).

The Petroleum Division would notify Euro-V fuel specifications within one month after approval of this policy. Refineries which do not provide such undertaking, would not get a waiver, and should not be allowed to sell their products in Pakistan if not meeting the notified fuel specifications, after June 30, 2023. However, refineries would be free to export the same.

Failure to meet the timelines provided by an existing refinery in the undertaking could initially result in a default notice by the Oil and Gas Regulatory Authority (OGRA) with an allowed cure period.

Failure to meet the milestones, even after the lapse of the cure period, would result in withdrawal of tariff protection and suspension of the waiver until the timelines were met, with the intent that the Refinery would not be allowed to market the inferior specification products in the country until it gets back on the agreed milestones and timelines, the policy read.