FBR resists tax exemptions for refinery upgradation package amid IMF discipline

ISLAMABAD: The Federal Board of Revenue (FBR) is reluctant to grant tax exemptions on the incentives amount to be given to the refineries for their upgradation, a senior energy ministry official said on Thursday, citing the government’s commitment to the International Monetary Fund (IMF) discipline.

The FBR authorities argue that it is not feasible for the tax collecting agency to provide shelter from 46 percent taxation on the incentives amount to be collected through an ESCROW account, the official, who requested anonymity, told The News.

The issue is likely to be discussed at a crucial meeting between the government officials and the local refineries’ representatives on January 15, which aims to finalise the implementation agreements for the existing refineries to upgrade in the next six years to attain Euro-V petrol and diesel standards.

The meeting will be held amid the refusal of FBR to give exemptions from taxation on the government’s incentives amount to be collected by refineries, the official added.

Pakistan has been under an IMF programme since July 2023, which requires the country to implement fiscal and structural reforms, including broadening the tax base and reducing tax subsidies.

The meeting between them was earlier scheduled on Friday (January 12, 2024) but has now been postponed to January 15. The revised deadline for finalization of the implementation agreements is January 16, 2024. In case of no progress, the upgrade plan of the local refineries will be further delayed.

The refineries are of the view that if the FBR is allowed to tax the amount to be given to them under the incentives package, the said incentives amount which accounts for 25 percent would reduce to just 12-13 percent and it would hurt the upgradation plans firmed up by the refineries.

The refineries under their upgradation plans would arrange 75 percent financing on their own and 25 percent would come under an incentives package to be extended by the government in 6 years.

The official explained that the local five refineries will have to arrange 75 percent financing of $4.5 billion for their upgradation to ensure all fuels, as per Euro-V specification , in six years. However, the government, the officials said, would provide $1.5 billion of the total upgrade of refineries from the ESCROW account. This is how the total cost of the upgradation of five local refineries will stand at $6 billion.

The official said that in case FBR continues to stick to its stance in the meeting to be held next Monday, then the issue may be taken up in a court of law as the refineries want the incentives amount to be treated as a grant, not as revenue. And if the court declares the incentives amount as a grant, then FBR will have no option but to treat it as a grant and tax collecting authorities will not be able to tax the incentives amount. So much so , FBR authorities will have the face-saving argument before the IMF that courts have barred it from taxing the amount of the incentives to be given to the refineries.

More importantly, KPMG, the audit firm earlier hired by the government , has also submitted its report to the petroleum division , terming the continuation of 7.5 percent deemed duty on diesel after implementation of the upgradation policy in 6 years as demanded by the refineries justifiable.

KPMG also endorsed the refineries’ viewpoint that the FBR should not collect the 46 percent tax on the amount to be collected under incentives as per the policy for local refineries’ upgradation through ESCROW accounts. Refineries want the incentive amount to be treated as a grant, not revenue.

They said Pakistan Refinery Limited (PRL) has signed an upgrade agreement with the regulator within the stipulated time on November 15, 2023. The remaining refineries didn’t sign until the issues were resolved. The remaining four refineries - PARCO, Cnergyico Pk Limited, NRL, and ARL have linked their willingness to sign the implementation agreement with the inclusion in implementation agreements committed output, force majeure, termination, project relinquishment, duration of the agreement and arbitration and continuation of 7,5 percent deemed duty on diesel even after the upgradation gets completed. They also want no taxation of 46 percent on incentive amounts.