Sales tax exemption on POL: Oil refineries say lenders won’t help in upgrading plants

ISLAMABAD: The country’s refineries have told the government functionaries that their lenders would not extend loans for upgradation unless and until all hiccups, including sales tax exemption on petrol (MS), High-Speed Diesel (HSD) and light diesel oil (LDO), are removed.

“This has been communicated by the managing directors of Pak-Arab Refinery Company, Pakistan Refinery Limited, National Refinery Limited, Attock Refinery Limited and Cenergyico Pk Limited in the meeting of Working Group of Special Investment Facilitation Council,” a senior official, who was part of the meeting, told The News. “Apart from representation from refineries, top officials of FBR, Finance Ministry, Planning Commission, SIFC coordinator and Petroleum Division also took part in the meeting.”

The FBR chairman acknowledged the fault of imposing sales tax exemption in the Finance Bill 2024-2025 saying that refineries should have contacted the tax authorities when this measure was proposed in the budget. In response, the refineries replied that OCAC (Oil Companies Advisory Council) had written to the FBR, arguing this measure was detrimental to the upcoming investment of $4-5 billion under the amended brownfield refinery policy. They also said that tax authorities seemed to be working in silos instead of working out the budgetary measures by looping in relevant stakeholders and they should have kept in mind the contents of amended brownfield policy approved by the ECC and federal cabinet after inputs from the FBR.

The refineries representatives, the official said, in the meeting argued that the exemption of sales tax on MS, HSD and LDO has not only made the project to upgrade local refineries economically unviable, significantly affecting project internal rates of return (IRRs), but would also virtually neutralise the incentive package of $1.6 billion the government would extend in seven years. “This tax measure has cast a significant impact rendering existing refining operations unsustainable, putting new projects and $5 billion investment in the five refineries in the doldrums.”

In the meeting, it was noticed that oil marketing companies (OMCs) will also suffer because of this budgetary measure as the companies would also be trapped in refunds of sales taxes. The meeting decided that refineries and OMCs would make a joint presentation on the impact of sales tax exemption on $5 billion investment in upgrade projects, operations of prevalent forms of refineries and business of oil marketing companies. The official sources said that refineries and OMCs will submit a joint presentation with the DG Oil, which would be pitched before the SIFC apex committee for the final decision. “The options rest with the government functionaries, including reversing the sales tax exemption measure through parliament act as the government can do it with a simple majority, or restoring the zero-rated regime for the said POL products or imposing sales tax on the said products. Let’s see what decision the SIFC apex committee takes in its next meeting. The chief of army staff also attends the SIFC apex committee meeting,” the official said.

The official also disclosed that all the refineries have proposed to impose a three percent to five percent sales tax on the products immediately. The FBR said it was difficult at this stage; however, they would review it. “Tax authorities may need to go back to IMF as no amendment in the Finance Act is allowed,” the official said while quoting FBR officials.