Petroleum Division eyes $5bn refinery upgrade with sales tax on POL products

ISLAMABAD: To ensure the initiation of $4-5 billion investment in the refining sector, top policymakers have decided to remove the sales tax exemption imposed in the finance bill for FY2024-25 on high-speed diesel (HSD), petrol, light diesel oil (LDO) and kerosene.

This exemption had not only made the upgrade projects for local refineries economically unviable, significantly affecting the Internal Rates of Return (IRRs), but also threatened to negate the $1.6 billion incentive package that the government would extend over seven years. “This tax measure has severely impacted existing refining operations, putting new projects and $5 billion investment in the five refineries in jeopardy,” senior officials from the energy ministry told The News.

In response, officials from the Petroleum and Finance Divisions, along with the Federal Board of Revenue (FBR), have agreed to remove the sales tax exemption on these products. Instead, the government will propose a 5pc sales tax on Motor Spirit, HSD, LDO, and Kerosene. This is expected to cause a Rs10-12 per litre increase in the price of petrol and HSD. However, it will be offset by a reduction in the petroleum levy by an equivalent amount, ensuring that POL prices do not rise while also preventing any revenue loss.

If the prime minister does not agree to the 5pc sales tax, the proposal could be revised to impose a 3pc sales tax instead. Under this scenario, POL product prices would increase by Rs8 per litre. To counteract this, the government could reduce the petroleum levy by Rs8 per litre to ensure no increase in POL product prices.

In the coming days, the Petroleum Division is expected to present a summary to the Economic Coordination Committee (ECC) seeking approval for the 5pc sales tax on petrol, HSD, LDO, and kerosene to support refineries and oil marketing companies (OMCs). Once approved, the government may choose to enforce the sales tax either through the promulgation of an ordinance or through an act of parliament. If enforced via ordinance, it will require ratification by parliament within 120 days. “The Petroleum Division has made this decision after consulting with officials from Finance Division and FBR,” the officials said. Initially, refineries had sought the restoration of zero-rated status of petroleum products (MS, HSD, kerosene, and LDO) as of June 30, 2024. However, to accommodate the OMCs, refineries have now agreed to imposition of a 3-5pc sales tax on these products. This compromise will provide relief to OMCs, which are already grappling with Rs70 billion in stuck-up sales tax refunds with the FBR.