Indecision holds up crucial refinery upgrades

ISLAMABAD: As the government struggles to find a solution to the sales tax exemption imposed by the FBR, the critical $5-6 billion investment for refinery upgrade projects hangs in the balance, according to senior Energy Ministry officials.”

“All the endeavors to develop the consensus decision at the SIFC (Special Investment Facilitation Council) between refineries’ representatives, officials of petroleum and finance divisions and FBR have ostensibly gone down the drain as after working out some options, FBR top notches have vetoed them saying they would affect the revenue and require IMF approval.”

The summary, officials said, seeking the imposition of 5 percent sales tax on POL products (Petrol, HSD, Kerosene oil, LDO) from ECC (Economic Coordination Committee) is lying at the Petroleum Division as the petroleum minister has proposed a 1 percent sales tax. “Approving the said summary means an increase in prices by Rs14-15 per litre each. The minister, however, has agreed to restore the zero rate status of the refinery sector on these petroleum products.” “The zero-rated status is ok with the refineries, but oil marketing companies want the imposition of sales tax because its Rs70 billion is stuck with FBR as refunds which is why they want the sales tax to avoid such future. In case of 1 percent sales tax enforcement, the loss of OMCs would be recovered from the Internal Freight Equalization Margin (IFEM) Fund as they were factually seeking 5 percent sales tax imposition on POL products.”

However, FBR officials have backed out from the 1 percent sales tax proposal arguing this may expose the refineries to a loss of Rs17 billion per year and Rs40 billion in the case of oil marketing companies. The total loss would be Rs57 billion per year. “As the losses are significant, FBR needs the prior approval of the IMF before the imposition of the sales tax.” The FBR contends that GST imposition would materialise only when the Fund gives the green signal as the finance division is seeking IMF’s new loan programme.

The official inferred from the FBR viewpoint that $ 5-6 billion investment in the upgrade projects of refineries may be further delayed because they are not ready to initiate them arguing they have become economically unviable. This would significantly affect the Internal Rates of Return (IRRs) and also threaten to negate the $1.6 billion incentive package that the government would extend over seven years. “This tax measure has already severely impacted existing refining operations as well.”

Furthermore, except the Pakistan Refinery Limited (PRL), the officials said, the other refineries have not signed the implementation agreement with OGRA keeping the investment in limbo. “The government has earlier given the 6 months’ extension mainly to PARCO and Cnergyico Pk Limited to join the upgradation project. The extension is to expire on October 22. Let’s see if the government ensures that all refineries sign the implementation agreements before October 22 or not, otherwise under the policy, it will have to give another extension.”