SIFC to address refinery upgrade deadlock

KARACHI: The Special Investment Facilitation Council (SIFC) is set to deliberate on the long-pending upgradation of brownfield refineries in its Executive Committee meeting scheduled for Wednesday (today).

According to the meeting agenda of the SIFC Executive Committee, the upgradation of refineries, delayed due to the sales tax exemption on petroleum products, will be a key focus.Under the Pakistan Refining Policy, refineries are required to sign upgradation agreements. However, the sales tax exemption on petroleum products has hindered these agreements. The Finance Act 2024 exempts sales tax on motor spirit (petrol), high-speed diesel, kerosene and light diesel oil, disallowing proportionate input tax claims and significantly raising operational costs.

With the government unable to impose sales tax on petroleum products due to fear of political backlash, refineries have hesitated to proceed with upgradation agreements. They argue that the exemption severely impacts the financial viability of upgrade projects, infrastructure development and routine operations.

“The continuation of this exemption will erode profitability and place severe financial strain on the industry, jeopardising critical capital-intensive projects essential for ensuring an uninterrupted supply of petroleum products,” the refineries recently informed the government. They estimate operational costs for the oil industry to rise by approximately Rs25 billion in the current fiscal year due to the exemption.

Refinery officials expressed scepticism about resolving the issue in the upcoming meeting, noting that the Petroleum Division missed an earlier SIFC deadline of November 12, 2024. They added that abolishing the sales tax exemption would likely require a mini-budget, which seems unfeasible in the current political and economic climate.

“We proposed that the government adjust Rs1.5-2 through the IFEM pool, similar to mechanisms for oil marketing companies,” officials said. They lamented the government’s inaction, which has stalled $4-5 billion in potential investments in the sector.

They also criticised the indecision of policymakers, which they believe is rendering the refinery policy ineffective. The meeting will also discuss Mubadala’s interest in the upgradation of Pak-Arab Refinery Limited (Parco). The UAE-based investor has been conducting a feasibility study to evaluate the project’s potential.