Petroleum Division hosts meeting on sales tax exemption

KARACHI/Islamabad: The Petroleum Division has convened a meeting of oil sector stakeholders to evaluate the impact of sales tax exemptions on petroleum products. This move comes after the Special Investment Facilitation Council (SIFC) urged authorities to expedite the signing of refinery upgradation agreements.

Industry insiders report that the meeting, scheduled for Tuesday (today), will include representatives from refineries, oil marketing companies, and the Oil Companies Advisory Council (OCAC). The Federal Board of Revenue (FBR) will host the discussion, focusing on the sales tax exemption issue that has delayed refinery upgradation agreements.

However, the oil sector remains sceptical about the meeting’s outcome, citing the need for a mini-budget to remove the exemption -- a step deemed unlikely in the current political and economic climate.

“The directives from the SIFC carry little weight, as past instructions from the council have failed to produce tangible results,” noted industry representatives. They also criticised the FBR meeting as an exercise in futility, pointing out that practical solutions, such as increasing the inland freight equalisation margin (IFEM), are being ignored.

“There seems to be a lack of seriousness among government authorities, which is delaying the signing of upgradation agreements,” they added. The Executive Committee of Special Investment Facilitation Council (SIFC) in its December 11 meeting had expressed dismay over the delay in actualising the Brownfield Refinery, 2023 owing to which the upgradation of the local refineries with $5-6 billion investment has not yet kicked off mainly because of the failure of the authorities to resolve the sales tax exemption on POL products. As per the minutes of the SIFC meeting, Secretary Petroleum raised concerns that the exemption of sales tax on petroleum products (petrol, kerosene, diesel and LDO) in the budget 2024-25 rendered upgradation & refinery operations apparently unviable, impacting overall project cost by $763 million, routine operations of refineries at risk and unsustainable.

The same SIFC meeting decided that the Petroleum Division will move a summary for extension of deadline for signing of implementation agreement for upgrade project beyond 22nd October, 2024 under refining policy by 10th January, 2025.

Now under the latest scenario, Ogra in its latest letter of December 26 available with The News, asked Attock Refinery Limited, National Refinery Limited and Cnergyico Pk Ltd tohave access to the petroleum division for the way forward as the date of the signingImplementation Agreements (IAs) has elapsed.

Adil Khattak, chairperson of the OCAC, when contacted, said that the continued delay in implementation of the Brownfield Refineries Upgradation Policy is the result of the typical bureaucratic attitude of passing the buck, meetings followed by more meetings but with no result.

The government’s reluctance to impose sales tax on petroleum products stems from fears of political backlash, leading refineries to hold off on finalising their upgradation plans. Industry leaders argue that the exemption undermines the financial viability of critical projects, infrastructure development and routine operations.

The continuation of this exemption is expected to erode profitability and impose severe financial strain on the sector, jeopardising capital-intensive projects essential for ensuring an uninterrupted supply of petroleum products. The exemption is estimated to increase operational costs for the oil industry by approximately Rs25 billion in the current fiscal year.

The Brownfield Refineries Upgradation Policy which took five years in the making was approved in August 2023, was amended in February 2024 but it is implementation was stalled due to exemption of petroleum products from sales tax in the Finance Act 2024 which deprived the refineries from claiming most of the sales tax paid at the input stage making not only their Upgradation projects unviable but also their current operations unsustainable. Even directives from the PM Office and the SIFC remain unheeded.

The SIFC, in its Executive Committee meeting of October 22, asked the relevant authorities to resolve this issue by November 10. The PM Office in itss letter dated November 11 directed that the sales tax be resolved within two weeks. The matter was also raised with the finance minister during his visit to the OICCI office on December 7, who assured to resolve it. The SIFC, in its December 11 meeting, directed the Petroleum Division to move a summary by January 15.

Under the Finance Act 2024, sales tax on motor spirit (petrol), high-speed diesel oil, kerosene, and light diesel oil remains exempt. According to the OCAC, this exemption disallows proportionate input tax claims, significantly inflating operational costs. In a letter to the petroleum minister, the OCAC warned of the adverse consequences of this policy on the industry’s sustainability and future growth.