By SKM
January 17, 2025
ISLAMABAD: Five refineries, one oil pipeline and, 22 oil marketing companies (OMCs) under the platform of Oil Companies’ Advisory Council (OCAC) have sought the intervention of Prime Minister Shehbaz Sharif as a last resort for resolution of the issue of sales tax exemption on petroleum products, a budgetary measure imposed in Finance Bill for FY25 that has virtually barred the initiation of the $6billion upgrade projects of refineries.
In the letter of the OCAC dispatched to the Prime Minister on January 15, 2025, Pak-Arab Refinery Company PARCO), Attock Refinery Limited (ARL), National Refinery Limited (NRL), Pakistan Refinery Limited (PRL) and Cnergyico PK Limited (CPL) mentioned that the Finance Act 2024-25 changed the sales tax status of petroleum products from zero-rated to exempt supplies which has led to disallowance of input sales tax claims, causing a substantial increase in operational and capital costs.
“The change in sales tax law is severely impacting the financial viability of our planned upgrade projects, infrastructure development, and day-to-day operations. The continuation of this exemption will result in significant erosion in profitability and severe financial strain on the Industry, jeopardizing the progress and sustainability of crucial capital-intensive projects essential for the uninterrupted supply of petroleum products nationwide thus nullifying the objectives of the Brownfield Refining Upgradation Policy which was approved by the government under your dynamic leadership in August 2023,” says the letter.
Despite continuous follow-ups over the past seven months and active coordination with the Ministry of Energy -Petroleum Division (MEPD), Oil and Gas Regulatory Authority (OGRA), Federal Board of Revenue (FBR), Ministry of Finance (MOF), and the Special Investment Facilitation Council (SIFC), the issue remains unresolved.
This matter is critical for the survival of the Industry in Pakistan, and its prolonged delay is causing significant challenges. We respectfully seek your urgent intervention to facilitate an amicable and swift resolution.
OCAC chairman Mr Adil Khattak who is also Managing Director of Attock Refinery Limited (ARL) while speaking to the Exclusivewaves.com.pk that consultation on Refineries Upgradation Policy was initiated in December, 2019, first draft was finalized in March 2021 and presented to Cabinet Committee on Energy (CCOE) in August, 2021. It took another two years till its approval government by the PDM in August, 2023.
After intense and prolonged consultation between the government, refineries, independent financial and legal advisory firms, the Policy for Upgradation of Brownfield Refineries was amended in February, 2024. The Policy, if implemented, will bring in US$5-6 billion investment to enable the Oil Refineries to undertake major upgradation projects to not only comply with Euro – V specifications but also increase production of deficit products of petrol and diesel by 100 % and 50 % respectively and also reduce production of furnace oil by 80 %, which because of drastically reduced demand in recent years often results in storage constraints forcing the refineries to reduce capacity utilization.
Unfortunately, implementation of the Policy remains stalled till this day due to one reason or another the latest hurdle being the 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. Numerous meetings have been held at the Petroleum Division, OGRA and FBR over the past six months but the issue remains unresolved. Even directives and deadlines given by the PM office and SIFC went unheeded.
Mr Adil Khattak, lashed out at that the inordinate delay in formulation, approval and now implementation of the Refineries Upgradation Policy has caused an estimated five billion dollars loss in terms of foreign exchange alone. This is in addition to the enormous opportunity loss to the refineries. “I personally don’t agree with some in the industry that the strong import mafia would not let the refineries upgrade and would rather have them shutdown. The delay can be attributed to various factors including lack of capacity and synergy in relevant departments and frequent changes in political leadership and bureaucracy.”
“In contrast India followed up its 2025 Vision for Energy Sector and today not only has the largest and most modern refining complexes but also exports petroleum products to countries with the most stringent environmental standards. It also enabled India to make the best out of the cheap Russian crude oil available,” Mr Adil reckoned.
However, the oil marketing companies in the same OCAC letter also sought the attention of the Premier for revision of OMCs margin saying that the margin revision was due in September 2024, however, the same has not been finalized as yet. In June 2024, OCAC had recommended the increase based on critical cost considerations, including financing costs of maintaining a 20-day stock cover, turnover tax, handling losses, demurrage costs, financing cost of unadjusted Sales Tax and operating expenses incurred by OMCs. The letter stressed for immediate revision of the margin which is essential to prevent further financial losses. Ends
