Refineries decry imposition of duty, taxes

The country’s all the five oil refineries have protested over imposition of duties and taxes on crude oil and violation of commitments by the government for incentives for upgrade and modernisation.

They have asked the government to honour commitments it had made with the refining sector as part of the new policy for petroleum refining finalised recently and awaiting formal approval and announcement.

In a joint letter to the Ministry of Energy Petroleum Division, all the five refineries have noted that many clauses in the Federal Budget 2021-22 were “not aligned to the consensus between Ministry of Energy (MoE) and refineries and are counterproductive” to the agreed objectives.

The refineries have pointed out that objective of the collectively agreed incentive package under the refining policy was to ensure sustainability of existing refineries in the face of existential challenges and support cash generation for upgrading refineries’ production to environmental friendly Euro-V fuels and reduce furnace oil production. However, the budget 2022 had gone to the opposite direction.

Criticising the imposition of 2.5pc customs duty on crude oil, the refineries said the two sides had agreed before the budget to keep the customs duty on crude oil at zero being a raw material for refineries. This was also in line with other industries where import of raw material has been exempted from application of customs duty.

“This custom duty on crude oil will increase the cost of production and will negatively impact refineries’ profitability”, they said, adding consequently this will significantly reduce the cash generation for upgradation projects unless allowed to pass on to the consumer.

Secondly, the 17pc sales tax proposed on crude under the budget for next year would not yield any additional revenue for the government as it was adjustable. However, it will create significant working capital issues in already financially stressed industry. It is estimated that this will create an additional working capital requirement of approximately Rs10bn. This will also increase financial charges and erode profitability of refineries. Furthermore, this will reduce cash generation required for upgrades.

Thirdly, under clause 126 B (b) of second schedule of the Income Tax Ordinance, tax holiday was already available to existing refineries for the purpose of upgradation, modernisation or expansion project. It was agreed as part of draft refining policy by two sides before budget that period of tax exemption of 10 years would be mentioned in this clause for the purpose of clarity and bringing it in the line with the incentive proposed in the draft refining policy. Contrarily, the budget 2022 has proposed that the tax holiday would be applicable on upgrades to deep conversion refinery’s project of at least 100,000 barrels per day (bpd) capacity. “This will exclude all of the existing refineries and is counter-productive to the objectives of the agreed package”, the refineries said.

Fourth, under clause 126B of second schedule of Income Tax Ordinance, a 20 year tax holiday was already available for new deep conversion refineries and it was agreed that this will be maintained. Unfortunately, budget has proposed the tax holiday applicable to new deep conversion refineries of at least 100,000 bpd capacity would be limited to 10 years. “This will discourage the much needed foreign investment in the refining sector”, the letter said.

The refineries hoped the other duty and tax exemptions like custom duty and sales tax on import of plant and machinery etc agreed under incentive package, for both existing refineries’ upgradation and investment in new refineries will be notified separately at the earliest.

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