Refineries raise observations over Finance Bill

Say certain amendments may hurt efforts to generate cash flow

Zafar Bhutta June 15, 2021


Oil refineries have raised objections on certain amendments proposed in the Finance Bill 2021-22, saying that it may hurt efforts of the government and industry to generate cash flow for upgrading projects.

In a joint letter sent to Petroleum Secretary Dr Arshad, refineries appreciated the support and sincere efforts, which enabled certain incentives relating to refineries to become part of the finance bill.

They were of the view that the objective of the collectively agreed incentive package was to ensure the sustainability of existing refineries in the face of existential challenges and support cash generation for upgrading refineries’ production to environmentally friendly Euro-V fuels and reduce furnace oil production.

“We would like to bring to your kind notice that certain clauses in the Finance Bill 2022 are not aligned to the consensus between the Ministry of Energy and refineries and are counter-productive to the aforementioned objectives.”

They have highlighted key variations and their consequences that may hurt the plans of upgrade of refineries.

Custom duty on crude oil

The customs duty on crude oil, a raw material for refineries, was agreed to be at zero. Refineries said that this was also in line with other industries where import of raw material has been exempted from the application of customs duty. However, in the finance bill, customs duty on crude has been proposed at 2.5%.

This levy on crude (raw material) will increase the cost of production and will negatively impact refineries’ profitability. Consequently, this will significantly impact cash flow unless the burden is allowed to be passed on to the consumer.

GST on crude oil

The letter further highlighted that the proposed GST of 17% will not yield any additional revenue for the government, however, it will create significant working capital issues in an already financially stressed industry. This will also increase financial charges and erode the profitability of refineries.

Tax holiday on upgrade

Under clause 126 B (b) of second schedule of the Income Tax Ordinance, refineries said that tax holiday was already available to existing refineries for the purpose of upgrade, modernisation or expansion project.

It was agreed that period of tax exemption of ten (10) years would be mentioned in this clause for the purpose of clarity and bringing it in line with the incentive proposed in the draft refining policy. Contrary to it, the finance bill proposes 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 the existing refineries and is counter-productive to the objectives of the agreed package.

An official of the Petroleum Division also said that the imposition of GST on crude imports will not result in any additional revenue for the Federal Board of Revenue (FBR). Refineries will pay GST at the import stage (input tax), but the government will offset GST they collected from sales (output tax) during the same month - thus, no additional revenue will arise.

Refineries that export naphtha and possibly furnace oil will face GST refund issues on exports, resulting in severe liquidity challenges due to delays in refunds.

This levying GST will also adversely affect efforts of the government to improve ease of doing business in the country.

Published in The Express Tribune, June 15h, 2021.

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