The government has finalised a draft of the oil refinery policy that envisages several tax exemptions and incentives to enable refineries to invest in upgrading their plants.
In the past 40 years, no new refinery has been set up in Pakistan, which needs a new plant that can process 400,000 barrels of crude per day to meet the country’s high petroleum demand.
Upgrading of the existing refineries can also lead to an increase in their installed capacity to cater to the consumer needs.
At present, Pakistan’s oil refineries are meeting 55% of the annual demand for petroleum products and saving foreign exchange of $1 billion. They utilise around 70,000 barrels of local crude and condensate per day. They say they are providing more than 100,000 direct and indirect employment opportunities and are making reasonable contribution to the national exchequer and the gross domestic product (GDP).
Unveiling the salient features of the much-awaited refinery policy, sources said that there would be a minimum customs duty of 10% on motor gasoline and diesel of all grades as well as imports of any other finished products for a period of six years from January 1, 2023 to December 31, 2028.
Refineries will be allowed to keep the 10% customs duty applicable to finished products in the ex-refinery price under the existing price mechanism or the regulated price mechanism from January 1, 2023 to December 31, 2028.
However, 2.5% of net taxes on diesel and 10% on gasoline would be deposited in a dedicated bank account of the respective refinery for plant upgrade purposes, sources said, adding that the customs duty above 10% would be returned to the Oil and Gas Regulatory Authority (Ogra) under the Inland Freight Equalisation Margin (IFEM) framework.
According to the draft policy, in case the pricing regime is deregulated, during the period from January 1, 2023 to December 31, 2028, the refineries will be allowed to retain the prevalent customs duty in the ex-refinery price.
If the existing pricing mechanism or a regulated pricing regime remains applicable after December 31, 2028, the applicability of prevalent customs duty to the ex-refinery price of finished products will be reviewed. In the event the pricing regime is deregulated after December 31, 2028, the refineries will be free to set prices of their products.
Deposits made by the refineries as per Clause 184.108.40.206 and 220.127.116.11 will be kept in a separate bank account, maintained by the respective refinery, with National Bank of Pakistan. These deposits and any associated mark-up will not be utilised for the distribution of dividends or the adjustment of losses or for any other general corporate purposes of the existing refineries.
Funds in this account will be available for withdrawal at the established milestones agreed with Ogra, post-financial close of the upgrading project for the respective refinery. Any duty on crude will be reimbursed through IFEM, according to the draft policy.
Subject to the applicable regulations of the State Bank of Pakistan (SBP) and after fulfilling all procedural requirements, the refineries will be allowed to open and maintain foreign currency accounts in relation to any export proceeds.
The policy proposes exemption from customs duty, surcharges, withholding taxes, general sales tax, any other ad valorem tax or any other levies/ duties on the import of equipment to be installed or material to be used in the refinery without any precondition of certification by the Engineering Development Board. The federal government will facilitate the grant of similar exemption from the provincial and local taxes.
Exemption will be available to foreign contractors or sub-contractors from the provincial and federal taxes with respect to the execution of services for construction, operations and engineering performed in Pakistan from outside of the country in relation to the upgrade project.
Refineries will be exempt from the withholding tax requirements under the Income Tax Ordinance 2001 on payments to be made to the non-resident persons (including the contractor or an associate of the contractor) on account of the purchase of machinery/ equipment to be installed in the project.
Published in The Express Tribune, January 26th, 2023.
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