The multibillion-dollar plant upgrade projects of Pakistan's refineries are at stake as the government has yet to resolve the issue of sales tax exemption on supplies of petroleum products.
The refineries have planned investments of up to $5 billion in upgrading their projects to ramp up local production and meet 100% demand of the country. At present, these refineries meet 30% of the country's petrol requirement. With the adoption of the proposed policy, this coverage is anticipated to double in the next six years, reaching a substantial 60% of the total petrol demand following the installation of upgraded plants.
Similarly, for diesel supply, the refineries account for 50% of the country's requirement. In the next six years, it is projected they will be able to double their capacity, resulting in domestic production catering to 100% of diesel demand without the need for imports.
Industry experts concede that while the demand for diesel may rise 10% to 20% over six years, the nation's self-reliance is poised to avert the requirement for imports.
Officials estimate that through bolstering local production of petrol and diesel, Pakistan will save approximately $600 million in foreign exchange annually, which will translate into a substantial benefit of $1.2 billion for the economy within just two years.
Sources revealed that oil refineries, in a joint letter to Finance Minister Muhammad Aurangzeb, raised the issue of sales tax exemption on supplies of petroleum products. They pointed out that the matter had not been resolved after the passing of several months and that could hamper their expansion plans to make the country self-sufficient in refined petroleum products.
"On behalf of the oil refining sector in Pakistan, we wish to draw your kind attention to a pressing challenge currently faced by the industry. The Finance Act 2024 changed the sales tax status of petroleum products (petrol, high-speed diesel, kerosene oil and light diesel oil) from zero-rated to exempt supplies," the refineries said in their letter.
"This change has led to the disallowance of input sales tax claims, significantly increasing the operational and capital costs of local refineries."
They added that the amendment was severely impacting the financial viability of planned upgrade projects, infrastructure development and daily operations. "If this exemption continues, it will result in a substantial decline in profitability and place immense financial strain on the oil refining industry."
Furthermore, it threatens the progress and sustainability of crucial capital-intensive projects, undermining the objectives of the Brownfield Refining Upgradation Policy, approved by the government in August 2023.
"Despite continuous follow-ups over the past seven months and active coordination with the Ministry of Energy – Petroleum Division, the Oil and Gas Regulatory Authority and the Federal Board of Revenue, the issue remains unresolved," the refineries said, adding that the matter was critical for the survival of the oil refining industry and its prolonged delay continued to pose significant challenges.
They called for urgent intervention of the finance minister to facilitate a swift and amicable resolution. Additionally, "we request an urgent meeting with your esteemed self to discuss and resolve this critical issue."
The government took several years to approve the brownfield refining upgradation policy to boost the production of refined products by attracting billions of dollars in investment.
But the sales tax exemption has drawn criticism from the refineries, which are calling for addressing the issue. The government had assured to resolve the matter and in that regard several meetings were held. However, it has not yet been resolved.
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