Diesel sales: Oil ministry suggests doing away with deemed duty

Says refineries have failed to modernise plants with the help of this levy.

Zafar Bhutta December 03, 2013
Oil ministry says refineries have failed to modernise plants with the help of this levy. PHOTO: FILE


The Ministry of Petroleum and Natural Resources has asked the prime minister to remove the deemed duty on high speed diesel in line with the recommendations of a Judicial Commission following failure of oil refineries to implement the programme set by the government.

Oil refineries are charging deemed duty at the rate of 7.5% on diesel sales to generate funds for modernising their plants to meet international fuel standards.

The petroleum ministry has also turned down the demand of oil refineries, calling for full deregulation of the prices of petroleum products.

In a communication to Prime Minister Nawaz Sharif, the ministry said it was pushing ahead with a policy of controlled deregulation in a phased manner as recommended by the Judicial Commission of the Supreme Court of Pakistan.

The ministry has also provided various incentives to the refineries in an attempt to encourage them to go for expansion and modernisation of their plants. Of these, the refineries are enjoying 7.5% deemed duty on the sale of diesel.

Initially, the refineries were allowed to collect 10% deemed duty on diesel and 6% duty on kerosene oil, light diesel oil (LDO) and JP-4 in 2002. With the passage of time and keeping in view the profits earned by the refineries and a sharp increase in prices of petroleum products in 2008, the deemed duty on kerosene, LDO and JP-4 was removed. On diesel, the duty was slashed from 10% to 7.5% to shield the consumers from the impact of high prices.

Under a formula agreed with the government, the refineries were required to transfer the profit over and above 50% of their paid-up capital to special reserves meant for upgrading and modernising their plants and to offset future losses, if any.

“It is regretted that the refineries did not comply with their commitment to setting up the projects,” the petroleum ministry said.

During the tenure of the previous government, when Dr Asim Hussain was the adviser to prime minister on petroleum, the Economic Coordination Committee (ECC) had decided that refineries should open an Escrow account – a temporary pass through account held by a third party on behalf of the other two parties – and deposit the profit accumulated in the special reserves.

The account would be operated jointly by the refineries and the Finance Division and the amount would be used for investment purposes after approval of the petroleum secretary. However, “the refineries have not implemented the decision so far,” the ministry added.

According to the ministry, the concept of duty protection to the refineries is not supported as the Judicial Commission has objected to it and recommended the removal of the deemed duty. In view of the refineries’ past attitude towards setting up modernisation projects, the deemed duty on diesel should be reviewed, it said.

The ministry suggested that the proposal of full deregulation of petroleum prices needed careful examination and due consideration of the pros and cons with specific emphasis on the country’s environment. There should be some sort of check on fixing prices of petroleum products, it said.

The government has already allowed the refineries to charge the actual import price paid by Pakistan State Oil – the state-owned oil marketing giant – including import incidentals and wharfage, accommodation provided at a wharf for the loading, unloading, or storage of goods, excluding ocean losses.

Despite repeated attempts, the petroleum secretary could not be reached for comments.

Published in The Express Tribune, December 4th, 2013.

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