Staff Report
ISLAMABAD:
Minister for Finance and Revenue Shaukt Tarin on Tuesday assured all five of the country’s oil refineries about meeting of their demands except 17 per cent General Sales Tax (GST) proposed on crude under the budget for next fiscal year 2021-22.
A meeting to review progress on draft Pakistan Oil Refining Policy 2021 was held at Ministry of Finance on Tuesday. Federal Minister for Finance and Revenue Shaukt Tarin chaired the meeting. The meeting was attended by Federal Minister for Power, SAPM on F&R, SAPM on Power, Secretary Finance, Secretary Petroleum, DG Oil and representatives of oil refineries.
According to sources, finance minister Shaukat Tareen has assured the refineries to meet their all demands except a proposal to remove 17percent GST condition from the incentive package for refineries.
Sources said that Shaukat Tarin has also assured approval of custom duties on MS and HSD to be at 10% as already proposed in Finance Bill 21-22. Customs duty on crude oil will remain at 2.5 % for one year only in 21-22 and will be zero in the next budget.
Speaking on the occasion, the Federal Minister for Finance and Revenue Shaukat Tarin said that the Prime Minister is very keen about progress in all sectors of the economy for sustainable growth. Energy sector is indeed very crucial to keep the cycle of economy moving with ever growing momentum. Oil refineries in Pakistan have been pillar of energy security of the country and now the government wants the domestic oil refineries to upgrade themselves at par with international standards. Modernization, efficiency and environment friendliness should be common characteristics of all oil refineries in Pakistan. Government of Pakistan is willing to extend all support permitted under law and policy framework to this effect.
The representatives of oil refineries said that the oil refinery industry is very happy due to support and patronage provided by the government. They added that the entire oil refinery sector is ready to upgrade itself to international standards and a complete framework is ready in this regard. With the approval of new Oil Refining Policy, the journey towards international standards will start.
The Federal Minister for Finance and Revenue directed the participants to work jointly to overcome all the hurdles in the formulation of new Oil Refining Policy 2021 so that same may come into effect at the earliest.
Earlier, all five of the country’s oil refineries had objected to the imposition of duties and taxes on crude oil and absence of incentives for the industry, demanding that the government should realign the Finance Bill FY22 with the consensus between them and the Ministry of Energy (MoE) to ensure the sustainability of existing refineries.
In a joint letter to the Ministry of Energy Petroleum Division, all the five refineries including Attock Refineries Limited, BYCO Petroleum Pakistan Limited, National Refinery Limited and Pakistan Refinery Limited 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 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 consumers.
Similarly, the letter added that 17 per cent GST proposed on crude under the budget for next fiscal 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 increase financial charges and erode profitability of refineries, in addition to reducing cash generation required for upgrades.
Regarding the tax holiday on upgradation, the letter said that 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.
Furthermore, 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.
It is relevant to note here that a draft incentive package was prepared after extensive deliberation between the stakeholders, with the commitment of refineries for upgradation within five years to produce environmental friendly Euro-V spec products and reduce furnace oil production. After this duration, refineries will be in a position to operate at optimal capacity with technological enhancement, which will result in forex saving.
Documents available with this scribe state that the proposed tariff protection formula would contribute revenue to refineries up to 40pc only and remaining 60pc investment would be arranged by refineries at their own, about $3.5 billion total cost, for upgrading activities during the next five years.
As per estimates, the net revenues for the Federal Board of Revenue (FBR) will remain neutral due to tariff revision coupled with growing demand for petroleum products in the country.
It is pertinent to mention that the last Petroleum Policy was announced in 1997. In the past 49 years, only two refineries have been commissioned in the country due to limited incentives.
In view of discontinuation and reduction of the various incentives and pricing formulas from time to time, protection available to local refining industry has significantly eroded; coupled with low international margins, these have badly affected the profitability of refineries, causing heavy losses and thereby, putting the survival of local industry at stake and are now at the verge of closure.
The prevailing pricing mechanism for local refineries is regulated and linked with the international market with low tariff protection.
Despite various constraints, refineries kept on upgrading to produce Euro-II/Euro-III standard products. Accordingly, their survival is now at risk unless fiscal support and adequate tariff protection is urgently provided.
