Staff Report
ISLAMABAD:
Five oil refineries of the country are unhappy over not making already agreed incentives package part of the Finance Bill-2021-22 and asked Secretary Petroleum to realign the Finance Bill (FB) 2021-22 with the consensus already made between Ministry of Energy (MoE) and refineries.
In a letter to Secretary Petroleum, Dr Arshad Mahmood, country’s five oil refineries namely Attock Refineries Limited, BYCO Petroleum Pakistan Limited, National Refinery Limited and Pakistan Refinery Limited have requested to realign the originally agreed basis for achieving the objectives of refining industry sustainability and upgradation in the FB-21-22.
The objective of collectively agreed incentive package between MoE and refineries was to ensure sustainability of the 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.
As per refineries’ letter to Secretary Petroleum, the custom duty on crude oil being a raw material for refineries was agreed at zero. This was also in line with other industries where import of raw material has been exempted from application of customs duty. However, in the FB-22, the custom duty on crude has been proposed at 2.5pc. This custom duty on crude (raw material) will increase the cost of production and will negatively impact refineries’ profitability. Consequently, this will significantly reduce the cash generation for upgradation projects unless allowed to pass on to the consumers.
Similarly, 17% GST proposed on crude under FB-21-22 does not yield any additional revenue for the government as the same is 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. Furthermore, this will reduce cash generation required for upgrades.
About tax holiday on upgradation, the refineries 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, modernization or expansion project. And, it was agreed that period of tax exemption of ten years would be mentioned in this clause for the purpose of clarity and bringing it in line with the incentives proposed in the draft refining policy. Contrary to above, it is proposed in the FB-21-22 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 objective of the agreed package, said refineries letter.
Regarding tax holiday to new refineries, the refineries said that under clause 126 B of second schedule of Income Tax Ordinance, a twenty year tax holiday was already available for new deep conversion refineries and it was agreed that this will be maintained. And, it is proposed in the FB-21-22 that 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 foreign investment in the refining sector, reads refineries letter.
“We understand that other exemptions (including custom duty/sales tax on import of plant/machinery etc.) agreed under incentive package, for both refineries’ upgradation and investment in new refineries, will be notified separately,” said five refineries in a letter to Secretary Petroelum.
It is relevant to note here that a draft incentive package was prepared after extensive deliberation between the stakeholders consisting of commitment from refineries for upgradation.
