Government plans to rename deemed duty as processing fee

After replacing petroleum development levy (PDL) with carbon surcharge on petroleum products, the government is planning to give cover to the much criticised "deemed duty" for oil refineries and rename it as "processing fee."
Sources revealed to the Business Recorder on Wednesday that the sub-committee of the Economic Co-ordination Committee (ECC) of the Cabinet had decided to increase deemed duty from current 7.5 percent to 10 percent, placing an upper cap at 80 dollars per barrel crude oil in the international market for oil refineries. These oil refineries include National Refinery Limited (NRL), Pakistan Refinery Limited (PRL), Attock Oil Refinery and Bosicor Pakistan Limited (BPL).
The sub-committee, headed by Advisor to the Prime Minister on Petroleum and Natural Resources Dr Asim Hussain, will submit its report to the ECC of the Cabinet for approval. The sources maintained that in the new proposed oil refinery policy, the government planned to rename deemed duty as "processing fee" to dupe the public as there had been intense criticism about the levy of deemed duty for oil refineries.
This duty was levied with the objective of allowing refineries to invest in development, but not a single rupee had so far been invested or a single plant to upgrade the projects established. Oil refineries have been enjoying the 10 percent deemed duty since 2002 that was reduced to 7.5 percent on July 31, 2008 when the oil prices shot up to 147 dollars per barrel in the international market.
In the proposed ex-refinery oil pricing formula, the ECC body has proposed upper cap at 80 dollars per barrel for 10 percent deemed duty. In the existing ex-refinery oil pricing formula, there is no cap for deemed duty and during the time of high oil prices in the international market last year, oil refineries had made billions of rupees profits.
The deemed duty was given to oil refineries to establish desulphuration plants, aimed at reducing sulphur content from one percent to 0.05 percent in high speed diesel (HSD) for the oil refineries. But these refineries have failed to set up plants to reduce the sulphur content.
The Judicial Commission, in its interim report submitted to Supreme Court last month, also noted that total consumption of HSD in the country was about eight million tons every year and, out of it, about 50 percent was imported while 50 percent was locally produced. Local refineries can only produce HSD, containing one- percent sulphur (inferior quality), while imported diesel contains 0.5 percent sulphur (superior quality).
The Judicial Commission further revealed that it was common knowledge that refineries in Pakistan had been charging the price for the higher quality, whereas they produced inferior quality diesel with one percent sulphur content, which was otherwise banned throughout the world.
Prior to 2002, all the refineries were guaranteed a minimum of 10 percent and maximum of 40 percent return on their paid-up capital. This guaranteed return formula was abolished in 2002 under deregulation policy. The new formula allowed the refineries 10 percent deemed duty on HSD, which was over and above the international market prices, the Judicial Commission said in the report.
According to sources, the Finance Ministry has agreed to provide financing for the projects to the oil refineries and the sub-committee also endorsed financing for desulpheration projects. The Finance Ministry had earlier proposed the upper cap at 70 dollars per barrel for the deemed duty, against the Petroleum Ministry''s proposal of 80 dollars.
The oil refineries have also submitted profits earned during 1998-2008. ARL, PRL, NRL, Bosicor and Parco earned profit, amounting to Rs 60.3 billion during the last 10 years. Parco earned a profit of Rs 40.218 billion during eight years. The NRL profit is Rs 7.397 billion; PRL: Rs 7.221 billion; ARL: Rs 5.120 billion; and Bosicor: Rs 419 million.