FY2021-22: Oil refineries term four clauses of budget 'counterproductive'

ISLAMABAD: The country's oil refineries have termed four clauses of the federal budget 2021-22 as counterproductive, including imposition of 2.5 percent customs duty on crude oil. In a joint letter to the Secretary Petroleum Dr Arshad Mahmood, Byco Petroleum Pakistan Limited chairman, Attock Refinery Limited CEO, National Refinery Limited CEO, Pakistan Refinery Limited, and MD and CEO, and Pak-Arab Refinery Limited MD conveyed their concerns.

Appreciating the secretary petroleum for his support and sincere effort which enabled certain incentives relating to refineries to become part of the Finance Bill 2021-22 in such a short span of time, oil refineries are of the view that the objective of the collectively agreed incentive package was to ensure sustainability of existing refineries in the face of existential challenges and support cash generation for upgrading refineries' production to environmentally-friendly Euro-V fuels and reduce furnace oil production.

However, the refineries are of the view that certain clauses in the budget 2021-22 are not aligned to the consensus between the Ministry of Energy (MoE) and the refineries, and which are counterproductive to the objectives.

The key variations and their consequences will be as follows:

(i) Customs duty on crude oil, being a raw material for refineries, was agreed to be at zero. This was also in line with the other industries where import of raw material has been exempted from application of customs duty. However, in the budget 2021-22, the custom duty on crude has been proposed at 2.5 percent. 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 upgrade projects unless allowed to pass on to the consumer; (ii) 17 percent GST proposed on crude oil under federal budget 2021-22 does not yield any additional revenue for the government as it is adjustable. However, it will create significant working capital issues in already financially-stressed industry. It is estimated that this will create an additional working capital requirement of approximately Rs10 billion. This will also increase financial charges and erode profitability of refineries. Furthermore, this will reduce cash generation required for upgrades; (iii) 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 upgrade, modernization or expansion project. It was agreed that period of tax exemption of 10 years would be mentioned in this clause for the purpose of clarity and bringing it in line with the incentive proposed in the draft refining policy. Contrary to this, it is proposed in the budget 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 entire existing refineries and is counterproductive to the objectives of the agreed package; (iv) under clause 126B of second schedule of the 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. It is proposed in the budget 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-needed foreign investment in the refining sector.

"We understand that other exemptions including customs duty/sales tax on import of plant/machinery etc agreed under incentive package, for both existing refineries' upgrade and investment in new refineries will be notified separately," said, the top bosses of the refineries.

Copyright Business Recorder, 2021