The government has introduced a sales tax exemption in the Finance Act 2024 on petroleum products, which will negatively impact the refineries upgrade plan as the cost may increase by a staggering Rs250 billion, said an industry source privy to the matter.
The exemption could also increase the operating costs of the oil industry by Rs25 billion, the source added.
“Foreign investors in the sector may soon approach Prime Minister Shehbaz Sharif on the issue,” they said.
In the Finance Act, Motor Spirit (Petrol), High Speed Diesel, Kerosene and Light Diesel Oil (LDO) have been changed from taxable supplies to exempt from levy of Sales Tax.
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Resultantly, up to 80-85% of the input tax will be disallowed resulting in a substantial increase in the operating cost as well as project cost, according to a letter sent to the Petroleum Division by refineries earlier this month.
“This has a material impact to the extent that it may make existing refining operations unsustainable as well as the projects/investments, expected under the policy unviable as it significantly affects Project IRRs,” the letter read.
“It is generally accepted practice that governments allow subsidies/grants to local industries to finance their projects and such subsidies are exempt from tax. The same was the case in Pakistan under Clause (102A) of Income tax ordinance, 2001.
However, with the introduction of the revised law, the said exemption has now been withdrawn which will have impact on the Refinery upgrade project as the incentives will not be treated as tax-exempt government grants,“ it added.
Since this issue – sales tax exemption instead of zero-rated sector that allows claims by refineries – has become a part of the Finance Act, it can only be amended through parliament.
The source explained that the oil industry operates in a regulated environment, and prices are determined by the Oil and Gas Regulatory Authority (OGRA) based on a government-approved formula, leaving no room for recovery of additional costs.
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Sales tax exemption may also discourage foreign investment in the oil industry, essential for refinery upgradation, setting up new refineries, and developing infrastructure for oil marketing companies, the source said.
Oil marketing companies are also struggling and the source siad that if this issue is not resolved, their service level will drop.
“They won’t be able to expand as they have planned.”
It may be noted that the government introduced the Refining Policy for Upgradation of Existing/Brownfield Refineries 2023 to attract investment of over $5 billion in the refining industry.
Industry stakeholders have urged the federal government to restore the status of petroleum products as taxable supplies and to ensure the continued development of the oil industry and uninterrupted supplies of petroleum products.