ISLAMABAD:
Refinery upgrade projects worth $6 billion may face a setback, as the oil industry is expected to incur a loss of Rs32 billion during the ongoing financial year due to sales tax exemptions.
The Finance Act 2024 changed the sales tax status of petroleum products – including petrol, high-speed diesel, kerosene oil and light diesel oil – from zero-rated to exempt supplies, which in turn disallowed input sales tax claims, significantly increasing operational and capital costs for local refineries.
Sources said that the oil industry estimated that refineries were going to suffer a loss of Rs18 billion in the current financial year whereas oil marketing companies would sustain a loss of over Rs14 billion.
The Oil Companies Advisory Council (OCAC) took up the matter with former petroleum minister Musadik Malik and the finance minister but it could not be resolved.
Now, according to sources, the oil industry is hoping that new Petroleum Minister Ali Pervez Malik will address the issue, but he has not yet been able to spare time for the industry. Industry players were of the view that the government was not interested in settling the matter in the current financial year.
They noted that the government could look into the tax issue in the upcoming budget, however, by then, oil refineries may have suffered a loss of Rs32 billion, making them unable to kick off work on plant upgrades.
Sources revealed that foreign investors, who had earlier been keen to work in collaboration with refineries, were concerned over the situation and lost their interest in the projects. Refineries have planned investments of up to $6 billion to ramp up production and meet 100% oil demand within the country.
At present, refineries meet 30% of the country’s petrol requirement. With plant modernisation, this coverage is anticipated to double over the next six years, reaching 60% of petrol consumption.
Similarly, for diesel supply, refineries account for 50% of the country’s requirement. In the next six years, it is projected they will be able to double their capacity, resulting in domestic production catering to 100% of diesel demand without the need for imports.
Industry experts concede that while demand for diesel may rise 10% to 20% over the next six years, the nation’s self-reliance is poised to avert the requirement for import.
Officials estimate that through bolstering petrol and diesel production, Pakistan will save approximately $600 million in foreign exchange annually, which will translate into a substantial benefit of $1.2 billion for the economy in just two years.
Sources pointed out that refineries had been given a six-month extension for signing supplemental agreements with the Oil and Gas Regulatory Authority (Ogra) in order to start upgrading their plants.
However, the situation has worsened and they may not be able to sign these agreements due to the reluctance of investors to pump capital into projects under the new refinery policy.
Oil industry officials said that the amendment regarding sales tax exemptions impacted the financial viability of planned plant upgrades, infrastructure development and daily operations. They warned that it would result in deterioration of earnings of the oil industry, especially refineries, forcing them to delay modernisation projects.
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