ISLAMABAD: All five of the country’s oil refineries have objected to the imposition of duties and taxes on crude oil and absence of incentives for the industry, demanding that the government realign the Finance Bill FY22 with the consensus between them and the Ministry of Energy (MoE) to ensure the sustainability of existing refineries.
In a joint letter to the Ministry of Energy Petroleum Division, all the five refineries including Attock Refineries Limited, BYCO Petroleum Pakistan Limited, National Refinery Limited and Pakistan Refinery Limited noted that many clauses in the Federal Budget 2021-22 were “not aligned to the consensus between Ministry of Energy (MoE) and refineries and are counterproductive” to the agreed objectives.
The refineries pointed out that objective of the collectively agreed incentive package under the refining policy was to ensure sustainability of 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. However, the budget 2022 had gone to the opposite direction.
Criticising the imposition of 2.5pc customs duty on crude oil, the refineries said the two sides had agreed before the budget to keep the customs duty on crude oil at zero being a raw material for refineries. This was also in line with other industries where import of raw material has been exempted from application of customs duty.
“This custom duty on crude oil will increase the cost of production and will negatively impact refineries’ profitability”, they said, adding consequently this will significantly reduce the cash generation for upgradation projects unless allowed to pass on to consumers.
Similarly, the letter added that 17 per cent GST proposed on crude under the budget for next fiscal year would not yield any additional revenue for the government as it was 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, in addition to reducing cash generation required for upgrades.
Regarding the tax holiday on upgradation, the letter 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, modernisation or expansion project. It was agreed as part of draft refining policy by two sides before budget that period of tax exemption of 10 years would be mentioned in this clause for the purpose of clarity and bringing it in the line with the incentive proposed in the draft refining policy. Contrarily, the budget 2022 has proposed 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 objectives of the agreed package”, the refineries said.
Furthermore, under clause 126B of second schedule of 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. Unfortunately, budget has proposed 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”, the letter said.
The refineries hoped the other duty and tax exemptions like custom duty and sales tax on import of plant and machinery etc agreed under incentive package, for both existing refineries’ upgradation and investment in new refineries will be notified separately at the earliest.
It is relevant to note here that a draft incentive package was prepared after extensive deliberation between the stakeholders, with the commitment of refineries for upgradation within five years to produce environmental friendly Euro-V spec products and reduce furnace oil production. After this duration, refineries will be in a position to operate at optimal capacity with technological enhancement, which will result in forex saving.
Documents available with this scribe state that the proposed tariff protection formula would contribute revenue to refineries up to 40pc only and remaining 60pc investment would be arranged by refineries at their own, about $3.5 billion total cost, for upgrading activities during the next five years.
As per estimates, the net revenues for the Federal Board of Revenue (FBR) will remain neutral due to tariff revision coupled with growing demand for petroleum products in the country.
It is pertinent to mention that the last Petroleum Policy was announced in 1997. In the past 49 years, only two refineries have been commissioned in the country due to limited incentives.
In view of discontinuation and reduction of the various incentives and pricing formulas from time to time, protection available to local refining industry has significantly eroded; coupled with low international margins, these have badly affected the profitability of refineries, causing heavy losses and thereby, putting the survival of local industry at stake and are now at the verge of closure.
The prevailing pricing mechanism for local refineries is regulated and linked with the international market with low tariff protection.
Despite various constraints, refineries kept on upgrading to produce Euro-II/Euro-III standard products. Accordingly, their survival is now at risk unless fiscal support and adequate tariff protection is urgently provided.