ARL refuses upgrade agreement with OGRA due to sales tax exemption dispute

Attock Refinery Limited (ARL) has refused to sign an upgrade agreement with the Oil and Gas Regulatory Authority (OGRA) until the sales tax exemption on petroleum products is resolved. 

In a letter to OGRA’s Senior Executive Director, ARL expressed its concerns over a notice regarding the execution of the Upgrade Agreement and the Escrow Account Agreement.

ARL emphasised that OGRA is aware of the sales tax’s impact on refinery operations, as it has been actively discussed with the Ministry of Energy, Ministry of Finance, Federal Board of Revenue (FBR), and the Special Investment Facilitation Council (SIFC). The Finance Act 2024 shifted the tax status of key petroleum products, including petrol and diesel, from taxable to exempt, disrupting the incentives provided under the Refining Policy. 

ARL indicated it would finalise the agreements with OGRA once the issue is addressed, expressing hope for resolution before the October 22 deadline.

The sales tax exemption, effective from July 1, 2024, has raised concerns in the oil sector about a potential Rs25 billion increase in annual operating costs and a Rs250 billion burden for refinery upgrades. 

Previously, these fuels were zero-rated, allowing companies to reclaim input taxes on production-related services and equipment. The new exemption has led to an accumulation of around Rs70 billion in outstanding input taxes as of June 30, 2024.

A recent discussion by a SIFC working group highlighted that the country’s five refineries may need help securing financing for upgrade agreements under the current tax exemption. Industry insiders suggest that other refineries may also refuse to sign agreements if approached by OGRA under the current circumstances.