The government has barred oil refineries from adjusting input taxes on crude oil purchases against sales tax on refined petroleum products, including petrol and diesel. This change, introduced through the Finance Act 2024, has sparked concern across the refining industry, as it threatens to increase operational costs and disrupt refinery upgrade projects.
According to Pakistan Refinery Limited (PRL), the tax adjustment restriction comes at a time when the industry is grappling with reduced demand for high-speed diesel and furnace oil. The company reported a Rs2.35 billion loss in the first quarter of FY 2024-25, compared to a profit of Rs4.48 billion in the same period last year.
PRL highlighted the negative impact of this amendment in its quarterly financial report submitted to the Pakistan Stock Exchange (PSX).
PRL stressed that the new tax policy complicates efforts to raise financing for its Refinery Expansion and Upgrade Project (REUP). The project aims to double crude processing capacity from 50,000 to 100,000 barrels per day and replace outdated furnace oil with environmentally friendly products.
Although Front-End Engineering Design (FEED) was completed in September 2024, the company is now navigating higher project costs and uncertain funding.
To address these issues, PRL, along with other industry players, is actively engaging with the government and the Federal Board of Revenue (FBR) to have petroleum product sales reclassified as taxable. Discussions are ongoing with the Special Investment Facilitation Council, which has directed the Petroleum Division to resolve the matter by November 12, 2024.
PRL’s struggle reflects broader industry challenges. The company reported reduced sales volumes for key products, with countrywide demand for diesel and furnace oil shrinking.
This decline, coupled with the inability to offset input costs, leaves refineries exposed to financial strain. Despite these hurdles, PRL reaffirmed its commitment to completing the REUP and securing strategic investors to achieve financial closure.
The Pakistan Oil Refining Policy 2023, notified in August 2023, initially promised refineries incentives such as 2.5% on high-speed diesel and 10% on motor spirit (petrol) for six years. In February 2024, these incentives were revised to extend the eligibility to seven years and increase the cap on incentives to 27.5% of project costs.
Additionally, the policy allows refineries to claim a 7.5% deemed duty on high-speed diesel for 20 years from the project’s commissioning.
PRL continues to explore solutions with the government to mitigate the financial impact of the new tax regulation. The outcome of the ongoing discussions will likely shape the future of refinery operations and investment in Pakistan.
For now, the industry faces a critical juncture, balancing regulatory changes, financial challenges, and the need to modernize operations in a competitive energy landscape.
