Amendment termed detrimental to refinery operations that will increase cost

KARACHI:

The government has barred oil refineries from adjusting the input tax paid on the purchase of crude oil to the sales tax on petrol, high-speed diesel, light diesel oil and kerosene – a restriction that will jack up the cost of refining.

In its latest financial report for the quarter ended September 30, 2024 submitted to the Pakistan Stock Exchange (PSX) on Tuesday, Pakistan Refinery Limited (PRL) reported, “Through Finance Act 2024, the government of Pakistan designated motor spirit, high-speed diesel, light diesel oil and kerosene as exempt (from sales tax) supplies, making the company unable to adjust input tax paid on purchases from its sales tax liability.”

It added, “This amendment is detrimental to the current refinery operations as well as bound to increase the (refinery up-gradation) project cost, making it even more challenging to raise the much-required financing.”

The company along with other members of the oil industry is constantly engaged with the government, particularly the Federal Board of Revenue (FBR), to resolve the matter and get the sale of petroleum products declared as taxable supplies. Recent developments suggest PRL also took up the matter with the Special Investment Facilitation Council along with other refineries. The council directed the Petroleum Division to address the issue within a couple of weeks, ie by November 12, 2024.

The situation, along with a volumetric decline in sales of high-speed diesel and furnace oil, resulted in losses for PRL in the first quarter.

“During the current quarter, the countrywide demand for refined petroleum products, mainly diesel and furnace oil, showed a volumetric decline as compared to the corresponding quarter. Consequently, the refinery suffered a loss after taxation of Rs2.35 billion as compared to the profit after taxation of Rs4.48 billion in the comparative quarter of last year.” Despite the challenging time, PRL – a subsidiary of the state-owned Pakistan State Oil – said that it remained committed to pushing ahead with its original plan to upgrade the refinery to double production and replace the outdated furnace oil with premium products like petrol and diesel.

“PRL remains committed to the Refinery Expansion and Upgrade Project, which will double the crude processing capacity from 50,000 barrels per day to 100,000 barrels per day,” said the quarterly report.

In this regard, the front-end engineering design (FEED) has been completed in September 2024 as per schedule. The refinery has now initiated the engineering, procurement, construction and finance (EPCF) tendering process, to be followed by financial close, for which “PRL continues to be engaged with different potential strategic investors.”

During the year ended June 30, 2024, the government notified the Pakistan Oil Refining Policy for Existing/ Brownfield Refineries 2023 on August 9 and 17, 2023 respectively.

As per the policy, the refineries were allowed incremental incentives at the rate of 2.5% on high-speed diesel and 10% on motor spirit (petrol) for six years to upgrade and produce environmentally friendly fuels as per Euro-V specifications. Later, the government revised the policy, which was notified on February 23, 2024 and amended the incentive period from six years to seven years, increased the maximum cap on incremental incentives from 25% to 27.5% of project cost and allowed refineries a 7.5% deemed duty on high-speed diesel for 20 years from the date of commissioning of the upgrade project.