ISLAMABAD: Following the IMF’s refusal to accept government proposals regarding the sales tax exemption on petroleum products (POL), which has put the $6 billion upgradation of local refineries in jeopardy, the government is preparing to revise the Brownfield Refinery Policy 2023 in a bid to revive stalled upgrade projects and protect the future of Pakistan’s refining sector.
Senior officials in the Ministry of Energy confirmed that the Petroleum Division is in the process of drafting a revised policy summary, which will soon be submitted to the Cabinet Committee on Energy (CCOE) for approval.
The updated policy is expected to include a range of new incentives, including a sales tax holiday on the import of plants and machinery, mirroring concessions granted under the Greenfield Refinery Policy.
A key measure under consideration is the continuation of the Inland Freight Equalisation Margin (IFEM) of Rs1.87 per liter, to be locked in as a guaranteed refinery margin for the next six to seven years. Officials also confirmed that a “stability clause” will be incorporated to ensure policy continuity and protect the financial models of refineries undertaking upgrades.
In addition, the government is exploring the creation of an ESCROW account to compensate certain refineries. This ESCROW fund is expected to accumulate around $900 million over six years, potentially growing to $1–1.6 billion with interest. The accumulated amount would serve as financial support for those impacted by the tax exemption policy.
The urgency to revise the policy stems from a measure in the Finance Bill for FY2025, which removed General Sales Tax (GST) on major petroleum products—petrol, diesel, kerosene, and light diesel oil (LDO). Although the exemption was aimed at consumer relief, it unintentionally made refineries ineligible for input tax adjustments, rendering upgrade projects financially unviable.
So far, only Pakistan Refinery Limited (PRL) has signed an Implementation Agreement (IA) with the government. Other local refineries have refrained from doing so, citing the adverse financial implications of the current tax regime.
In the recent interaction, the government had proposed to the IMF a compromise: allowing partial GST rates between zero per cent and three per cent on petroleum products and related upgrade machinery. However, during recent discussions with the IMF review mission, the Fund insisted that the standard 18 per cent GST be uniformly applied to all sectors, including the oil and refining industry.
Implementing this condition, government officials warn, would result in a Rs50 per liter increase in the retail price of petrol and diesel -- a politically and economically unviable option. The IMF suggested that Pakistan impose the full GST while simultaneously reducing the petroleum levy by the same amount of Rs50 per liter to cushion the impact on consumers.
However, federal officials have opposed this alternative, as GST revenues are shared with provincial governments, while the petroleum levy is a critical federal revenue stream.
To offer short-term relief, the government had previously increased the IFEM by Rs1.87 per liter, enabling refineries to recover a portion of the estimated Rs35 billion in losses caused by the exemption. But industry stakeholders have labeled the measure as inadequate, warning that it does not offer a sustainable financial solution.
The Brownfield Refinery Policy was originally designed to help Pakistan’s refineries meet Euro-V fuel standards within seven years. The plan also aimed to double petrol production, boost diesel output by 50 per cent, and reduce furnace oil production by 80 per cent, thereby alleviating storage challenges and improving refining margins.
However, with continued policy uncertainty and disagreement with international lenders, these strategic goals are now at risk. Both domestic refiners and international lenders have repeatedly called for a clear, consistent, and investor-friendly framework to move forward with the upgrades.
Until a revised policy is formally approved and implemented, Pakistan’s refinery modernisation efforts will remain in limbo, constrained by fiscal limitations, external lender requirements, and political sensitivities.
