ISLAMABAD: Following the directives from Special Investment Facilitation Council (SIFC) about doing away with all hurdles in the implementation of policy on local refineries’ upgradation, the KPMG, which is one of the best audit firms in the country, has been assigned by the government to come up in the current week as to how much the local refineries’ upgrade plans are sound and perfect to qualify for the demands, refineries have put in for the smooth implementation of the refinery policy for upgradation purposes, a senior official of the Energy Ministry told The News.
“Refineries want the continuation of the 7.5 percent deemed duty on diesel once the upgradation of the local refineries in 6 years is completed.
They also want the FBR not to collect the 46 percent tax on the amount to be collected under incentives as per the policy for local refineries’ upgradation to be through ESCROW accounts.
Refineries are of the view that 25 percent ($1.5 billion) of the amount of the incentives is to be used for upgrade plans by the refineries and if the 46 percent tax is imposed, then the incentives will be curtailed to just 12-13 percent from 25 percent and the upgradation of the refineries will suffer the most.
Refineries also want the inclusion of clauses in the implementation agreements on arbitration, the right to terminate the agreement if the government introduces some material changes, force majeure, and taxation and import duty incentives.
“The local five refineries will have to arrange 75 percent financing of $4.5 billion for their upgradation to ensure all fuels, as per Euro-V specification in six years’ time.” However, the government, the officials said, would provide $1.5 billion (25 percent) of total upgrade of refineries from the ESCROW account. This is how the total cost on the upgradation of five local refineries will stand at $6 billion.
On the said issues top mandarins of the petroleum division, the official said, had held a meeting with FBR on the demands of the local refineries some days back and decided to assign KPMG to carry out the due diligence of the upgrade plans of the local refineries to enable the government to take right decisions on the demands of the refineries seeking continuation of the existing deemed duty of 7.5 percent on the diesel and barring FBR to deduction the 46 percent tax on the incentives amount to be added in the ESCROW accounts for upgrade plans.
In the said meeting, refineries argued that the amount of the incentives to be extended by the government to them should be treated as a grant, not a revenue to escape taxation.
More importantly, the plants and machinery that are to be imported for upgrade plans should also be exempted from import duties.
In the meeting, he said, it was also decided that a local law firm would be hired for an opinion on the refineries’ demand seeking inclusion of the clauses of force majeure and the right to terminate the agreement if the government introduces some material changes in the policy unilaterally.
However, later on, the proposal of hiring local law firm was scratched down and it was decided that Ogra and refineries would resolve such issues on their own.
The SIFC, the official said, some weeks back directed the petroleum division to do away with all hurdles in the way of smooth implementation of the local refineries upgradation and approved the revised timelines of Implementation Agreements between refineries and Ogra and submit its final report to its next apex committee which is headed by the prime minister and attended by Chief of Army Staff (COAS).
Each refinery will also have to come up with feasibility and Front-End Engineering Design for their respective upgrade project, and the timelines for the execution of the project. “Cabinet Committee on Energy in its recent meeting has extended the deadline for another sixty days to reach an agreement with refineries and the Ogra for the implementation of the upgrade refinery policy.”
Local refineries argue the government has extended to investors for setting up the newly branded green refinery with incentives of 7.5 percent deemed duty for 25 years and a tax holiday of 20 years.
But, when it comes to the local refineries, the incentives are quite limited at 25 percent of the upgrade cost. After 46 percent taxation, the net incentives will come down to just 13 percent, they say.
After the upgrade in six years, the existing refineries have been given the targets mentioned in the policy under which they would produce Euro-V diesel of 31,288 tons per day against the production of 21,237 tons. Likewise, existing refineries would produce 21,251 tons of Mogas (Petrol) of Euro-V per day against the volume of 10,702 tons of Euro-III petrol per day. Furnace oil production will plummet to just 3,414 tons per day from the 15,417 tons.
