Oil industry fears Rs250bn burden from sales tax exemption

KARACHI: The oil sector fears a staggering Rs25 billion annual increase in operating costs and a Rs250 billion burden for refinery upgrades if the recently introduced sales tax exemption remains in place.

Industry representatives, speaking to journalists on Tuesday, expressed concerns that the exemption would create a double whammy -- increased operational costs and a financial hurdle for crucial refinery upgrades.

The Finance Act 2024 introduced a sales tax exemption on essential fuels like petrol, high-speed diesel, kerosene, and light diesel oil, effective July 1st, 2024. While intended to benefit consumers, the policy has unintended consequences for the oil industry.

Previously, these products were ‘zero-rated’, allowing oil companies to claim input taxes on services and equipment used for production. However, under the new exemption, these claims are no longer valid. Currently, around Rs70 billion in outstanding input taxes have been accrued up to June 30th, 2024.

The representatives said that the oil sector operates under Ogra regulations, with fuel prices set by the government. Companies have limited flexibility to pass on these additional costs to consumers. Industry representatives fear this financial strain could discourage foreign investment, essential for refinery upgradation, new refinery construction, and infrastructure development for oil marketing companies (OMCs).

The recent policy contradicts the government’s Refining Policy for Upgradation of Existing Refineries, which aims to attract over $5 billion in investment for modernization. Refineries warn that the sales tax exemption jeopardizes the benefits of this policy and the planned investments in energy security.

The industry has approached the Federal Board of Revenue, Ogra, and the Petroleum Division for a solution but has not received a response. The representatives urged the government to either remove the exemption or develop an alternative mechanism for cost recovery.