Attock Refinery blocks upgrade deal, demands tax change

KARACHI: Attock Refinery Limited (ARL) has declined to sign the upgrade agreement with the Oil and Gas Regulatory Authority (Ogra) until the sales tax exemption on petroleum products is withdrawn.

In a letter addressed to Senior Executive Director (Refinery & Lubricants) at Ogra Rana Zaheer Ahmed, ARL expressed surprise at receiving a notice from Ogra regarding the execution of the Upgrade Agreement and the Escrow Account Agreement, as stated in letter No OGRA-19-8(11)/2023 dated August 6, 2024.

ARL highlighted that Ogra is already aware of the sales tax issue’s impact on refining policy implementation and has been actively involved in discussions with the Ministry of Energy (Petroleum Division), Ministry of Finance, Federal Board of Revenue (FBR), and Special Investment Facilitation Council (SIFC). ARL pointed out that the recent Finance Act 2024 altered the status of petroleum products (including mogas, diesel, kerosene, and LDO) from taxable to exempt. This legislative change has significantly disrupted refinery operations and upgrade projects, effectively negating the incentives provided under the Refining Policy, ARL stated. The refinery expressed hope that, given the constructive engagement with the government, the sales tax issue would be resolved before the October 22 deadline. ARL indicated willingness to finalize the Upgrade and Escrow Account Agreements with Ogra once the issue is addressed.

The oil sector is concerned about a potential Rs25 billion increase in annual operating costs and a Rs250 billion burden for refinery upgrades if the sales tax exemption remains. This exemption could lead to both higher operational costs and financial challenges for essential refinery upgrades. The Finance Act 2024 introduced a sales tax exemption on critical fuels such as petrol, high-speed diesel, kerosene, and light diesel oil, effective from July 1, 2024. While the policy aims to benefit consumers, it has adverse effects on the oil industry.

Previously, these fuels were ‘zero-rated’, allowing companies to reclaim input taxes on production-related services and equipment. The new exemption invalidates these claims, leading to an accumulation of around Rs70 billion in outstanding input taxes as of June 30, 2024.

Recently, a working group of the SIFC discussed the issue, noting that the five refineries in the country are unlikely to secure financing for upgrade agreements under the current sales tax exemption. Refining sector insiders indicated that other refineries may also refuse to sign agreements if Ogra approaches them for agreement signing.