Refining sector awaits sales tax exemption resolution to finalise upgrade agreements

KARACHI: The refining sector anticipates that the issue surrounding the sales tax exemption on petroleum products will be resolved within a week, which has delayed the signing of refinery upgradation agreements with the government.

This update was shared during a corporate briefing by the management of Attock Refinery Limited (ATRL).

Regarding the New Refinery Policy, the management noted that ATRL is prepared to sign. However, changes introduced in the Finance Act 2024 to the Sales Tax Act 1990 (affecting tax exemption on petroleum products) could hamper incentives and raise costs for the company, as input taxes cannot be offset against output taxes. As a result, signing has been postponed until this matter is resolved.

The sector has held discussions with the government, which has committed to resolving this issue. The management expects a resolution within the week (November 10-15, 2024).

During FY24, the company exported 80,000 tonnes of low-sulfur fuel oil (LSFO), with an additional 30,000 tonnes scheduled for export this quarter. For FY25, the management projects exports to reach 120,000 tonnes. Due to the low sulphur content, the company is able to secure higher prices for LSFO.

The management added that the refinery policy allows a deemed duty collection of 10 per cent on motor spirit (MS) and 2.5% on high-speed diesel (HSD), which will be held in an escrow account. Refineries can withdraw up to 27 per cent of the project cost from this account.

Annual savings after the refinery upgrade are projected to reach Rs15 billion, primarily due to the elimination of penalties for low-RON quality and high sulfur content in HSD, along with reduced spending on chemicals and additives.

Following the upgradation, MS production is expected to increase by 25 per cent.

The influx of smuggled Iranian HSD and unwarranted imports has led to lower demand for local HSD. ATRL has approached the government on this issue, and prompt government action has helped curb smuggled Iranian products.

In the light of declining crude oil supply from the northern region, the government has approved the allocation of 5,000 barrels of oil per day (bopd) from the southern region, particularly the Badin Basin in Sindh, to ATRL.

Regarding the commencement of supply from the Badin Basin, the management shared that the process is in its final stages, with freight issues nearing resolution. Transportation costs will also be reimbursed from the escrow account.

The management confirmed that the refinery policy has been revised to remove the cap on dividends from old reserves. In the event of petroleum price deregulation, the management noted that there will be no inland freight equalisation margin (IFEM) due to the company’s strategic location.