Ogra proposes lower deemed duty on HSD for non-compliant refineries

KARACHI: The Oil & Gas Regulatory Authority (Ogra) has recommended reducing the deemed duty on high-speed diesel (HSD) from 7.5 per cent to 5.0 per cent for refineries that do not sign upgrade agreements under the Pakistan Oil Refinery Policy, The News learned on Monday.

In a letter addressed to the Petroleum Division, Ogra also recommended that the differential deemed duty, above 5.0 per cent on HSD, as well as the 10 per cent duty on petrol, be surrendered to the Inland Freight Equalization Margin (IFEM) pool.

Ogra stated that the failure of four refineries -- Attock Refinery Limited, National Refinery Limited, Pak Arab Refinery Limited, and Cnergyico -- to execute the upgrade agreements would directly impact their deemed duty. The authority urged the Petroleum Division to provide an update on the current status of these refineries.

The delay in signing the upgrade agreements stems from objections raised by the refineries regarding the sales tax exemption on petroleum products, which was announced in the Finance Bill for the current fiscal year. The deadline for signing these agreements lapsed on October 22, 2024, but it is expected to be extended when the Cabinet Committee on Energy meets next.

During a recent briefing, the management of Attock Refinery informed analysts that the Finance Act of 2024, which amended the Sales Tax Act of 1990, introduced a tax exemption on petroleum products. They expressed concerns that this could undermine incentives and increase costs for the company, particularly due to the lack of input tax adjustments against output taxes. As a result, they have delayed signing the agreement until the matter is resolved. The management also mentioned that discussions with the government were ongoing, and they were hopeful the issue would be resolved soon.

Sources within the refining sector indicated that Ogra’s recommendation to reduce the deemed duty serves as a direct warning to refineries, signalling that they may lose out on potential benefits if they fail to sign the upgrade agreements.

The issue of the sales tax exemption on petroleum products remains a challenging decision for the government, despite recommendations from the Special Investment Facilitation Council (SIFC) to resolve it promptly. Upgrading the refineries would require an investment of $4-5 billion, aimed at transforming the refining sector.

Once the refineries sign the upgrade agreements, they will be granted 10 per cent tariff protection/deemed duty on motor gasoline and diesel’s ex-refinery price for six years, starting from the notification date of this policy and the opening of a joint escrow account with Ogra. However, 2.5 per cent of the deemed duty on diesel and 10 per cent on motor gasoline (the incremental incentive) will be deposited by the refineries into the escrow account, jointly managed by Ogra and the respective refinery, at the National Bank of Pakistan (NBP). These funds will be used exclusively for the upgrade projects. The joint escrow account must be opened within three months of the policy’s notification. Until then, the incremental incentive will be deposited into the IFEM.