Industry estimates suggest oil sector may face Rs35bn loss due to sales tax exemption

KARACHI: The oil sector is expected to incur financial losses of Rs 35 billion in the current fiscal year due to a sales tax exemption on petroleum products introduced in the Finance Act 2024.

Industry estimates suggest that refineries will suffer losses of Rs18 billion, while oil marketing companies (OMCs) may see losses of Rs17 billion as a result of the exemption. The Finance Act exempts sales tax on motor spirit (petrol), high-speed diesel oil, kerosene and light diesel oil. This has prevented companies from claiming proportionate input tax, significantly increasing operational costs.

Industry insiders say there is little hope that the exemption will be revoked before the end of the financial year. “If the government considers our request, the sales tax exemption will likely be removed in the next budget,” a senior executive at an oil company told The News.

The recent change in the Ministry of Petroleum has also failed to bring any progress. The new petroleum minister has yet to meet industry representatives to discuss the tax issue, which remains a key obstacle to finalising refinery upgrade agreements with the Oil & Gas Regulatory Authority (Ogra).

“The continuation of this exemption will erode profitability and place severe financial strain on the industry, jeopardising critical, capital-intensive projects essential for ensuring an uninterrupted supply of petroleum products,” the executive warned.

He added that refinery upgrade projects -- requiring investments of over $6 billion -- depend on the resolution of the sales tax issue before agreements can proceed. “The scale of investment makes it imperative to resolve the tax matter urgently,” he said.

The oil sector has approached the Special Investment Facilitation Council (SIFC) and the prime minister to resolve the issue, but no breakthrough has been achieved so far. Once upgrades are completed, local refineries will be able to supply Euro V fuels. Industry officials highlight that increasing diesel production -- a product in deficit -- would help Pakistan save valuable foreign exchange by reducing fuel imports. Local refineries have long-term commercial contracts with leading OMCs under Ogra’s licensing conditions and in accordance with industry regulations.