Govt mulls relief for refineries as POL prices dip

ISLAMABAD: The government is considering providing relief to refineries -- which have incurred Rs13 billion in losses during the first nine months of the current fiscal year due to sales tax exemptions, shrinking margins, and inventory losses -- either by shifting relief of Rs4.60 per litre in the Inland Freight Equalisation Margins (IFEM) or by imposing a 3-5 per cent sales tax on petroleum products.

Under one proposal, the government may shift part of expected Rs8-10 per litre relief in POL products’ prices to refineries by increasing IFEM to help offset the losses they have incurred, a senior official at the Petroleum Division told this scribe.

Another proposal under consideration is to impose sales tax of 3-5 per cent on POL products; however, under this proposal, the losses refineries have incurred so far would not be mitigated as sales tax cannot be imposed retrospectively from July 1, 2024. Moreover, for imposing sales tax, the government also requires to enforce an ordinance.

“The IMF has no objection but it wants to impose 18 per cent sales tax on POL products which will cause an increase of POL produce by Rs45 per litre. The fund says 3-5 per cent sales tax is allowed on essential items, not the items like petroleum products. Like electricity, sales tax should be imposed on petroleum products by 18 per cent.”

The government is most likely to move Economic Coordination Committee (ECC) today (Monday) or tomorrow (Tuesday) for a decision in favour of refineries, industrial sources said.

In a letter on April 8, 2025, refineries informed the Oil and Gas Regulatory Authority (Ogra) chairman and the DG oil that they have reached the verge of collapse on account of sales tax exemption, shrinking margins and inventory losses. It stated refineries have so far braved the losses of Rs13 billion in the first nine months of the current fiscal year mainly due to the imposition of sales tax exemption on petrol, diesel, LDO and kerosene oil, and their losses would increase to Rs18 billion by June 30, 2025.

Refineries in the letter suggested to the government to shift the relief expected in the next fortnight, starting from April 16, 2025, in the shape of an increase in Internal Freight Equalisation Margin (IFEM) by Rs4.60 per litre each on petrol and diesel from April 16 onward till June 2025.

“The resolution of sales tax exemption issue is imperative for the survival of the industry which is also critical to national security. Refineries, therefore, request that the benefit of the forthcoming price reduction be extended to the refineries to adjust their sales tax claims of approximately Rs18 billion through IFEM (Internal Freight Equalisation Margin) over 2.5 months (equivalent to PKR 4.60 per litre on petrol and diesel each), providing the much-needed solace to the industry.

They pleaded their case asking the government’s top mandarins that while the freefall in petroleum product prices has posed a significant threat in the form of inventory losses, it also presents an opportunity as a substantial price reduction in petrol and diesel, expected in the forthcoming fortnight.

“This reduction offers the government a chance to address critical issues, including the adjustment of unadjusted sales tax claims, which currently stand at Rs 13 billion for the past 9 months and are expected to reach Rs18 billion by the end of FY 2024-25.”

Apart from operational losses of Rs18 billion, under brownfield policy, refineries upgrade projects valuing $5-6 billion are at a halt just because of the budgetary measure of sales tax exemption--imposed in the finance bill for 2024-25. The upgrade project has become unviable in the presence of the sales tax exemption.

Refineries also urged the government to permanently resolve sales tax issue in the forthcoming Federal Budget 2025-26 through requisite legislation in the Sales Tax Act, 1990, to make petroleum products taxable.

The letter also mentions that refining margins have been shrinking in the international market over the past nine months, resulting in lower profitability for local refineries. This, coupled with the ongoing sales tax issue, has further exacerbated the financial strain on the refineries.