Govt pledges tax relief for refineries in Budget FY26

ISLAMABAD: The government has assured Pakistan’s leading oil refineries that it will permanently resolve the contentious sales tax exemption on petroleum products in the upcoming federal budget, a move seen as pivotal to unlocking $6 billion in long-delayed infrastructure upgrades across the sector.

At a high-level meeting held on Tuesday, chief executives and managing directors of major refineries, including Pakistan Refinery Limited, Attock Refinery, National Refinery, PARCO and Cynergico, met with Petroleum Minister Ali Pervaiz Malik to express their appreciation for the government’s interim resolution of the sales tax issue and pressed for a long-term policy fix to allow investment in Euro-V compliant refinery upgrades.

The refineries welcomed the government’s decision to temporarily address the issue for FY25 and highlighted the urgent need for a permanent solution in the FY26 budget. Under the Finance Act 2024, petroleum products were reclassified from zero-rated to exempt, which removed the ability to claim input tax adjustments. This policy shift, refineries argued, significantly increased both operational and capital costs, threatening the commercial viability of modernisation plans.

An official present at the meeting said the petroleum minister had taken up the matter directly with Prime Minister Shehbaz Sharif and the Ministry of Finance, and assured the industry that a permanent resolution would be included in the forthcoming federal budget. The minister said that the government’s actions reflect its “unwavering resolve to support the refining sector, which plays a pivotal role in Pakistan’s energy security and economic growth”. He added that the planned upgrades will not only enhance production efficiency but also support the transition towards cleaner and more sustainable energy sources.

Refinery executives warned that without policy consistency, the $6 billion investment required for upgrading refineries to Euro-V standards would remain stalled. They stressed that an ad-hoc approach would not suffice and urged the government to provide tax policy stability for at least seven years. They said the sales tax exemption runs counter to the government’s Brownfield Refining Upgradation Policy announced in August 2023, which promised fiscal incentives to modernise refineries. The petroleum minister’s resolution of the tax issue -- by temporarily increasing the Inland Freight Equalisation Margin (IFEM) by Rs1.87 per litre to cover losses incurred during FY25 -- was acknowledged as a positive first step. Refineries and Oil Marketing Companies reportedly suffered losses of Rs34 billion due to the tax changes.

Chairperson of the Oil Companies Advisory Council (OCAC) and CEO of Attock Refinery Adil Khattak said, “The minister deserves appreciation for understanding the issue and resolving it within a short time after taking office. A permanent resolution in the upcoming budget will pave the way for over $6 billion in refinery upgrades.”

The refineries reiterated their readiness to proceed with the planned modernisation projects, which aim to reduce import dependency, improve fuel quality, and promote clean energy through the production of Euro-V standard fuels. They also praised the prime minister’s personal support and reaffirmed their commitment to aligning with his vision of a cleaner, more energy-secure Pakistan.

The refinery upgrades are expected to significantly raise environmental standards, boost local production and attract foreign investment. Officials noted that the initiative forms a core component of the government’s broader strategy to enhance economic stability and industrial competitiveness. The delegation included CEO of Pakistan Refinery Limited Zahid Mir; Managing Director of Parco Irtiza Qureshi; CEO of Attock Refinery Adil Khattak; CEO of Cynergico Amir Abbasi; and CEO of National Refinery Limited Asad Hasan.