Refinery upgrade: Govt to reopen talks with IMF to break deadlock

ISLAMABAD: The Petroleum Division, led by Federal Minister Ali Pervaiz Malik, is set to revive discussions with a visiting IMF tax team in a bid to break the deadlock over the sales tax exemption that has effectively frozen $6 billion upgrade plans of Pakistan’s oil refineries.

The policy dilemma emerged after the passage of Finance Bill 2025 with the budgetary measure of sales tax exemption on key petroleum products — petrol, diesel, kerosene and light diesel oil -- disqualifying refineries from claiming input tax adjustments. As a result, the long-awaited refinery upgrade projects have become financially unviable.

During earlier talks with the IMF review mission, the government was assured that a specialised tax team would come to Pakistan to work on budget preparations and guide the newly created Tax Policy Office (TPO). That team is now in Islamabad.

“We have asked the finance minister to arrange a meeting with the visiting IMF experts to resolve the stalemate on refinery upgradation,” a senior Petroleum Division official told this scribe.

In previous discussions, the government proposed applying a partial GST—between 0 per cent and 3 per cent —on petroleum products and machinery for refinery upgrades. But the IMF mission insisted on a uniform 18 per cent GST across all sectors, including oil and refining.

Officials warn that adopting the 18 per cent GST would push petrol and diesel prices up by Rs50 per litre — an outcome neither politically nor economically feasible.

The IMF suggested a workaround: apply the full GST but reduce the petroleum levy by the same Rs50 per litre. Federal officials rejected the idea, pointing out that GST revenues are shared with provinces, while the petroleum levy remains a critical federal revenue source.

To provide temporary relief, the government earlier raised the Inland Freight Equalisation Margin (IFEM) by Rs1.87 per litre, helping refineries recover a portion of the estimated Rs35 billion in losses triggered by the GST exemption. However, refiners say the step is insufficient and does not address the underlying financial imbalance. The Brownfield Refinery Policy 2023 was crafted to help refineries meet Euro-V standards within seven years, double petrol production, raise diesel output by 50 per cent, and cut furnace oil production by 80 per cent —measures meant to boost margins and ease storage issues. But with upgrades stalled, these goals are now in jeopardy.

If ongoing efforts fail, officials say the government will move to revise the Brownfield Refinery Policy to revive the upgrade programme and safeguard the sector’s future. The Petroleum Division has already begun drafting a revised summary for submission to the Cabinet Committee on Energy (CCOE).

The upcoming policy overhaul is expected to include new incentives, including a sales tax holiday on the import of plants and machinery — similar to those granted under the Greenfield Refinery Policy. The government is also considering locking in the Rs1.87 per litre IFEM as a guaranteed margin for the next six to seven years, alongside a “stability clause” to ensure predictability for investors.

Additionally, authorities are exploring the creation of an escrow account aimed at compensating refineries impacted by the tax exemption. The fund could accumulate around $900 million over six years, potentially reaching $1–1.6 billion with interest. So far, only Pakistan Refinery Limited (PRL) has signed an Implementation Agreement (IA) with the government. Other refineries have held back, citing the financial fallout of the current tax policy. With international lenders demanding clarity and domestic refineries warning of stalled investments, officials acknowledge that a stable and investor-friendly policy framework is urgently needed to put the refinery upgrade programme back on track.