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June 15, 2021

Refineries feel betrayed as agreed promises not met

ISLAMABAD: The local refineries have berated the government on being “betrayed” on the incentives package, which was mutually agreed before the budget. The government in the Finance Bill 2021-22 has imposed 17 percent GST and 2.5 percent federal excise duty (FED) on crude oil against what was agreed. The government’s said steps will prove detrimental for the existing refining industry.

“The consensus that earlier developed between the refineries and Energy Ministry for refining industry has been brazenly violated in the budget for 2021-22,” one of the top men in the refining sector told The News, saying: “Refineries feel betrayed”.

Meanwhile, the existing refineries in the country that include PARCO (Pak-Arab Refinery Limited), ARL (Attock Refinery Limited, NRL (National Refinery Limited), Byco Petroleum Pakistan Limited, and Pakistan Refinery Limited wrote a letter on June 14 signed by their chief executives addressed to secretary petroleum, Dr Arshad Mahmood with copy to Hammad Azhar, Federal Minister Ministry of Energy, and Tabish Gauhar, Special Assistant to Prime Minister, highlighting their deep concerns about the budgetary measures mentioned in the Finance Bill 2021-22. In the letter, the refineries drew the attention of the Energy Ministry towards the objectives of the collectively agreed incentives package under which it was agreed to ensure sustainability of existing refineries in the face of existential challenges and support cash generation for upgrading refineries’ production to environmental friendly Euro-V fuels and reduce Furnace Oil production.

The letter says that certain clauses in the Finance bill 2021-22 are not aligned to the consensus between the Ministry of Energy (MoE) and Refineries and which are counter-productive to the aforementioned objectives.

The letter mentions that the customs duty on crude oil, being a raw material for refineries, was agreed to be at zero. This was also in line with other industries where import of raw material has been exempted from application of customs duty. However, in the Finance bill 2021-22, the customs duty on crude has been proposed at 2.5pc. This customs duty on crude (raw material) will increase the cost of production and will negatively impact refineries’ profitability.

The refineries in the letter also say that 17pc GST proposed on crude in the budget does not yield any additional revenue for the government as the same is adjustable. However, it will create significant working capital issues in already financially-stressed industry. It is estimated that this will create an additional working capital requirement of approximately Rs10 billion.

Mentioning about the tax holiday on upgradation, the letter says that under Clause 126 B (b) of second schedule of the Income Tax Ordinance, tax holiday was already available to existing refineries for the purpose of upgradation, modernization or expansion project. It recalled saying that it was agreed that the period of tax exemption of 10 years would be mentioned in this clause for the purpose of clarity and bringing it in line with the incentive proposed in the draft refining policy. However, contrary to the agreed package, it is now proposed in the Finance bill 2021-22 that the tax holiday would be applicable on upgrades to deep conversion refinery’s project of at least 100,000 barrels per day (bpd) capacity. “This will exclude all of the existing refineries and is counter-productive to the objectives of the agreed package.”

It also mentions about the tax holiday to new refineries saying under Clause 126B of second schedule of Income Tax Ordinance, a 20 year tax holiday was already available for new deep conversion refineries and it was agreed that this will be maintained. It is proposed in the FB22 that the tax holiday applicable to new deep conversion refineries of at least 100,000 bpd capacity, would be limited to 10 years. This will discourage the much-needed foreign investment in the refining sector.

Refineries in the letter say they understand that other exemptions including customs duty/sales tax on import of plant/machinery agreed under incentive package, for both existing refineries’ upgradation and investment in new refineries, will be notified separately. They also stressed the government to realign the Finance Bill 2021-22 to the originally-agreed basis for achieving the objectives of refining industry sustainability and upgradation.