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Govt looking to drop tax incentives for existing refinery in new policy - Inside Financial Markets

Govt looking to drop tax incentives for existing refinery in new policy

– The News

The government is likely to drop a few mooted measures for existing oil refineries and would offer tax incentives to new and up-grade projects to be executed before December 31, 2025, according to a final draft of the Pakistan Oil Refining Policy 2021 seen by The News.

In the earlier policy draft, the government was to contribute 40 percent while the refineries had 60 percent share for up gradation. However, in the new draft the government’s share has been reduced to 30 percent, subsequently increasing refineries’ share to 70 percent.

Official said, although the refineries had collected multi-billion rupees as deemed duty, they did not undertake up gradation projects. The tax holiday has also been abolished for the existing refineries.

However, for Greenfield refineries, there would 20-year income tax holiday of all taxes under the Income Tax Ordinance 2001, from the date of commissioning of the project.

The government would table the Pakistan Oil Refining Policy 2021 finalized by the Petroleum Division before the Cabinet Committee on Energy (CCoE) for final approval in its upcoming meeting.

The draft policy links the 10 percent tariff protection (deemed duty) on motor gasoline and diesel with the construction of up-gradation projects before December 31, 2025.

It will be effective from the date of the commission for six years. This protection would be also available for new refineries.

The tariff protection to local refineries has been declining over the years and is currently available only for Diesel, which is ~30% of the total production.

Thus, the refineries effectively receive less than 2 percent in tariff protection. The deemed duty collection was linked so that the refineries would use it for up gradation of refining facilities.

There will be no guarantee of rate of return for existing, or new, refineries provided by the regulator or the Government of Pakistan.

Subject to the applicable regulations of State Bank of Pakistan and fulfilling all procedural requirements, refineries shall be allowed to open and maintain foreign currency accounts.

They shall be allowed to retain a certain portion of export proceeds in foreign currency, if any, to meet operational requirements, as notified by SBP from time to time.

In 2002, the then government allowed 10 percent deemed duty on local production of diesel and petrol and 6 percent on other SKO, LDO and JP-4 to ensure price parity with imported products that carried 10 percent customs duty, replacing the previous arrangement of guaranteed 10 percent return on refining.

In 2007-08, deemed duty was abolished on other products except diesel but reduced it to 7.5 percent which is so far applicable. Under the new draft, the deemed duty (tariff protection) has been increased to 10 percent on diesel and another 10 percent duty has been imposed on Petrol.

Interestingly, in finance bill 2021-22, the government has already approved 10 percent tariff protection for existing refineries, which is now to be made part of the policy.

Besides, the refineries that want to get the fiscal incentives to upgrade/modernize/expand would have to provide undertaking to the petroleum division before December 31, 2021.

They will have to submit to the division the proposed timeline, potential configuration/unit, the tentative product slate after up gradation (ensuring production of EuroV Mogas and Diesel), the size, as well as all other relevant information.

Upon receipt of this undertaking, Petroleum Division shall provide a waiver (“Waiver”) for the refinery to continue marketing its products, until the agreed completion date of the up gradation (not later than December 31 2026), from the fuel specifications to be notified by Petroleum Division by end-October, 2021.

If a refinery does not provide the undertaking and have no Waiver, and if it does not meet the notified fuels specifications, it shall not be allowed to sell its products in Pakistan, after June 30, 2022.

It is to be noted that on 11 October 2021, the petroleum division held a meeting with the senior representatives of the oil refineries and discussed the proposed draft.

Furthermore, there shall be no import duties and Sales Tax on import of Petroleum Crude oil with effect from July 1, 2022, being the primary raw material. However, the finished products shall be subject to import duties and sales tax as notified by the competent authority from time to time.

The government would give new refinery projects a pricing mechanism that shall be no less favorable than the prevailing mechanism till deregulation.

The Product Pricing Formula of refineries shall be based on “True Import Parity Price” to be derived from Arab Gulf Mean FOB spot price, or if not published, shall be derived from Singapore Mean FOB price.

The government will add all other elements, including premium, freight, port charges, incidentals, import duties, exchange rate, and provincial taxes as applicable, and different price adjustments as per PSO actual imports, in the FOB price arrive at True Import Parity Price.

Additionally, prevalent inland freight of imported crude oil to refineries and provincial duties, levies/cess, and taxes (with import duty on crude oil, if any) at the import of crude oil shall be added for refineries.

Recently, Chairman CCoE Asad Umar had raised questions over the 10 percent upfront tariff for existing oil refineries to upgrade projects.

The cabinet body on energy had approved new oil refinery policy 2021 in principle. However, it had directed Petroleum Division to revisit the upfront tariff.

Now, the Petroleum division has informed CCoE that upfront tariff was part of finance bill 2021-22 which

the Parliament had already approved in the budget for the ongoing financial year.

Cabinet Committee on Energy (CCoE) had approved in principle oil refinery policy 2021 earlier subject to clarification on certain issues.

It raised questions on the use of incremental revenue again. It also questioned the utilization of deemed duty by oil refineries in past.

CCoE also raised questions on the collection of revenue and its utilization if the government allows 10% tariff protection.

The petroleum division will submit a response again for formal approval of the policy.

The CCoE has not given go-ahead to upfront tariff so far.

Cabinet Committee on energy had raised some observations over upfront tariff along with some other questions. The petroleum division has submitted a response to CCOE now for formal approval.

The petroleum division said that government would contribute 25-30 percent for the up-gradation of refinery projects.

Moreover, the Petroleum division said that oil refineries had collected Rs 200 billion on account of deemed duty. But, they had also spent the same amount on the up-gradation projects.

Moreover, the petroleum division said that government would seek Rs 500 million guarantees from the refineries and would pay from incremental accounts from projects after award of contracts.

Petroleum division informed it had reviewed the CCoE’s observations and responded item-wise.

It said that the earlier proposal was to implement upfront utilization of incremental tariff protection in the Policy effective from January 1, 2022.

However, the petroleum division had amended now with the condition that refineries could utilize the amount after the award of EPC.

The incentives are likely to start by the start of 2024.

A “Special Reserve Account” for Upgradation/modernization/Expansion will be maintained by each refinery in a separate bank account to be opened in National Bank of Pakistan. They will ensure its utilization for up-gradation and expansions on a proportionate basis of the incremental revenue.

OGRA will monitor the generation of incremental revenue that each refinery shall deposit in a special reserve account.

The government had now extended a bank guarantee worth Rs 500 million per refinery till the commissioning of the project (COD).

Earlier, the Petroleum division had presented a refinery policy in the last meeting of CCoE. However, it had directed the Petroleum Division to clarify the mechanism of investment of incremental revenue by refineries for up-gradation projects.

Syed Zaki Hussain

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