ISLAMABAD: All five refineries are now ready to initiate upgrade projects involving a $6 billion investment after the government addressed their key demand for clearance of their Rs34bn stuck-up funds through petroleum pricing.
The chief executive officers (CEOs) on Tuesday had a meeting with Petroleum Minister Ali Pervaiz Malik to appreciate his proactive role in resolving almost a year-long problem hampering refinery expansion plans, and promised to immediately go ahead with investment plans soon after the budget was provided the matter stood permanently resolved.
Last week, the government allowed about Rs1.87 per litre increased adjustment through transportation margin in petrol and diesel prices to clear about Rs34bn stuck up funds since July 2024. The refineries are required to pay standard rate of sales tax on their input costs that they used to recover through sale prices under the zero-rated regime.
The 2024-25 budget converted the zero-rated regime but product prices fell in sales tax exempt regime. This meant the refineries input costs could not be adjusted through product pricing. This happened at a time when the refineries were scheduled to sign agreements with the government for their upgradation under the improved refining policy cleared after more than two years of negotiations and approvals.
The budget 2024-25 changed the refining economics as it nullified many of the incentives in the revised policy for brownfield refining projects. The refineries backed off at the last moment from signing upgradation agreements.
On the request of Petroleum Division, an increase of Rs1.87 per litre was allowed last week in Inland Freight Equalisation Margin (IFEM) to satisfy OMCs and refineries with an estimated financial impact of Rs34bn. The Petroleum Division argued that petroleum products (petrol, high speed diesel, kerosene and light diesel oil) had been classified as “exempted” under Finance Act 2024-25. Resultantly, the input sales tax had become cost of refineries and OMCs (Rs34bn for FY25) which could not be recovered through the product prices.
It proposed since the petroleum products were exempted from sales tax during the current financial year, the refineries and OMCs’ unadjusted sales tax during July-June FY25 on these products may be compensated through IFEM (estimated Rs34bn).
Published in Dawn, May 21st, 2025
