Refineries are expressing significant dissatisfaction with the government’s decision to exempt imported petroleum products from sales tax, a move they warn could severely impact the industry and derail a planned $4.5 billion investment over the coming years.
Last week, five leading refineries sent a letter to the Finance and Petroleum ministries, arguing that the removal of sales tax from MS petrol, high-speed diesel, kerosene, and light diesel oil will prevent local refiners from claiming 70 percent of their input sales tax. This change will impede the refineries’ ability to recoup taxes paid on taxable purchases and services, according to a report from a national daily. Because the selling prices of these products are regulated, refineries cannot pass on the increased costs to customers. This will adversely affect their operations, potentially making them unsustainable.
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The letter also highlighted that the government recently announced the Pakistan Refining Policy for the Upgradation of Existing/Brownfield Refineries 2023, which offers various incentives for substantial investments in the sector. Currently, refineries are undertaking upgrade and expansion projects worth $4.5 billion, expected to boost the economy through import substitution and job creation. However, the inability to claim input tax on project-related imports and purchases will increase costs and threaten these upgrades. The refineries argued that the refining policy would become redundant without the ability to claim these taxes, causing the sector to miss out on the $4.5 billion investment. They view the government’s decision as counterproductive, straining cash flows and discouraging investment in upgrades and other expansion-related projects.
The sector criticized the practice of offering incentives and then quietly removing them. They urged the federal government to maintain the existing taxable status of petroleum products to support the industry and ensure the continuation of planned investments.
