As a result of discussions with the refinery sector, the petroleum division has eliminated a 10-year tax exemption, decreased the government’s commitment to the financing of oil refinery improvements, and increased compliance requirements.
The Cabinet Committee on Energy (CCoE), which is chaired by Planning Minister Asad Umar, had previously authorised a package of incentives for new refineries, including a 20-year tax break, but had refused to grant the same safeguards for older refineries that were being renovated.
According to insiders, the petroleum division has now addressed both of the CCoE’s concerns about providing incentives to the country’s ageing refineries. As opposed to the CCoE’s rejection of a 40 percent upfront government contribution, there is no longer a 10-year tax break.
There is a 10 percent customs tax on gasoline and diesel that must be collected in order to fund refinery improvements. These funds have already been set aside in the fiscal year 2021-22’s budget bill. Under the new policy, existing refineries would no longer be guaranteed a return on investment from the regulator or Pakistan’s government, and refineries may establish and keep foreign currency accounts. If any export profits are received in a foreign currency, they may keep a part of that money to satisfy operating needs.
“There shall be a tariff protection in the form of 10pc import duty on Motor Gasoline and Diesel of all grades as well as imports of any other white product used for fuel for any kind of motor or engine, effective from January 1, 2022 to December 31, 2027,” the policy said.
In order to upgrade, modernise, and expand, each refinery will keep a ‘Special Reserve Account,’ which will be a bank account established at the National Bank of Pakistan. The ‘Special Reserve Account’ will receive any additional income generated by the refineries as a result of the new tariff structure (over and above the current pricing mechanism for refineries).
In the company’s records, this will show as a distinct entry, and it will be used only for modernization, expansion, or upgrade projects at the current refineries, and not for dividend distribution or loss adjustment.
There are no restrictions on when refineries may use money from the “Special Reserve Account,” as long as the EPC contract for the particular modernization, expansion, or upgrade project has been granted. There will be a proportional use of the money taken out of the ‘Special Reserve Account.’
While petrochemical projects will account for 30 percent (net of taxes) of the total project cost, refineries will foot the bill for the remaining 70 percent through corporate debt, sponsors equity, or a combination of both. These funds will be used exclusively for upgrading, modernising, and expanding refineries. Reserve Account, certified by professional auditors (from major four audit firms), will be paid via an Oil and Gas Regulatory Authority method if the balance is more than 30 percent of the total project cost.
To be eligible for these fiscal incentives for modernization or expansion, the existing refinery must commit to the government by December 31, 2021 and provide an undertaking to the petroleum division regarding the proposed timeline, potential configurations, the tentative product slate after modernization (ensuring production of EuroV Mogas and Diesel), the size and all other relevant information. In return for your pledge of support, the petroleum division will grant the refinery a “exemption” from notification of fuel specifications by the petroleum division by October 31, 2021, allowing it to continue marketing its products until the agreed completion date of the upgrade but no later than December 31 2026.
Unless they obtain a ‘waiver,’ refineries that do not give such an assurance or do not satisfy the specified fuel standards would be prohibited from selling their products in Pakistan after June 30, 2022.