Tuesday, February 27, 2024

Govt Eliminate 10-year tax relief for oil refineries

The petroleum division has eliminated a 10-year tax exemption protection, reduced the government’s participation in the financing of renovations to existing oil refineries, and increased compliance requirements as a result of agreements with the refining business.

The Cabinet Committee on Energy (CCoE), led by Planning Minister Asad Umar, had previously approved an incentives package for modern refineries, which included a 20-year tax break, but had refused to extend the same safeguards to existing refineries that were undergoing renovation.

In response to the CCoE’s concerns about incentives for aging refineries presently operating in the country, sources said the petroleum division has now withdrawn both complaints expressed by the CCoE. The 10-year tax vacation has been repealed, and the upfront government contribution has been cut to 30 percent in the final draught, as opposed to the 40 percent rejected by the Commission on Constitutional and Economic Rights.

This payment must be generated through a 10 percent customs levy on gasoline and diesel, and the funds must be placed in a special reserve account to be used to finance refinery modifications. This contribution has already been included in the budget plan for the fiscal year 2021-22. There would be no rate of return guarantee for current refineries granted by the regulator or the government of Pakistan under the updated policy, and refineries will be permitted to open and keep foreign currency accounts in their own names. They will be permitted to retain a portion of the export revenues in a foreign currency, if any, in order to meet their operating needs in that currency.

During the period January 1, 2022, to December 31, 2027, tariff protection in the form of a ten percent import charge on motor gasoline and diesel of all grades, as well as on imports of any other white product used as fuel for any sort of motor or engine, was in place, according to the policy.

Each refinery shall maintain a ‘Special Reserve Account’ for the purpose of upgrading, modernizing, and expanding its operations in a separate bank account to be opened with the National Bank of Pakistan. Upon implementation of the amended tariff structure, any additional revenue (net of taxes) obtained by refineries above and beyond the present pricing mechanism for refineries will be remitted to the ‘Special Reserve Account.’

In the company’s books of accounts, this fund will be designated as a separate account, and it will be used exclusively for up-grading, modernization, or expansion projects at the existing refineries. It will not be used for dividend distribution, loss adjustment, or other general corporate purposes at the existing refineries.

Once the EPC contract for the respective up-gradation, modernization, or expansion project has been awarded, the refineries will be able to withdraw funds from the ‘Special Reserve Account.’ The funds withdrawn from the ‘Special Reserve Account’ would be applied in a proportional manner to the various projects.

It is intended that these funds be used solely for refinery up-gradation, modernization, and expansion. Petrochemical projects will account for no more than 30 percent (net of taxes) of the total project cost, with the remaining 70 percent funded by the refineries themselves, either through corporate debt, sponsors equity, or a combination of the two. It is proposed that any balance in the ‘Special Reserve Account’ exceeding 30% of the total cost of the project, as verified by independent auditors (from the Big Four audit firms), be settled through a mechanism to be devised by the Oil and Gas Regulatory Authority. The mechanism will be devised by the Oil and Gas Regulatory Authority.

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