The government prohibited oil refineries from adjusting input taxes on crude oil purchases against sales tax on refined petroleum products, including gasoline and diesel. The change, introduced through the Finance Act 2024, has raised concern across the refining industry, as it threatens to increase operating costs and disrupt refinery upgrade projects.
According to Pakistan Refinery Limited (PRL), the tax adjustment restrictions come at a time when the industry is facing declining demand for high-speed diesel and furnace oil. The company reported a loss of Rs2.35 billion in the first quarter of fiscal year 2024-25, compared to a profit of Rs4.48 billion in the same period last year.
PRL highlighted the negative impact of this amendment in its quarterly financial report submitted to the Pakistan Stock Exchange (PSX).
PRL stressed that the new tax policy complicates efforts to raise financing for the Refinery Expansion and Modernization Project (REUP). The project aims to double the crude oil processing capacity from 50,000 to 100,000 barrels per day and replace old furnace oil with environmentally friendly products.
Although the front-end engineering design (FEED) will be completed in September 2024, the company is now navigating high project costs and uncertain financing.
To address these issues, PRL, along with other industry players, is actively working with the government and the Federal Board of Revenue (FBR) to reclassify sales of petroleum products as taxable. Discussions are still ongoing with the Private Investment Facilitation Board, which has directed the Petroleum Division to resolve the issue by November 12, 2024.
PRL’s struggle reflects broader industry challenges. The company reported lower sales volumes for key products, with nationwide demand for diesel and furnace oil shrinking.
This decline, coupled with the inability to offset input costs, leaves refineries vulnerable to financial pressure. Despite these hurdles, PRL reaffirmed its commitment to completing the REUP program and securing strategic investors to achieve financial close.
The Pakistan Oil Refining Policy 2023, notified in August 2023, initially promised incentives to refiners such as 2.5% on high-speed diesel and 10% on motor spirit (petrol) for six years. In February 2024, these incentives were revised to extend eligibility to seven years and increase the maximum incentives to 27.5% of project costs.
In addition, the policy allows refiners to claim a deemed royalty of 7.5% on high-speed diesel fuel for 20 years of project operation.
PRL continues to explore solutions with the government to mitigate the financial impact of the new tax regime. The results of the ongoing discussions are likely to shape the future of refining and investment operations in Pakistan.
Currently, the industry is at a critical juncture, balancing regulatory changes, financial challenges and the need to modernize operations in a competitive energy landscape.