ISLAMABAD: Claiming that the proposed federal budget 2024-25 practically cancelled the recently announced policy for setting up new and upgrading existing refineries, the oil industry has asked the government to revive the existing taxation regime, including continuing customs duty on diesel and sales tax laws on all petroleum products.

In a representation to the federal ministers for finance and petroleum, the Oil Companies Advisory Council (OCAC)—an independent organisation formed by refineries, oil marketing companies, and a pipeline company—has conveyed the industry’s concerns over the next year’s budgetary measures.

The OCAC said the withdrawal of the existing 10 per cent customs duty on the import of high-speed diesel (HSD) contradicted the “Pakistan Oil Refining Policy for New/Greenfield Refineries 2023” and the “Pakistan Oil Refining Policy for Upgradation of Existing/Brownfield 2023,” aimed at attracting foreign investment for new refineries and upgrading existing ones.

The above policies allow for a 7.5pc customs duty on HSD for 25 years for greenfield projects and a 10pc duty for brownfield projects for six years.

Calls for continuation of existing tax regime for POL products

“Reducing the duty to zero could lead to the closure of refineries, which currently supply over 60pc of the country’s petroleum products”, said the OCAC and called for correction of this “anomaly before the federal budget 2024-25 is approved”.

Secondly, the OCAC pointed out that the Finance Bill 2024 envisaged the exemption of sales tax on petrol, HSD, kerosene, and light diesel oil. Previously, these products were zero-rated, which meant that input sales tax on services was technically claimable against sales of these products but was piling up. “Implementation of this proposal will lead to disallowance of input tax on services for the oil industry thereby increasing their operating costs”, it said, demanding that petroleum products should be brought into taxability regime.

Moreover, the tax commissioners currently had the authority to issue exemption certificates in cases where an individual’s income is exempt from tax or eligible for a 100pc tax credit. Additionally, the Commissioner can issue these certificates for payments related to the sale of goods, services rendered, and contract execution by both resident and non-resident individuals, subject to certain conditions. However, the new finance bill proposed withdrawing these powers.

The OCAC pointed out that petroleum products produced by refineries have been exempt from withholding tax under the Income Tax Ordinance 2001 since the early 1990s, with the commissioner granting exemptions in accordance with the law. This exemption was provided because despite refineries’ high sales volume, their profit margins are low.

It said that if the proposed changes in the finance bill are implemented, refineries will face significant withholding tax liabilities without corresponding income to offset it. This would impose a substantial burden on refineries, making it difficult to continue operations due to the considerable amount of cash flow that would be immobilised. “This proposal is stringent and should be deleted, as it would negatively impact refineries by creating significant financial strain and operational challenges”, the OCAC claimed. The OCAC also expressed concern over another new budgetary measure regarding commissioner’s power to reject advance tax estimate in the absence of filing of relevant information by the taxpayer.

It said that under this proposal, the commissioner could outrightly reject the estimate and the advance tax would be calculated on turnover basis. This would create scenarios where tax refundable positions would be created at time of filing of return, while it would detrimental to the cashflow of the company. Further, the company would need to go through the hassle of processing the refund.

Published in Dawn, June 25th, 2024