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ISLAMABAD: Ministry of Energy (MoE) is likely to submit new refinery policy to the Economic Coordination Committee (ECC) of the Cabinet next week, official sources told Business Recorder.

Ministry’s official has held three meetings on the refinery policy. On Wednesday, the officials held the fourth meeting with Chief Executives and senior representatives of refineries to give final shape to the policy. Former Special Assistant to the Prime Minister on Petroleum, Nadeem Babar has contributed in the preparation of the document.

“The government will give 10 year tax holiday to new refineries and incentives to existing refineries for upgradation. “We want to finalise incentives before the federal budget, 2021-22,” the sources added.

The government is likely to charge additional funds from consumers by increasing petrol (motor gasoline) prices which will be deposited in a special account for upgradation. Ministry of Energy wants to create an escrow account for this purpose, but refineries argue that the amount should be deposited in each refinery’s special account.

The spending of this amount, to be maintained in National Bank of Pakistan, will be audited quarterly by OGRA, sources said, adding that 40 per cent cost of upgradation will be collected through imposition of deem duty on petrol whereas 60 per cent cost has to be borne by the refinery itself.

“If we don’t spend funds on upgradation of existing refineries, these will shut down,” the sources continued.

The refineries are to make Euro-5 petrol in the months to come as demand of furnace oil will be almost zero after disposing off furnace oil- fired power plants. These plants consume 2 million tons furnace oil per annum.

“Refineries argue that they should be given some amount to be used only for upgradation of plants,” the sources continued.

Locally produced crude shall be allocated to the closest refinery that can handle crude with such specifications. Once allocated, the same may not be cancelled if a new refinery comes up closer to the crude source, unless mutually agreed amongst the existing users, new proposed user and the Petroleum Division.

After upliftment of local crude oil, if so allocated, the refineries shall be free to import crude oil from any source except from prohibited countries, with no obligation or guarantee on the part of the Government of Pakistan.

Refineries will be allowed export of surplus petroleum products and/or products with specifications with no local demand.

No refinery shall be allowed to market, in Pakistan, petroleum products of specifications with inferior quality than those notified by the competent authority from time to time, unless it has a waiver from the Government of Pakistan. If it produces products of inferior quality and does not have a waiver to sell it locally, it shall be free to export it.

Pricing Regime: the product pricing formula of local refineries shall be based on “Import Parity Price” to be derived from the average daily Arab Gulf Mean FOB spot price, for the pricing period in use by OGRA, or if not published shall be derived from average daily Singapore Mean FOB price for the same period. All other elements including premium, freight, port charges, incidentals and Import duties shall be added in the above FOB to arrive at import parity price. Ad valorem taxes shall then be added to arrive at final consumer price.

There shall be no import duties on import of crude oil by refineries for their own use. The finished products, however, shall be subject to import duties notified by the competent authority from time to time.

There will be no guarantee of rate of return for existing, or new, refineries provided by the regulator or the Government of Pakistan. Any such policy protection to existing refineries, if existing today, in whatever form, deemed duty, return guarantee etc. shall be replaced by Import Parity Price upon notification of this policy subject to the applicable regulations of State Bank of Pakistan and fulfillment of all procedural requirements, refineries shall be allowed to open and maintain foreign currency accounts. They shall be allowed to retain a certain portion of export proceeds in foreign currency, if any, to meet operational requirements, as notified by SBP from time to time.

There shall be a ten percent 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/engine, from July 1, 2021 to June 30, 2026. The rate of import duty would then drop one percent per annum starting July 1, 2026, such that it is reduced to five percent on July 1, 2030 and shall then remain fixed at 5% thereafter. This declining scale tariff protection shall be available to any new refinery starting from its commissioning date of 10% for 5 years, with the rate declining 1% per annum for next five years and shall remain fixed at 5% thereafter, as long as such refinery starts construction before June 30,2024.

Fiscal Regime for new refinery projects: all new deep conversion oil refinery projects of a minimum of 100,000 bpd refining capacity, to be set up anywhere in the country, that are approved by the Ministry of Energy (Petroleum Division) before December 31, 2021, shall be eligible for the following fiscal incentives: (i) twenty year income tax holiday from profits and gains as provided in Clause 126 of the Income Tax Ordinance at the time of effectiveness of this policy, from the date of commissioning of the project; (ii) exemption from customs duties, withholding taxes, or any other levies on import of any equipment to be installed, or material to be used in the refinery without any precondition for certification by Engineering Development Board; (iii) exemption from general sales tax, or any other ad valorem tax on the import of equipment to be installed, or materials to be used in the refinery prior to commissioning, without any precondition for certification by Engineering Development Board; (iv) construction, operations and engineering services performed in Pakistan, whether by local firms or foreign firms operating in Pakistan, as well as procurement of any local materials shall remain subject to all applicable local taxes, whether provincial or federal; and (v) temporary imports by contractors/sub-contractors of all machinery, vehicles, plant and equipment, other materials and spares in connection with setting-up, operation, maintenance and repair, which are to be repatriated after completion of the works, shall be exempted from all customs duties, taxes, surcharges and levies on import, and shall be released by customs authority on provision of a bond by the importer, for the defined time period of use.

Upgradation/modernization/expansion of existing refineries: All existing refineries are incentivised to upgrade and modernize their refineries. There is no restriction on the technology, equipment of process to qualify for such upgradation, provided that it results in motor gasoline and diesel being produced by them meeting the specification notified by competent authority for import of such products as on the date of effectiveness of the policy. This could include modernization, expansion and bottom-of-barrel upgradation, whether individually or jointly, by the existing refineries. If an existing refinery qualifies as having met the requirements, its upgrade/modernization/expansion program shall be treated as new project, and shall be eligible for the following fiscal incentives, to the extent of such upgrade/modernization/expansion project: (i) ten year income tax holiday from profits and gains as provided in clause 126 of the Income Tax Ordinance, as on the effectiveness date of the policy, from the date of commissioning of the upgrade/modernization/expansion project; (ii) exemption from customs duties, withholding taxes, or any other levies on import of any equipment to be installed, or material to be used in the refinery prior to commissioning, without any precondition for certification by Engineering Development Board; (iii) exemption from general sales tax, or any other ad valorem tax on the import of any equipment to be installed, or material to be used in the refinery without any precondition for certification by Engineering Development Board; (iv) construction, operations and engineering services performed in Pakistan , whether by local companies or foreign companies operating in Pakistan , as well as procurement of any local materials shall remain subject to all applicable local taxes, whether provincial or federal. These fiscal incentives shall be available to existing refineries to the extent of upgradation/modernization/expansion under the policy, and the existing refinery shall be obligated to maintain segregated accounts to ensure the applicability of the same. Modalities to do such apportionment of existing versus upgrade/modernization/expansion business shall be as per Rule 13 of the Income Tax Ordinance, 2001.

Copyright Business Recorder, 2021

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