ECCs ongoing deliberations on the proposal to charge an additional amount of Rs 1.2/liter over and above the existing 7.5 percent deemed duty for oil refineries on diesel (HSD) sales, sounds largely uncalled for.
Its sub-committees recent recommendation is aimed to boost the implementation of Euro-II desulphurization plants to be implemented by January 2012. Euro-II is a Europe-based standard adopted by the government of Pakistan to ensure compliance of low-sulphur diesel resulting in environment friendly exhaust emissions by vehicles.
It is important to note here, that local refiners produce diesel with one percent sulphur content, whereas the imported refined diesel contains half that amount. So the basic aim of deemed duty is just to reduce the sulphur content by 0.5 percent.
But the sub-committees recommendation comes apparently on the pressure of the refineries, who have been pleading the case for the past one year. In fact, if this proposal (which also includes a suggestion to rename deemed duty as processing fee) to charge Rs 1.2/ litre, is approved it will effectively mean succumbing to refiners wishes as it equals nearly 2.5 percent of prevailing FOB oil prices.
Deemed duty was allowed for the sole purpose of development in investment and up-gradation by refineries. The government had allowed 10 percent deemed duty between 2002 and 2008; however, it was revised downwards to 7.5 percent in 2008 as refineries were getting higher amount at the expense of both general consumers and national exchequer, owing to high international oil prices.
Despite enjoying higher duty for six years, however, all efforts to modernize plants have been confined only to paper work. Many refiners have carried the design specification and feasibility studies - but with no physical implementation. Adding to the agony, they have instead been demanding more incentives, when in fact, as in most of other industries, protectionism has failed to yield benefits in case of refineries as virtually all the collected amount has been used to fatten on their reserves.
The countrys listed refineries (NRL, PRL, ATRL & BOSICOR) have earned approximately Rs 35 billion (net of all taxes) during FY03 - FY08, a period when deemed duty was 10 percent. Including PARCO in the list takes the total amount earned by local refineries to a massive Rs 75 billion in six years. And based on provisional figures, oil refineries gathered no less than Rs 15.7 billion from deemed duty receipts in FY09.
At current oil prices and rupee dollar parity, deemed duty amounts to Rs 2.96/liter. Being conservative, assuming no growth in HSD sales in FY10, local oil refineries are expected to pocket a sizable amount of Rs 26 billion under this head. This amount is of course, subject to considerable change with movement in oil price and exchange rate.
With oil prices expected to be stable throughout the year, Rs 26 billion may just sound a lesser figure, considering that experts put the Euro-II implementation estimate at Rs 42 to 45 billion in the next three years.
However, there seems to be no justification in refineries claim of the current deemed duty of not being sufficient enough to generate the required amount for producing Euro-II diesel in three years time. At current levels of oil prices, refineries could make as much as Rs 78 billion in next three years, which is way above the estimated amount to invest in Euro-II.
At current rate of international crude oil price, 10 percent deemed duty on HSD would mean Rs 1.2/ltr increase in HSD product prices, enabling refineries to pocket Rs 35bn, which is Rs 9bn higher than their current deemed duty collection of Rs 26bn.
Hence, the refiners cry for higher duty and sub-committees proposal for the same is totally unwarranted. But given the governments weak writ against corporate giants, one cant be too sure about their decision. One can just wait and watch how the government reacts to this proposal and that maybe - just may be - this time around they will take the right decision.