ISLAMABAD: Prime Minister Shehbaz Sharif has instructed the Petroleum Division to resolve the impasse over the Brownfield Policy, aimed at upgrading local refineries to produce Euro-V standard petrol and diesel, within two weeks.
The directive comes amidst delays in implementing the sales tax exemption critical to the policy’s success. The issue, a contentious budgetary measure from the FY25 Finance Bill, is essential for securing $5-6 billion in refinery sector investments. The Prime Minister’s Office has also asked the Petroleum Division to present concrete options to address the situation.
The Special Investment Facilitation Council (SIFC) had set a November 10 deadline for resolution, but the Petroleum Division failed to act. The situation worsened when the IMF, during its recent mission, rejected the government’s proposal to impose a 1-2% sales tax on petroleum products, instead recommending an 18% levy. Officials fear this could hike petrol prices by Rs45 per litre, a burden the government is unwilling to shoulder.
Refineries Voice Concerns
Local refineries argue that abolishing the sales tax exemption makes upgrade projects financially unfeasible, jeopardizing $1.65 billion in incentives tied to an ESCROW account. They estimate a $1.152 billion loss due to the change in the Finance Act, which shifts petroleum products from zero-rated to exempt status for sales tax purposes.
The ongoing stalemate is causing an annual foreign exchange loss of $1 billion, according to industry estimates. Refineries have urged the government to address the issue to ensure project sustainability and boost internal rates of return (IRRs).
Proposed Solutions
One suggestion involves reducing the current Petroleum Levy (PL) of Rs60 per litre by Rs45, replacing it with an 18% sales tax of Rs45 per litre. The government must now weigh these options to maintain affordability and incentivize much-needed investments in refinery upgrades.
The Prime Minister’s intervention underscores the urgency of reaching a consensus among stakeholders, including the Finance Division, FBR, and OGRA, to secure the future of the country’s refining sector.
Story by Khalid Mustafa
