Oil sector demands reversal of exemptions withdrawal

Our Correspondent
Friday, Jun 21, 2024

KARACHI: The oil sector has sought the reversal of the withdrawal of both sales tax exemptions on certain petroleum products and the customs duty on high-speed diesel (HSD).

The Oil Companies Advisory Council (OCAC) sent a letter to the ministeries of finance and petroleum on Thursday, highlighting its concerns over certain measures announced in the FY25 budget.

The oil body said that proposed changes to the import tariff of HSD, which suggest reducing the current tariff of 10 per cent to zero per cent, “contradict 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.” Under the two policies, the statement read, authorities had imposed a 7.5 per cent customs duty on HSD for 25 years for Greenfield projects and a 10 per cent duty for Brownfield projects for a specified period.”

According to the OCAC, reducing the duty to zero per cent could lead to the closure of refineries, which currently supply over 60 per cent of the country’s petroleum products. “We strongly oppose this change and urge the Federal Board of Revenue (FBR) to correct this anomaly before the budget is approved”, it stated.

Per the oil body, the Finance Bill 2024-25 has proposed the withdrawal of exemptions of sales tax on motor spirit (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.

The OCAC now fears that the implementation of this proposal will lead to the disallowance of input tax on services for the oil industry, thereby increasing their operating costs, and recommends that petroleum products should be brought into the taxability regime.

In its letter, the oil body added, :“the commissioner currently has the authority to issue exemption certificates in cases where an individual’s income is exempt from tax or eligible for a 100 per cent tax credit. 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 However, it is proposed that these powers be withdrawn.”

The letter noted that since the early 1990s, petroleum products produced by refineries have been exempted from withholding taxes under the Income Tax Ordinance 2001, with the commissioner granting exemptions in accordance with the law. This exemption was provided because, despite the high sales volume of refineries, their profit margins were low.

If the proposed changes are implemented, refineries will face significant withholding tax liabilities without the corresponding income to offset them. 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 immobilized, the OCAC said.

It said that this proposal is stringent and should be withdrawn, as it would negatively impact refineries by creating significant financial strain and operational challenges.

The new proposal, according to the OCAC, allows the commissioner to outrightly reject the estimate and calculate the advance tax on the turnover basis. This may create scenarios where tax refundable positions would be created at the time of the filing of returns. The OCAC added in the letter that not only will this be detrimental to the cash flow of the company, but the company will also go through the hassle of processing the refund. The OCAC is concerned that the proposed changeswill increase the cost of doing business as companies would be paying extra tax and urges authorities to withdraw the powers granted to the commissioner in the said proposal and accept the estimates calculated as per the details given by the taxpayer.

In the letter, the oil body said: “the export of goods has been governed by a final tax regime where the withholding tax collected by authorized dealers on the remittance of export proceeds is considered the final discharge of the exporter’s tax liability, regardless of the underlying income or loss. It is now proposed that the tax collected from these exporters at the rate of 1.0 per cent will be treated as the minimum tax. Consequently, these individuals will be required to compute their normal taxable income or loss according to the applicable provisions.”

It added, “if 1.0 per cent withholding tax is less than the tax computed on the taxable income, the difference will need to be paid. This change in the tax regime means that exporters will also be liable to pay super tax, unlike the previous system where their income, being subject to final tax, was exempt from this additional tax.”

Due to low domestic consumption of certain refinery products, such as the FFO and Naphtha, refineries are compelled to export these products, according to the OCAC.

Exporting these products not only brings valuable foreign exchange to the country but also ensures the continuous operation of refineries, enabling the production of other essential products like HSD and PMG to meet local demand, the OCAC said, recommending that the proposal for the abolition of the final tax regime on export should be withdrawn.