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Deemed duty withdrawal: ‘Refineries to suffer Rs 12 billion loss’

Staff Report

ISLAMABAD: A Spokesman for the Attock Refinery Limited on Thursday warned that in case of total withdrawal of deemed duties on High Speed Diesel by the government, the refineries would suffer a huge revenue loss of over Rs 12 billion, which would simply make the refineries unoperational.

He added that any cut in deemed duties of 10 percent on HSD products by local refineries would seriously impair refineries continued operations leading to substantial cut in local production and in turn would result in importing high volumes of petroleum products, further burdening the foreign exchange reserves of the country.

The refineries sustained operations would not only be at stake, but would also be unable to undertake various up-gradation and expansion projects vital to continue operations.

While referring to news report published under the caption ‘New oil pricing mechanism to cut OMCs, refineries profits’, the spokesman said that as mentioned in this news report a proposal is under consideration to cut the rate of deemed duty on HSD from 10 percent to 5 percent and impose 5 percent duty on crude oil and accordingly reduce the heavy rate of return being given to the refineries.

According to the news report the Secretary Finance has also advised the Senate Standing Committee on Finance & Revenues that the deemed duty which was generating only Rs 2 billion in the initial years to provide proper rate of return on investment to the refineries has, with the increase in oil prices, benefited the refineries to the tune of Rs 27 billion in July, 2007 to April, 2008, he mentioned.

A Spokesman, while referring to the report said that with increase in international oil prices the refineries are benefiting to the extent of Rs 27 billion on account of deemed duty. As a matter of fact the total deemed duty revenue is Rs 12 billion only (and not Rs 27 billion which was in fact the loss of custom duties revenue that shall occur to government in case of total elimination of this duty).

As regards to the proposal of reducing deemed duty from 10 percent to 5 percent on HSD and an imposition of 5 percent duty on crude oil would have a devastating impact on the refineries operations and they will literally be crippled if the proposal is accepted. The impact of reduction in deemed duty from 10 percent to 5 percent shall reduce the revenues of the three refineries by over Rs 6 billion and imposition of 5 percent duty on crude oil shall cost an additional Rs 23 billion on the basis of average prices for the last 11 months period. The impact of 5 percent duty on crude oil is far more than reduction of 5 percent duty on HSD as production of HSD represents only about 26 percent of crude oil processed.

It may be pointed out that the government had already withdrawn the deemed duties on kerosene oil and LDO in 2007 and this year the duty on jet fuel has also been withdrawn. Last year's loss of revenue to the three refineries was Rs 600 million whereas another Rs 800 million loss of revenue would occur to the refineries on withdrawal of duty on jet fuel. In case of total withdrawal of deemed duties on HSD, the refineries would suffer a huge revenue loss of over Rs 12 billion.

We may also add here that the three refineries production of HSD represents only 24 percent of total HSD consumption in the country. While the measure to reduce duty on HSD would have a serious impact on the refineries profitability and sustained operations, the benefit so derived would only be marginal and that too shall be absorbed in adjustment of subsidy without benefiting the consumer. The existing pricing formula has in-built checks on distribution of profits by the refineries as the profits available for distribution have been restricted to 50 percent of the refineries respective paid-up capital prevailing on 1st July, 2002 and profits over and above the prescribed limits, if any, are transferred to the reserves account for refineries up gradation.

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