Govt Set to Scrap Tax on Oil Machinery Imports to Unlock $6 Billion Refinery Upgrades

ISLAMABAD — The government has finally moved to secure $6 billion in investment for Pakistan's oil refining sector, with plans to exempt machinery imports from sales tax to clear the way for long-stalled refinery upgrade projects. The implementation of the new Brownfield Refinery Policy, delayed for the past two years, has created uncertainty for the oil industry and banks that were set to finance multibillion-dollar plant upgrade projects across the country.

A high-level meeting chaired by Finance Minister Muhammad Aurangzeb on Thursday reaffirmed the government's commitment to removing tax and policy bottlenecks facing the sector, with a second meeting scheduled for Monday to finalise proposals before sending a summary to the Economic Coordination Committee (ECC) for approval.

Stability Clause for Investors

According to sources familiar with the discussions, the government may incorporate a "stability clause" into agreements to be signed between the Oil and Gas Regulatory Authority (OGRA) and refineries, ensuring no policy shifts occur while work continues on upgrading the plants. This provision is seen as crucial for attracting long-term investment in capital-intensive refinery modernisation projects.

The meeting was attended by Petroleum Minister Ali Pervaiz Malik, senior officials of the Finance Division, Petroleum Division, Federal Board of Revenue (FBR), OGRA, and representatives of refineries, focusing on addressing challenges that emerged following changes introduced through the Finance Act 2024.

Key Measures Under Consideration

The government is considering several measures to revive the stalled refinery upgrade programme:

• Sales Tax Exemption — Machinery imports for refinery upgrades to be exempted from sales tax, reducing project costs significantly
• Policy Stability Clause — Contractual guarantees ensuring no adverse policy changes during the upgrade project lifecycle
• Investor Confidence Mechanisms — Frameworks to restore investor trust and ensure cash flow stability for projects
• Tax Treatment Reforms — Addressing concerns arising from the shift from "zero-rated" to sales tax "exempt" status for petroleum products
• Fiscal Predictability — Ensuring long-term consistency in tax and regulatory frameworks for capital-intensive projects

Addressing Industry Concerns

Refinery representatives informed the meeting that changes in tax treatment had disrupted financial models for both ongoing and planned projects. The shift from zero-rated to exempt status meant that input sales tax could no longer be fully adjusted against output liabilities. Industry estimates suggest that a substantial proportion of operational and project-related taxes will add significantly to business costs under the current framework.

Despite these concerns, the meeting was viewed positively by industry stakeholders, particularly after the finance minister and petroleum minister assured participants that the government would work closely with all stakeholders to develop a sustainable and investor-friendly solution.

Finance Minister Aurangzeb assured refineries that the government was fully aware of their concerns and that outstanding issues would be resolved swiftly, reflecting a broader commitment to safeguarding nearly $6 billion in planned investments deemed critical for Pakistan's long-term energy security.

Strategic National Priority

The government reiterated that refinery modernisation was a strategic national priority due to its direct implications for fuel quality, import substitution, environmental compliance, and energy security. The Brownfield Refinery Policy has been specifically designed to encourage refineries to undertake major upgrades aimed at:

• Cleaner Fuel Production — Enabling production of Euro-V compliant fuels meeting international environmental standards
• Reduced Furnace Oil Output — Decreasing reliance on low-value furnace oil and shifting toward higher-value refined products
• Import Substitution — Reducing Pakistan's dependence on imported petroleum products through enhanced domestic refining capacity
• Environmental Compliance — Aligning Pakistan's fuel quality standards with global environmental regulations
• Energy Security — Strengthening the country's strategic energy infrastructure and reducing vulnerability to global supply disruptions

Industry Response

Industry executives welcomed the government's proactive engagement, stating that policy continuity and fiscal predictability are essential for projects involving long gestation periods and multibillion-dollar investments. Refineries have long maintained that upgrade projects require stable tax and regulatory frameworks over extended periods to attract financing and maintain investor trust.

Sources privy to discussions revealed that the Prime Minister has already directed all relevant ministries to streamline the implementation of refinery upgrade projects and dismantle policy hurdles. With the Finance Ministry now actively engaged in resolving outstanding issues, industry participants expressed optimism that a workable solution could emerge in the coming weeks.

The meeting also deliberated on the need to introduce a broader stability framework to protect approved investments from abrupt fiscal policy changes. Stakeholders believe such assurances will significantly strengthen confidence among investors, lenders, and international technology partners.

If implemented successfully, the Brownfield Refinery Policy is expected to transform Pakistan's downstream petroleum sector by enabling cleaner fuel production, improving refining margins, reducing reliance on furnace oil, and attracting substantial investment into energy infrastructure over the coming years.