Pakistan’s $6 billion refinery upgrade plan has faced a major setback after visiting IMF tax experts refused to compromise on the sales tax exemption that has stalled investment in the oil sector.
According to reports, the IMF mission rejected proposals from the Petroleum Division aimed at resolving the deadlock created by the Finance Bill 2025, which exempted petrol, diesel, kerosene, and light diesel oil from sales tax. This exemption prevents refineries from claiming input tax adjustments, a key incentive for investment.
A senior Petroleum Division official said the IMF provided no relief, effectively freezing refinery upgrade plans until at least the next national budget. While the IMF raised no objection to removing the exemption, it insisted on applying the full 18% GST on all petroleum products.
Officials warn that this would increase petrol and diesel prices by around Rs50 per litre, a politically and economically sensitive move. The government had proposed a partial GST of 0-3% on petroleum products and refinery machinery, but the IMF dismissed the plan. Suggestions to offset the GST with reductions in the petroleum levy were rejected by Islamabad, as the levy is a critical source of federal revenue while GST is shared with provinces.
To provide temporary relief, the government increased the Inland Freight Equalisation Margin (IFEM) by Rs1.87 per litre, recovering only a fraction of the Rs35 billion losses caused by the exemption. Refiners argue that this is a cosmetic fix that does not address structural issues in the FY25 tax policy.
The deadlock now threatens the Brownfield Refinery Policy 2023, which seeks to upgrade local refineries to Euro-V standards, double petrol production, increase diesel output by 50%, and reduce furnace oil output by 80% within seven years. So far, only Pakistan Refinery Limited (PRL) has signed an implementation agreement, while other refineries have delayed commitments due to the uncertain financial framework.
The government is now preparing a revised Brownfield Refinery Policy to restore investor confidence amid the stalemate.
