As the news reports suggest, Government is working upon a new refining policy in order to incentivize up-gradation of local refineries on international standards along with establishment of new refineries where the incentives will lead to favorable pricing regime and tax breaks.
The major factor in the upcoming policy is introduction of 10% import duty on Petrol and Diesel for next five years. The duty will decrease by 1% every year from 2026 till 2030 and will remain at 5% thereafter.
Moreover, a 5% duty on the import of crude oil is also expected to be removed. Presently there is a 5% duty on import of crude oil while for Petrol/Diesel there is 5%/13% effective duty. Thus with the implementation of the new policy, duty protection for local refiners will increase from 0% to 10% on Petrol while for Diesel, it will increase to 10% from 7.5% as currently, of the 13% import duty, refiners keep 7.5% with them.
Incentives for new Refineries
As per the proposed policy, major incentives include for new refienries include
a) Twenty year income tax holiday from profits and gains
b)) Exemption from duties and taxes on import of equipment or material.
However, the incentives are applicable to those new refineries which have a minimum capacity 100,000 barrels per day and approval by the Ministry of Oil and Petroleum before 31-Dec-21.
For existing refineries, the same incentives are available for up-gradation however the up-gradation plan needs to be approved by Ministry of Energy by 31-Dec-2021.
The plan must include proposed timeline, product details after upgradation and total size of upgradation among others.
Once approval is granted, the refinery will be able to market their product however, in case of failure to get approval, the refinery won’t be able to market their product beyond June-2022.
Refinery sector outlook
The upcoming policy has all the ingredients to change the local refinery sector where existing refineries are also being given incentives for up-gradation. The policy will motivate refineries to choose Catalytic Cracking Units to convert Furnace Oil into Petrol and Diesel which lead to meeting Government standards and improving overall Gross Refinery Margins.
Installation of Catalytic Cracking unit in a refinery will need a Capital Expedition of up to $300mn (~Rs. 48billion).
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