ISLAMABAD: In a major setback for Pakistan’s oil refining sector, the International Monetary Fund (IMF) has refused to accept the government’s proposals aimed at facilitating $6 billion in refinery upgrade projects, dealing a blow to efforts to produce cleaner Euro-V standard fuels.
A senior Petroleum Division official confirmed to ‘The News’ that the IMF’s rejection has effectively stalled the planned investments, leaving top officials—including Federal Petroleum Minister Ali Parvaiz Malik—deeply frustrated. The minister immediately escalated the matter to the prime minister, urging urgent intervention.
“In the Finance Bill for FY26, the government financial managers as per their promises have not resolved the issue of sales tax exemption on POL products — a measure introduced in the Finance Bill for FY25 that has made the upgrade projects extremely unviable,” he said.
The petroleum minister had earlier told ‘The News’ that since the IMF response had not been received on time, the government could not remove sales tax exemption in the budget for FY26. The sales tax exemption measure earlier imposed by the Federal Board of Revenue (FBR) in the Finance Bill for FY25 resulted in a loss of Rs34 billion to refineries and oil marketing companies in the outgoing fiscal.
Now the government functionaries have received the IMF response rejecting the government proposals.
The petroleum minister, according to the top official, seems determined to resolve the issue as the upgradation of the local refineries was a project of paramount importance. “Once these upgrade projects are completed, the consumers would use fuel as per the Euro V specifications which are environment friendly. The production of furnace oil will be at the lowest ebb after the upgradation and the whole crude oil would be converted into finished products at par with Euro-V specifications.”
When asked about the nature of the government proposals, that the IMF refused to accept, the official said one was seeking restoration of zero-rated status of POL products and the second was about imposition of a 10 percent sales tax to make upgrade projects viable. The IMF has disallowed the restoration of zero rate status. However, on the proposal of imposition of the 10 percent sales tax, the Fund argued that FBR functionaries didn’t have a capacity to judge if the imported plants or spare parts and machinery are new or old ones which will be part of the upgrade projects for imposition of the sales tax. So IMF has refused to accept both proposals, urging the government to come up with new proposals for upgrade projects.
The officials said that the IMF had agreed to impose the 10 percent sales tax on motor spirit and high speed diesel which would have impact of Rs25 per litre.
However, the official said that some of the refineries are in talks with lenders for investment in upgrade projects, but lenders were eyeing the budget for FY26 in which the government has failed to undo the sales tax exemption on POL products.
On May 20, 2025, the managing directors and CEOs of the country’s leading refineries in separate meetings with the petroleum and finance ministers stressed the solution of sales tax exemption imposed on POL products in the upcoming budget ensuring no change in tax policy for seven years so that refineries could initiate investment of $6 billion on their upgrade projects.
