ISLAMABAD: The Islamabad High Court (IHC) has ruled that the sales tax zero-rating applicable to petroleum crude oil also extends to condensate, marking a significant win for the petroleum industry in its dispute with the Federal Board of Revenue (FBR).
The IHC declared the tax department’s interpretation of tax laws as “illegal and misconceived,” rejecting the tax authority’s longstanding position that condensate should be excluded from zero-rating under SRO 549(I)/2008. The ruling resolves years of contention between the FBR and multiple petroleum exploration and production companies.
The verdict was delivered in a series of Sales Tax Reference (STR) cases where petroleum companies argued that condensate, a hydrocarbon liquid derived during natural gas production, qualifies under the same tariff heading—PCT 2709.0000—as crude oil, which is zero-rated for sales tax under the Sales Tax Act.
While earlier rulings by assessing officers and the Appellate Tribunal Inland Revenue (ATIR) had gone against the taxpayers—citing distinctions between crude oil and condensate based on production methods and physical properties—the IHC dismissed those conclusions as scientifically flawed and legally untenable.
Criticizing the tax authorities’ rationale, the IHC judgment noted, “Anyone familiar with the petroleum industry is aware that condensate and crude oil are two different products of the petroleum family. But the taxpayers’ case was never that the two are physically identical—it was that condensate falls under the same tariff heading and should receive identical tax treatment.”
The Court further remarked on the ATIR’s logic, suggesting that the tribunal’s reasoning “bordered on absurdity,” and sarcastically stated that its member might be better suited to teaching petroleum engineering than adjudicating tax disputes.
Ultimately, the IHC ruled in favor of the petroleum companies, affirming that sales of condensate fall within the scope of zero-rating for sales tax purposes. The judgment delivers a setback to the FBR and could have significant financial implications for both the government and oil and gas producers operating in Pakistan.
