In a significant move to address a mounting financial crisis, Pakistan State Oil (PSO) has formally requested the Federal Board of Revenue (FBR) to grant zero-rated tax status on the supply of petroleum products. This critical appeal aims to prevent the accumulation of massive sales tax refunds, which are projected to balloon to a staggering Rs. 700 billion by June 2025 if the current tax structure remains unchanged.
The Core of the Financial Quagmire
PSO, the country's leading oil marketing company, finds itself trapped in a severe liquidity crunch due to the existing tax mechanism. Under the present system, the company pays a sales tax of 18% on its purchases of crude oil and petroleum products. However, it can only claim refunds from the government after it supplies these products to its customers. This creates a dangerous gap where PSO's cash is continuously locked up, awaiting reimbursement from the national exchequer.
The situation has deteriorated to a point where the company's outstanding refunds, including late payment surcharges, have already reached an alarming Rs. 360 billion. This massive sum represents capital that is desperately needed for PSO's operational expenses and for financing future imports of essential fuels. The company has warned that without immediate intervention, this figure is set to double within the next fiscal year, pushing the state-owned enterprise toward an unsustainable financial precipice.
Proposed Solution and Government Engagement
To break this debilitating cycle, PSO's management has proposed a clear and direct solution: shifting the tax regime on petroleum products from the standard rate to a zero-rated category. This change would mean that PSO would not have to pay the 18% sales tax upfront on its purchases. Consequently, the issue of refunds and the associated cash flow blockage would be eliminated at the source.
PSO has actively engaged with the highest levels of government to highlight the severity of the crisis. The company's case was presented before the Cabinet Committee on Energy (CCoE) in a meeting held on April 30, 2024. During this high-stakes presentation, PSO officials detailed the crippling impact of the refund buildup on the company's ability to function and, by extension, on Pakistan's entire energy supply chain.
The committee, recognizing the gravity of the situation, directed the relevant ministries to collaborate with PSO and the FBR to find a workable resolution. The goal is to formulate a proposal that can be presented for formal approval, aiming to provide permanent relief from this recurring financial strain.
Broader Implications for Pakistan's Economy
The ramifications of PSO's refund crisis extend far beyond the company's own balance sheet. This issue is a major contributor to the broader circular debt plaguing Pakistan's energy sector. When PSO does not receive its due refunds on time, it struggles to pay its own suppliers, which include major refineries and international fuel suppliers. This creates a domino effect of unpaid dues throughout the energy value chain.
Furthermore, the liquidity shortfall hampers PSO's capacity to ensure timely imports of petroleum products and liquefied natural gas (LNG). Any disruption in these imports can lead to fuel shortages and power generation deficits, directly affecting industrial output, transportation, and the daily lives of citizens. The government's own finances are also impacted, as the growing refund payable becomes a significant liability on the national books.
Experts argue that granting zero-rating is not just a corporate bailout but a necessary structural reform. It would streamline the tax collection process, reduce administrative burdens on the FBR for processing huge refunds, and inject much-needed stability into the country's critical energy infrastructure. The move is seen as essential for ensuring energy security and preventing a fiscal meltdown in a key state-owned enterprise.
As the June 2025 deadline for the projected Rs. 700 billion buildup looms, the ball is now in the court of the FBR and the federal government. The decision they make will have profound consequences for Pakistan's economic stability and its ability to keep the wheels of its economy and transportation sector moving smoothly.
