Pakistan court curbs super tax on exploration and production firms

Pakistan’s Federal Constitutional Court has issued a short verdict limiting the scope of the controversial super tax on exploration and production (E&P) companies, a move that could lead to partial reversals of taxes already paid and materially lift sector earnings over the medium term.

In its ruling, the court said that for E&P companies, the tax commissioner must compute tax payable strictly in accordance with the Fifth Schedule of the Income Tax Ordinance after examining each Petroleum Concession Agreement (PCA), adding that no super tax can be charged beyond the limit specified under Rule 4 of the Fifth Schedule.

“With respect to E&P companies, the commissioner shall compute the tax payable in accordance with the Fifth Schedule after examining each PCA and applicable law and no super tax will be chargeable beyond the limit specified in Rule 4 of the Fifth Schedule,” the court said in its verdict.

According to a report by Topline Securities, discussions with listed E&P companies suggest that the super tax will now be treated strictly in line with tax liability thresholds defined in individual PCAs and the Fifth Schedule of the Income Tax Ordinance.

“This interpretation is broadly consistent with how base tax rates for listed E&P companies already differ, reflecting the specific terms of their PCAs,” Topline Securities said in its note, adding that recalculating the super tax within the available space under PCAs could result in partial reversals of previously provided amounts.

The brokerage noted that existing tax calculations, including super tax, generally follow PCA and income tax ordinance formulas, which explains the variation in effective tax rates across the sector.

For context, Pakistan Petroleum Ltd. (PPL) had paid or provided super tax during FY2015-FY2019 related to income from non-agreement areas, including Bolan Mining Enterprises, the report said.

Topline Securities also pointed to a 2015 Federal Board of Revenue (FBR) circular stating that core E&P income was not included in the super tax calculation and was instead assessed separately under the relevant schedules of the tax law.

An analyst tracking the energy sector said the court’s decision could have meaningful earnings implications but cautioned that implementation will take time.

“The verdict is clearly supportive for E&P companies, but the actual financial impact will depend on PCA-wise tax workings with the authorities, which is a lengthy process,” said the analyst. “That said, even partial reversals could be earnings-accretive.”

Based on channel checks, Topline Securities expects the issue to reach finality only after detailed tax computations are completed with tax authorities for each PCA, potentially by the June 2026 financial results. The brokerage said it cannot rule out reversals of some or a major portion of the already provided super tax, though actual reversals could be lower than headline estimates.

The report added that some companies had already paid a portion of the provided super tax to tax authorities, implying a recurring earnings impact as well. If the full super tax working is adjusted downward by 50% to 100%, annual earnings could rise by an estimated 6% to 15%, according to Topline’s analysis.

Investors are now awaiting the release of the court’s detailed judgment, which is expected to provide greater clarity on implementation and company-specific outcomes.