Oil ministry seeks Rs1tr levy cap

The Petroleum Division has opposed increasing the petroleum levy tax target and suggested cutting it to Rs1 trillion while reducing the rate to Rs50 per litre until global prices remain high, warning that higher levies were creating affordability issues and threatening social stability.

The division has submitted its budget 2026-27 recommendations to the finance ministry. Discussions have also been held at the Prime Minister's Office to find a way out of the current situation, where consumers face the brunt of higher fuel prices coupled with higher taxes.

Petroleum Minister Ali Pervaiz Malik recently wrote to Finance Minister Muhammad Aurangzeb, saying that considering the US?Iran conflict and its impact on global energy prices, reducing reliance on petroleum levies had become imperative to cushion vulnerable segments of society.

The Petroleum Division has proposed that the annual petroleum levy collection target be reduced to Rs1 trillion for the next fiscal year. This is Rs727 billion less than the International Monetary Fund (IMF)'s projection for the next year and also Rs468 billion less than this year's original target.

As an alternative, the division has proposed reducing the levy rate on petrol and diesel to Rs50 per litre – a cut of Rs30 from the rates agreed with the IMF. The government is currently charging Rs118 per litre in levy on petrol.

The division proposed that the levy rate could be increased from Rs50 per litre only if global prices fall below $60 per barrel.

After the war began, Pakistan increased diesel prices by 48% and petrol by almost 56% to recover global prices and collect more taxes on petrol. The recommendations have been shared with the finance ministry ahead of the budget, which the government plans to unveil on June 5. Discussions with the IMF on the next year's budget have also concluded.

The Petroleum Division believes that reducing targets and rates is critical to easing the burden on the people and ensuring economic stability. However, the levy appears to be the most favoured tool of the Pakistan Muslim League-N (PML-N) government. Data shows that since the Pakistan Democratic Movement (PDM) government came to power in 2022, annual petroleum levy collection targets have been exceeded every year. From July 2022 to June this year, estimated levy collection stands at Rs4.3 trillion. By contrast, during the last two years of the Pakistan Tehreek-e-Insaf (PTI) government, levy collection fell below budget targets.

The government has used the levy to offset revenue shortfalls from the Federal Board of Revenue (FBR) and is under pressure from various sides to rationalise taxes on fuel, which is used by both poor and rich alike. The tax on petrol is almost 36% of the total price. By comparison, the government charges 18% sales tax on jet fuel.

The Petroleum Division has also urged the finance ministry to reduce sales tax on LPG – a fuel used by the poor – from 18% to 10% in the next budget. It has recommended not increasing the petroleum levy collection target on LPG.

The division has also recommended addressing Pakistan State Oil (PSO)'s legacy issues through budget allocations and ending cross?subsidies on gas prices.The Petroleum Division has also sent proposals to the finance ministry on issues facing the oil and gas sector, recommending that they be resolved in the upcoming budget. Oil and gas companies are complaining about undue tax burden, unjustified tax demands and the blocking of their refunds to inflate tax revenues. The sustainability of the energy supply chain and the financial viability of the energy sector demand that companies in the oil, gas and mineral sectors are not unnecessarily burdened with additional taxes that erode their viability, according to the Petroleum Division.

It has asked the FBR to clear Rs55 billion in pending tax refunds to Sui Northern Gas Pipelines Limited, which is limiting the company's ability to clear dues. The Sui companies also face Rs182 billion in tax demands from the FBR on the swapping of imported gas used in the Sui Southern Gas Company Limited system with local gas. The division has asked the FBR to amend the sales tax law to address this issue in the budget.

The finance ministry has not budgeted for gas subsidies, distorting prices as the government charges these subsidies to residential consumers. The Petroleum Division has asked the ministry to set aside Rs130 billion in the next fiscal year for gas subsidies instead of passing the burden to residential and other consumers.

It has also asked the ministry to fully budget the cost of loans that PSO takes to import petroleum products. PSO incurs huge exchange rate losses because of foreign loans for imports and has demanded a budget allocation to clear Rs61 billion in arrears.

The division has also encouraged abolishing the 10% super tax on oil and gas sector companies, which has distorted their profitability.