Rising Reliance on Petroleum Levy Raises Inflation and Tax Reform Concerns

The government’s growing dependence on the petroleum levy to meet budgetary revenue targets is raising concerns over the sustainability of the petroleum sector and its impact on consumers and the wider economy.

 

Petroleum Minister Ali Pervaiz Malik recently argued that the Petroleum Division cannot continue absorbing excessive taxation and financial interventions simply to meet fiscal targets, warning that the long-term sustainability of the sector must also be considered.

 

In a written response to the National Assembly, the minister said the petroleum levy has been budgeted to generate Rs1.676 trillion during the current fiscal year. The levy was temporarily reduced to provide relief to consumers following the US-Israel conflict with Iran but has since been restored in phases to remain aligned with the government’s revenue targets.

 

The restoration has also been linked to commitments under Pakistan’s ongoing Extended Fund Facility programme with the International Monetary Fund (IMF), including the requirement to achieve budgeted revenues, avoid unplanned expenditures and pass additional costs through to consumers.

 

According to the minister, the levy on both petrol and high-speed diesel (HSD) has now reached Rs80 per litre.

 

Recent fuel-price increases have also been influenced by agreements reached between the government and petroleum dealers and transport associations. The government negotiated with the Pakistan Petroleum Dealers Association after a nationwide strike, while the All Pakistan Goods Transport Association later suspended its strike following discussions over fuel prices, axle-load limits and toll taxes.

 

The increasing use of petroleum levies as a revenue source has become a recurring feature of successive federal budgets. The levy is relatively easy to collect, with petrol stations effectively serving as collection points, requiring limited direct involvement from the Federal Board of Revenue.

 

However, higher petroleum taxation can have wider economic consequences. Rising fuel costs increase transportation expenses and can feed into inflation, affecting household purchasing power, public transport users and business operating costs.

 

The continued reliance on indirect taxation is particularly concerning given Pakistan’s high poverty levels. Critics argue that the tax system should gradually shift away from heavy dependence on consumption-based taxes towards direct taxation based more closely on taxpayers’ ability to pay.

 

A broader reform of the tax structure could help reduce the burden on consumers while creating a more sustainable and equitable source of government revenue.