The government is considering a major change to Pakistan’s petroleum taxation policy by gradually reducing the Petroleum Levy to between Rs. 5 and Rs. 10 per liter while exploring alternative sources to replace the revenue generated through the levy.
According to a report by Business Recorder, the proposal aims to compensate for an estimated Rs. 1.45 trillion in lost petroleum levy revenue by generating around Rs. 1.5 trillion annually through additional taxes, spending reductions, fewer exemptions and stronger tax enforcement.
The proposal has reportedly been circulated by the Ministry of Planning to the Finance Ministry, Federal Board of Revenue and State Bank of Pakistan for review and further consideration.
The move comes as Petroleum Levy collections have become an important source of government revenue. During fiscal year 2025-26, collections reached Rs. 1.557 trillion, exceeding the original target of Rs. 1.468 trillion.
For fiscal year 2026-27, the government has set a Petroleum Levy collection target of Rs. 1.576 trillion. Any reduction in the levy could therefore create a substantial gap in government finances unless replacement revenue measures are successfully implemented.
One of the options being examined involves increasing Federal Excise Duty and regulatory duties on luxury imports, expensive vehicles and other high-end consumption.
Officials estimate that these measures could generate between Rs. 200 billion and Rs. 280 billion annually once they are fully implemented. This would represent a significant contribution toward replacing revenue lost through a lower Petroleum Levy.
The government is also examining the possibility of reducing tax exemptions as part of its broader revenue strategy. Limiting exemptions could increase the effective tax base and provide additional resources without relying entirely on higher petroleum-related charges.
Spending cuts and improved enforcement are also included in the proposal under consideration. Better enforcement could help increase tax collection by reducing leakage, underreporting and other weaknesses in the existing revenue system.
A reduction in the Petroleum Levy could have implications for consumers, businesses and the wider economy. Since petroleum products are closely linked to transportation and logistics costs, changes in fuel-related taxation can influence the cost of moving goods and people across the country.
Lowering the levy could potentially reduce the tax component of petroleum prices, although the final impact on consumers would depend on international oil prices, exchange rates, other taxes and the government’s overall pricing mechanism.
The proposal also highlights the government’s challenge of balancing revenue collection with economic relief. Petroleum taxes provide substantial funds to the national exchequer, but high fuel-related charges can increase financial pressure on households and businesses.
Replacing petroleum levy revenue with taxes on luxury consumption would shift a greater portion of the additional tax burden toward higher-value imports, expensive vehicles and affluent consumers rather than relying primarily on fuel users.
However, the proposal is still under review, and its final structure could change following consultations among the relevant economic institutions. Any decision would need to account for Pakistan’s revenue requirements, fiscal targets and broader economic conditions.
The government’s target of generating around Rs. 1.5 trillion through alternative measures indicates the scale of the challenge involved in reducing reliance on the Petroleum Levy. The success of the plan would depend on how effectively new taxes, reduced exemptions, expenditure controls and enforcement improvements are implemented.
For now, the proposal remains under consideration by the concerned authorities. If approved, it could mark a significant shift in Pakistan’s approach to petroleum taxation and government revenue collection.