Govt to raise petroleum levy, weighs partial GST to support refineries

ISLAMABAD: Pakistan’s government is set to raise the petroleum levy by Rs10 to Rs90 per litre and introduce a partial General Sales Tax (GST) of 3–5 per cent on key petroleum products in a bid to ease financial pressure on local refineries and sustain the oil supply chain, according to officials familiar with the matter.

The changes, approved by the Economic Coordination Committee (ECC) on May 13 and ratified by the federal cabinet, come amid ongoing discussions with the International Monetary Fund (IMF) on fiscal reforms.

Currently, petroleum products such as petrol, diesel, kerosene, and light diesel oil are exempt from GST under the Finance Act 2024-25. This has led to an unclaimable input tax cost of around Rs34 billion for refineries and oil marketing companies (OMCs) during the fiscal year, as prices are regulated and cannot be adjusted by sellers.

To offset these costs, the government will use the Inland Freight Equalization Margin (IFEM) as temporary reimbursement mechanism starting May 16. The recovery will stretch until the end of FY26, with Rs2.09 per litre charged on diesel and Rs1.07 on petrol to cover the tax burden.

Plans to apply a reduced GST rate on petrol and diesel were drafted in consultation with the Finance Ministry, Federal Board of Revenue, and the oil sector, but could not proceed due to IMF reservations. A full 18 per cent GST would have added nearly Rs45 per litre to retail prices—something the government is trying to avoid.

Alongside the tax adjustments, the ECC approved an increase in distribution margins: Rs1.13 per litre for OMCs and Rs1.40 for fuel dealers. These changes, combined with the IFEM cost recovery, are expected to raise fuel prices by approximately Rs4.12 per litre.

As a fallback, if GST exemptions persist into FY26, the government may continue compensating companies via IFEM. OGRA has been directed to finalise mechanisms for GST adjustments and digitisation cost recovery within a month. The cost of digitisation will be borne entirely by OMCs.

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