Pakistan may introduce a major change to its petroleum taxation policy as the government considers reducing the Petroleum Development Levy (PDL) to between Rs5 and Rs10 per litre. The proposal could lower the levy burden on petrol consumers, but it may also create a revenue shortfall of up to Rs1.5 trillion for the cash-strapped government.
The proposal was submitted by Jamaat-e-Islami and circulated by the Ministry of Planning to the Finance Ministry, Federal Board of Revenue and State Bank of Pakistan. It suggests replacing the government’s reliance on petroleum levy collections with additional taxes on luxury consumption, wealthy individuals, large corporations, property, agriculture and the retail sector.
However, the proposed change comes with serious financial challenges. The government would need to introduce alternative revenue measures quickly to prevent a major gap in the federal budget. The plan would also require careful discussions with the International Monetary Fund, as any major change in the tax structure could affect Pakistan’s fiscal commitments.
Official figures highlight the scale of the issue. The government collected around Rs1,557 billion through the Petroleum Development Levy during the fiscal year 2025-26, exceeding its target of Rs1,468 billion. For the current fiscal year, the government expects to collect approximately Rs1,576 billion through the levy.
If the PDL is reduced to Rs5–10 per litre over one year, annual collections could fall to around Rs90–180 billion. This would create a potential revenue shortfall of approximately Rs1.45–1.50 trillion. The proposal therefore calls for a broad-based revenue drive to recover the lost funds.
Another challenge is the difference between petroleum levy and Federal Board of Revenue taxes. The petroleum levy is classified as non-tax revenue and goes directly to the federal government. In contrast, most FBR taxes are distributed between the federal and provincial governments under the National Finance Commission Award.
This means the federal government cannot simply collect an additional Rs1.5 trillion in FBR taxes and expect to receive the same amount in federal revenue. According to the proposal, gross FBR collections may need to be around 2.3 times the PDL shortfall unless the government relies on other non-tax measures, surcharges or a special arrangement under the NFC framework.
The proposed alternative revenue plan places significant emphasis on wealthy individuals and luxury consumers. The government may consider increasing Federal Excise Duty and regulatory duties on luxury imports. First-class and business-class air travel, as well as high-end vehicles, could also face additional taxes.
A wider luxury-tax package could potentially generate between Rs200 billion and Rs280 billion. The proposal also suggests an additional surcharge of 5 to 7.5 percentage points on the country’s largest 200 to 300 corporations and ultra-high-income individuals. This measure could raise another Rs180–250 billion if companies are unable to shift profits or avoid the additional burden.
Sectors such as banking, exploration and production, fertiliser and cement could face increased taxation. Pakistan’s existing super tax, which can reach 10 percent, currently generates an estimated Rs150–200 billion.
The proposal also highlights the country’s large tax-exemption system. Total tax expenditure during FY2025-26 was estimated at approximately Rs2.35 trillion. This included sales-tax exemptions of around Rs1.27 trillion, income-tax exemptions of Rs580 billion and customs-related exemptions of nearly Rs500 billion.
After protecting exemptions linked to food, healthcare, education and defence, the proposal estimates that Rs1.2–1.4 trillion could potentially be reviewed. Recovering 35 to 50 percent of this amount over two years could generate between Rs450 billion and Rs650 billion.
Lower interest rates have also been identified as a possible way to create fiscal space. Pakistan’s debt-servicing bill reached around Rs6.9 trillion in FY2025-26, including approximately Rs6 trillion in domestic debt. Since a large portion of domestic borrowing is linked to floating interest rates, a 100-basis-point reduction could eventually save the government around Rs350–500 billion annually as Treasury bills and other instruments are repriced.
A 200-basis-point reduction could create fiscal space of approximately Rs700 billion to Rs1 trillion. However, the proposal notes that these savings would not represent direct tax revenue. They would depend on lower inflation, stable economic conditions and the government’s ability to maintain reduced borrowing costs.
The proposal is still under consideration, and no final decision has been announced. If approved, the plan could bring relief to petrol consumers but would also require major changes to Pakistan’s tax system and revenue collection strategy.
Also read: Pakistan May Move Petrol Prices to Market-Based System
