The government was compelled to raise fuel charges effective 3 April due to the escalating international fuel prices as a consequence of the ongoing Middle East conflict – 43 percent for petrol and 55 percent for diesel. This decision is being sourced to the International Monetary Fund’s insistence that subsidies announced earlier must be fully funded, through austerity measures as well as slashing Public Sector Development Programme by 100 billion rupees.
Temporary subsidy, the public was informed, will remain in place to safeguard lower and middle income groups, including a 100 rupee per litre per motorcyclist subsidy for three months with a monthly cap of 20 litres, small farmers to receive 1500 rupees per acre to support harvesting costs, 1000 rupees per litre to intercity transporters, 70,000 per litre for trucks/goods transport, 80,000 for larger vans with passenger vans to receive 100,000 rupees per month for an initial one month period and Pakistan railways would also receive a subsidy. It is unclear whether the government has quantified the amount of subsidy required for these relief measures or whether it has devised a foolproof mechanism that would ensure that the target groups receive the subsidy, and it is not hijacked by those who are not eligible, as happened in past such measures.
Fuel is priced on the basis of implicit and explicit costs. The World Bank defines explicit cost as follows: “Explicit subsidies measure the amount that the financial cost to supply a fuel (i.e., the supply cost) exceeds the price paid by the fuel user. Implicit subsidies measure the difference between a fuel’s full social cost and the price paid by the fuel user, exclusive of any explicit subsidy.” Perhaps the single most devastating example of an explicit cost – fuel subsidy – was in 2007, during the tenure of Prime Minister Shaukat Aziz, when he, after consultation with the then dictator Pervez Musharraf, slashed petrol price by 4 rupees per litre and diesel by 1.03 rupees per litre for reasons linked entirely to the forthcoming general elections (held in February 2008) rather than based on commercial fundamentals. That the strategy was unsuccessful is evident from the fact that the King’s party, an amalgam of pro-Musharraf politicians from several parties, was routed in the elections that compelled the successor PPP-led government to seek yet another IMF programme loan.
Countries tax petrol and products with Europe imposing one of the highest taxes at 50 percent, with India taxing fuel at round 50 to 60 percent.
The United States has one of the lowest rates, 18.4 cents per gallon and 24.3 cents per gallon on diesel fuel. Successive Pakistani administrations have raised their reliance on petroleum levy, a sales tax which is a regressive tax, as a revenue source for two reasons: (i) it is not collected by the government’s tax collecting arm, Federal Board of Revenue, as that would have entailed crediting the amount to the federal divisible pool which would then be distributed between the federal government and all four provincial governments, according to the National Finance Commission (NFC) award last agreed through consensus in 2010. Instead, it is credited straight into the federal kitty as it is parked under Other Taxes; and (ii) the maximum limit of the levy was set by parliament and was raised a number of times, though this year the cap has been removed.
The rate of growth of the levy exceeds all other taxes - revised income tax collections in 2024-25 were budgeted to rise by 18 percent in the current year compared to the year before, customs duties by 21 percent, sales tax (minus the levy) by 19 percent while petroleum levy has been budgeted to rise by a whopping 26 percent in the current year’s budget.
The 3 April measures include a rise in the levy on petrol by 55.24 per litre (petrol is by far the highest source of revenue under petroleum levy) raising it to a total of 137.23upees per litre while it has been reduced to zero for High Speed Diesel.
On 1 March 2026, petroleum levy was charged at 84.4 rupees per litre on petrol but with a retail price of 258.17 rupees to the litre this constitutes 33 percent of the total per litre cost of the fuel. And on 3 April the increase in levy on petrol to 160.61 rupee per litre raised the price of petrol to 458.41 or, in other words, the higher levy constitutes 35.4 percent of the total price – or a rise of 2.4 percent per litre.
At public outcry the prime minister halved the levy to 80 rupees per litre. It is not clear if an agreement on this measure was reached with the Fund and if not then where would the shortfall in revenue be met from: a further cut in development expenditure, an even higher surplus from provinces than is realistic at this stage or higher borrowing domestically - a highly inflationary policy in itself or possibly an amalgam of all three measures with disastrous consequences.
True other countries have reduced their tax on petrol but poverty levels in Pakistan are much higher than in these countries. As per the World Bank, Pakistan’s poverty rate will remain at 42.4 percent (using the USD 3.65/day 2017 PPP line) in fiscal year 2025, keeping over 100 million people below the poverty line. Pakistan’s continued massive reliance on indirect taxes, a regressive tax, whose incidence is greater on the poor than on the rich coupled with continued tax evasion and avoidance in the country (with critics arguing that the resources spent on plugging loopholes higher than the revenue generated) a tax on fuel is a low-hanging fruit for the treasury – easy to collect with evasion or avoidance almost non-existent. And that sadly drives the government, the incumbent as well as their predecessors.
The IMF defines implicit costs as occurring “when the retail price fails to include external costs, inclusive of the standard consumption tax.
External costs include contributions to climate change through greenhouse gas emissions, local health damages (primarily pre-mature deaths) through the release of harmful local pollutants like fine particulates, and traffic congestion and accident externalities associated with the use of road fuels.
Getting energy prices right involves reflecting these adverse effects on society in prices and applying general consumption taxes when fuels are consumed by household.” As of 2024 over 70 carbon pricing initiatives, including taxes and emissions taking systems (ETS) defined as a set of technologies, components, and mechanisms designed to reduce, trap, or convert harmful pollutants released from combustion engines and industrial processes before they enter the atmosphere), exist globally covering around 25 percent of all greenhouse gas emissions.
India does not have a single explicit carbon tax but utilizes a complex system of high excise duties on fuels, such as coal and petroleum, which act as implicit carbon pricing and is developing the Carbon Credit Trading Scheme (CCTS), expected by mid-2026, to move towards a formal regulatory mechanism for reducing emissions across key sectors.
Pakistan has consistently rated among the top ten of the most climate vulnerable countries facing floods, heatwaves, and water scarcity though it contributes less than one percent to greenhouse emissions.
The 2025 floods alone caused loss of life, destroyed crops and infrastructure with a negative impact on Gross Domestic Product (GDP). There are disturbing projections of GDP reduction by up to 20 percent by 2050.
In this context it is relevant to note that Pakistan’s current year’s budget envisages ETS of 529 billion rupees as mitigating measures implicit (though unexplained) in the energy sector, 9 billion rupees in industries and 7.3 billion rupees implicit in transport (cited as directly favourable though details are lacking). Indirectly favourable again not backed by details envisages 20 billion rupees for food and 22 billion rupees for agriculture (a provincial subject). The source of these substantial funds is also not provided in the budget documents.
The carbon levy, a condition of the USD 1.4 billion Resilience and Sustainability Facility by the IMF approved last year has led to an additional 2.5 rupee per litre on the retail price pledged to rise to 5 rupees per litre next year bringing the total taxes to 37 percent of the pump price.
To conclude, there is a need for the government to quantify the amount of fuel subsidies it has already disbursed, the projected amount of subsidies post-3 April and the measures that would be taken to ensure that the target group benefits.
Copyright Business Recorder, 2026
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