Oil and gas sector tax proposals for Federal Budget 2025-26

The upcoming Federal Budget 2025-26 of the country is arriving in a scenario when world is reeling from the shocks of US sanctions on the rest of the world, especially China.

The trade war between two superpowers of the world has sent the world economy, particularly oil and gas sector, into a recessionary circle, whereby Crude Oil prices and refinery margins are squeezing, leading to projected closure of upstream and downstream businesses world over. Simultaneously, contrary to the expectations from the alternate sources of energy, Oil and Gas demand continues to grow.

Oil and gas sector is the biggest contributor to the national economy. Upstream Exploration and Production (E&P) and downstream (Refineries and Oil Marketing Companies) contribute a substantial chunk of country’s budget in the form of Petroleum Development Levy (PDL), Windfall and Discount, Sales Tax and Income Tax and other Federal, Provincial and Local Government levies and taxes. In view of its importance, the budgetary policies and measures should be designed in a way so as to boost the earning capacity of this sector.

Challenges being faced by Oil & Gas sector

Last year, we witnessed some positive developments in oil and gas sector of Pakistan as major international players had entered the marketing business while all the local refineries of the country were gearing to sign their respective upgrade agreements under the Pakistan Oil Refining Policy-2023 for existing/ Brownfield refineries with potential investment of around US$ 6 billion to the ailing economy of the country. Ideally, the budgetary measures should have been positively inclined to facilitate this investment environment. Unfortunately, the measures adopted were contrary to the expectations; whereby in order to resolve the operational issue of outstanding refunds of OMCs, the major petroleum products were declared as “Sales Tax Exempt Supplies” disallowing OMCs and refineries from adjusting their input sales tax.

Proposals for upcoming budget

The government is urged to adopt tax measures proposed by the Overseas Investors Chamber of Commerce and Industry (OICCI), which should restore the confidence of local and foreign investors and facilitate the implementation of Pakistan Oil Refining Policy — 2023 for existing/ Brownfield refineries.

The OICCI urges the government to undo the exemption of sales tax on major petroleum products; namely, Motor Spirit (Petrol), High Speed Diesel Oil, Kerosene, and Light Diesel Oil, brought through Finance Act 2024 and these should be declared as Taxable Supplies at an appropriate sales tax rate.

The disallowance of input tax has increased the operating costs as well as cost of infrastructure development of the industry; impact for TY 2025 is expected to be more than Rs. 33 billion.

The excessive tax burden on the formal corporate sector and especially the oil industry, which is already bearing the brunt of compliance and regulation, requires urgent review to ensure long-term sustainability and competitiveness. Further, taxation regime of E&P companies is governed under the respective Petroleum Concession Agreements (PCAs) signed by the President of Pakistan. The PCAs contain a freezing clause for pricing and taxation to provide fiscal stability and long-term investment security to E&P Companies. Imposing Super Tax on E&P companies violates the fiscal stabilization/freezing clause of the PCAs.

Super Tax, originally introduced as a one-time levy, has been extended well beyond its initial scope. In light of the current economic climate and the need to support documented and responsible businesses, OICCI recommends the gradual abolishment of Super Tax in three years.

Prices of Petroleum Products (High Speed Diesel and Motor Spirit — Petrol) and the margins thereon are fixed by the Government of Pakistan and cannot be changed unless approval of the relevant Ministries of the Government is obtained. This fixed margin covers all costs related to establishment, development, and set-up of the business and running of the business, including capital cost and financial costs, at the current price, the Minimum Tax eats up around 16% of OMCs’ fixed margin.

It’s recommended that Minimum Tax applicable on Refineries and OMCs should be reduced to 0.25% and abolished in the subsequent year.

Since the early 1990s, petroleum products produced by refineries have been exempt from withholding tax under the Income Tax Ordinance, 2001, with the Commissioner granting exemptions in accordance with the law. This exemption was provided because, despite the high sales volume of refineries, their profit margins are low.

Due to this change, refineries are facing significant withholding tax liabilities without corresponding income to offset it. It is, therefore, OICCI’s recommendation that the Commissioner’s power for issuing Exemption Certificates should be reinstated.

Copyright Business Recorder, 2025