Hike in prices of petrol, diesel likely

ISLAMABAD: The government is expected to approve an increase of over Rs 4 per litre in the price of petrol (MS) and diesel, aiming to generate Rs 35 billion. The funds will support oil refineries, address sales tax challenges, and raise the profit margins of Oil Marketing Companies (OMCs).

According to official documents, petroleum products— including petrol, diesel, kerosene, and light diesel oil (LDO) —have been classified as “exempt” under the Finance Act 2024–25. As a result, input sales tax has become a cost for refineries and OMCs, totalling an estimated Rs 35 billion for the fiscal year, which cannot be recovered through product prices due to government regulations enforced by the Oil and Gas Regulatory Authority (OGRA).

A draft proposal to levy a 3–5% sales tax on petrol and diesel was developed in consultation with the oil industry, the Ministry of Finance, and the Federal Board of Revenue (FBR). However, it was shelved due to the absence of an agreement with the International Monetary Fund (IMF) on allowing reduced GST rates for these products.

Govt cuts petrol, diesel prices by Rs2 per litre for next fortnight

Sources noted that applying the standard 18% GST would result in a price hike of approximately Rs 45 per litre— an increase considered politically and economically unfeasible. Any adjustment to the sales tax rate would require IMF approval and endorsement from Parliament.

In parallel, OMCs and petroleum dealers have sought increases in their per-litre margins on petrol and diesel. To support the sustainability of the oil supply chain, OGRA has recommended raising the margins by Rs 1.13 for OMCs and Rs 1.40 for dealers.

OGRA’s recommendations have been reviewed, and certain amendments have been suggested in the summary. To partially address the financial challenges faced by refineries, OMCs, and dealers, the following proposals have been submitted for ECC’s consideration: (i) since the petroleum products (Mogas, Diesel, Kerosene and LDO) are exempted from sales tax during current financial year, the refineries and OMCs’ unadjusted sales tax during July 2024- June 2025 on these products may be compensated through Inter Freight Equalisation Margin (IFEM) estimated Rs.34 billion.

The amount may be recovered in 12 months and recovery of this item will cease from the 13th month automatically; (ii) for FY 2025-26, 3-5% sales tax on above mentioned products may be imposed through Finance Act; however, in case the products remain exempted from sales tax in the FY 2025-25, the unadjusted sales tax may continue to be compensated through IFEM as a fallback option to keep the oil supply chain sustainable; (iii) the margins of OMCs and Petroleum Dealers may be enhanced to keep their business sustainable; and (iv) OGRA will develop a mechanism for adjustment of GST claims for above period and effective utilisation of digitisation cost along-with implementation timelines within one month of approval. Full cost of the digitisation will be borne by OMCs throughout the oil supply chain including outlets.

The indicative impact on prices of MS and SHD will be as follows: (i) Refinery & OMCs ’unadjusted Sales Tax Rs. 28 billion for July-April, 2024 -25 and Rs 6 billion for May-June, 2025, impact Rs 1.87 per litre for 12 months; (ii) OMCs Margins (including-digitalization cost) Rs 1.13 per litre; and (iii) Petroleum Dealers Margin, Rs 1.12 per litre. The total impact will be Rs 4.12 per litre.

The Government is likely to increase Attock Refinery Limited’s (ARL’s) freight charges by 30 per cent to Rs 1,490/ per barrel from Rs 1,143.95 per barrel for transportation of condensate as the key oil transporting companies have declined to accept the existing rate.

Copyright Business Recorder, 2025