ISLAMABAD: The government has reportedly decided to increase the petroleum levy from Rs80 to Rs90 per litre and to impose a 3–5 percent General Sales Tax (GST) on petroleum products to support local refineries, well-informed sources told Business Recorder. The move also aims at ensuring the timely implementation of fortnightly petroleum price revisions.
The decision was taken by the Economic Coordination Committee (ECC) of the Cabinet on May 13, 2025, and was subsequently ratified by the Federal Cabinet on May 20, 2025.
During a briefing to the ECC, the Petroleum Division explained that petroleum products—including Mogas, diesel, kerosene, and light diesel oil (LDO)—had been classified as “exempt” under the Finance Act 2024-25. As a result, input sales tax became a cost burden for refineries and Oil Marketing Companies (OMCs), amounting to approximately Rs34 billion for FY 2024-25.
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This cost cannot be passed on to consumers due to government-regulated petroleum pricing, which is determined by the Oil and Gas Regulatory Authority (OGRA) under federal policy.
A draft proposal to levy a 3–5 percent GST on motor spirit (MS) and high-speed diesel (HSD) was developed in consultation with the oil industry, the Ministry of Finance, and the Federal Board of Revenue (FBR). However, it could not be implemented due to the lack of agreement with the International Monetary Fund (IMF) on taxing these products at reduced GST rates.
Applying the standard 18 percent GST would result in a price increase of approximately Rs45 per litre for MS and HSD, which the government considers undesirable. Any change to the GST rate would require prior consultation with the IMF and approval from Parliament.
In addition to the GST matter, the ECC also approved an increase in margins for OMCs and petroleum dealers by Rs1.13 and Rs1.40 per litre, respectively, to ensure the sustainability of the oil supply chain. OGRA’s initial recommendations on the matter were reviewed, and certain amendments were made before final approval.
To partially address the financial issue of the refineries, OMCs and Dealers, the following proposals were submitted for 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 of these products may be compensated through IFEM (estimated Rs34 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 percent sales tax Mogas/HSD products may be imposed through Finance Act, however, in case the products remain exempted from sales tax in the FY 2025-26, the unadjusted sales tax may continue to be compensated through IFEM as a fall back 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 utilization of digitization cost along-with implementation timelines within one month of approval. Full cost of the digitization will be borne by OMCs throughout the supply chain including outlets.
The Petroleum Division further briefed the forum that on the basis of these proposals, indicative impact on prices of MS and HSD will be as follows: (i) refinery and OMCs’ unadjusted sales tax (Rs28 billion for July-April, 2024-25) and (Rs6 billion for May –June, 2025) recovery timeframe at Rs1.87 per litre; (ii) OMCs margins (including digitization cost) will have an impact of Rs1.13 per litre; and (iii) Petroleum Dealer’s Margin, Rs1.12 per unit. Total impact will be Rs4.12 per litre.
However, after discussion, the ECC decided that OMCs’ and Refineries unadjusted sales tax of FY25 may be compensated from May 16, 2025, through IFEM (estimated Rs34 billion to be verified by OGRA). The amount may be recovered till end of FY26 on the following rates and recovery of this item will cease subsequently after: (i) HSD sales tax adjustment at Rs2.09 per litre; and (ii) Mogas, Rs1.07 per litre.
Copyright Business Recorder, 2025
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