The federal budget for FY26 offers few surprises on the energy front—yet between the lines lies a tale of strategic juggling, revenue prioritisation, and a dash of reform signalling. The biggest headline? Taxing solar.
An 18 percent sales tax on imported solar panels is the most consequential step. Imports of solar panels crossed $2 billion last year, and this new measure is expected to generate a hefty Rs110–130 billion in additional revenue. That’s a sizeable chunk, especially as the government eyes solar not just for green credentials but also as a tool to ease grid pressure and lower average tariffs in the long run. This is less about slowing the solar boom and more about monetising it smartly—provided it doesn’t dampen momentum.
Meanwhile, the budget also quietly confirms the removal of the ceilingon the Debt Service Surcharge (DSS), previously capped at 10 percent of the national average electricity tariff. With the government doubling down on additional bank borrowingto tackle the mounting circular debt stock, electricity consumers are now locked into paying the DSS for at least six more years—and not just at 10 percent, but potentially more, if required. It's a stealth tax that refuses to go away, now permanently baked into monthly bills. Some may still call it reform. But it is anything but.
On the subsidy front, power sector allocations have been trimmed modestly, down from Rs1.19 trillion to Rs1.03 trillion. It’s aligned with IMF conditionalities and hints at an upcoming base tariff hike in July, given the reduced inter-DISCO tariff differential.
But there's a rub: the budget includes a Rs400 billion lump sum power subsidy, the same as last year. That raises questions about how the government intends to continue the Rs1.71/unit relief throughout FY26, which in FY25 was only covered for three months. Unless there’s a mid-year revision, the math doesn't add up.
One possible answer? The Petroleum Levy (PL). Budgeted at Rs1.47 trillion, it's up by Rs207 billion. Historically, the government has linked PL proceeds to funding power subsidies, and on paper, the math could work. But it’s an optimistic call.
The new Carbon Levy—Rs2.5/litre on petrol, diesel, and furnace oil—might fetch around Rs50 billion at best. That leaves the bulk of the PL target dependent on keeping petrol and HSD levies around Rs87–88/litre on average through the year. That’s ambitious, if not outright risky, especially with oil markets as volatile as ever. A mid-year downward revision, like the Rs120 billion cut last year, is not off the table.
Zooming out, the budget reveals the continued tilt toward consumption-based taxation, with energy at the centre. From taxing solar to squeezing PL harder, the budget leans more on revenue extraction than structural fixes. The former may be justifiable; the latter, if pushed too far, could backfire.
Fiscal discipline is a fine goal. But as ever, execution, external prices, and policy coherence will decide whether these bets pay off—or unravel midway.
Copyright Business Recorder, 2025
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