EDITORIAL: Economic Coordination Committee (ECC) of the cabinet, the economic policymaking body in the country, decided to pass on the financial benefit of petroleum levy from Captive Power Plants (CPPs) to electricity consumers for distribution companies and K-Electric.
This policy decision notably to use a specific revenue source to subsidise electricity tariffs was introduced by Prime Minister Shehbaz Sharif on 15 March 2025 when he raised the petroleum levy by 17 percent, in total terms 10 rupees per litre - a rise that was not backed by any increase in the per litre price for consumers as the international prices of fuel had declined.
ECC also approved recovery of 47.5 billion-rupee petroleum levy from Cynergico PK Ltd, which reportedly defaulted on payments since 2019. And approved the Power Division’s monthly fuel cost adjustment mechanism to ensure the passing on of the levy to consumers but with a two-month procedural lag.
Be that as it may, the levy on CPPs is a condition of the ongoing International Monetary Fund (IMF) programme lending and is based on economic as well as equity reasons — economic because, as per the Fund, it “will help reduce the power generation costs including ensuring that better priced gas can help channel scarce gas resources to the most efficient gas-based power generators”, envisaging the transition of CPPs to the electricity grid by end of the year.
Notwithstanding the 5.91 percent weightage given to transport and 23.63 percent to housing, water, electricity, gas and fuels in the calculation of the Consumer Price Index by the Pakistan Bureau of Statistics, there have been periodic concerns voiced by independent economists of data manipulation to understate inflation reflected by claims that electricity charges have declined that are not supported by the bills received as well as by the International Monetary Fund’s (IMF’s) October 2024 report that claimed that “important shortcomings remain in the source data available.”
It is evident that the government’s reliance on petroleum levy has been rising over time as it is not only easy to collect but is also not part of the divisible pool so is not shared with the provinces even though it is a sales tax (a component of the divisible pool), an indirect tax whose incidence on the poor is greater than on the rich.
In the current year, the levy is budgeted to generate 1.468 trillion rupees, a 26.5 percent rise from the revised estimates of last year, estimated at 57.5 percent of the entire defence budget for the year, which may well account for the 44.7 percent poverty levels in the country as per the World Bank. One would hope that the government engages in structural changes in the taxation sector by relying on the ability to pay direct taxes rather than on indirect taxes, which currently account for over 75 percent of all collections.
Copyright Business Recorder, 2025