Pakistan’s government is considering a major change to its Petrol Levy policy. A proposal seeks to reduce the levy to Rs5–10 per litre.

The plan could lower pressure on petrol consumers. However, it could also create a major revenue gap for the cash-strapped government.

The proposal was submitted by Jamaat-e-Islami. The Ministry of Planning circulated it to the Finance Ministry, FBR and State Bank of Pakistan.

It suggests replacing petroleum levy revenue with taxes on wealth and luxury consumption. Untaxed sectors, property, agriculture and retail could also face greater taxation.

The government collected Rs1,557 billion through the Petroleum Development Levy in FY2025-26. This was higher than the Rs1,468 billion target.

For FY2026-27, the government expects to collect around Rs1,576 billion. A major reduction could therefore have significant fiscal consequences.

Cutting the levy to Rs5–10 per litre would leave only Rs90–180 billion annually. This could create a revenue shortfall of nearly Rs1.45–1.50 trillion.

The proposal calls for alternative measures to cover the expected gap. However, implementing those measures quickly could prove challenging.

Another issue involves how petroleum levy revenue is classified. The Petrol Levy is considered non-tax revenue and goes directly to the federal government.

Most FBR tax collections are distributed between the federal and provincial governments. This happens under the National Finance Commission Award.

Therefore, collecting an additional Rs1.5 trillion through FBR taxes would not fully replace federal revenue. The proposal estimates that gross FBR collections could need to reach 2.3 times the shortfall.

The government could also consider surcharges and other non-tax measures. An NFC-related arrangement may also be required.

The proposed tax strategy would initially target luxury consumption. Higher Federal Excise Duty and regulatory duties could apply to luxury imports.

Business-class and first-class air travel could also face additional taxes. High-end vehicles are another possible target.

The broader luxury tax package could generate between Rs200 billion and Rs280 billion. Additional taxes could also target wealthy individuals and major corporations.

A proposed surcharge could add 5–7.5 percentage points for large companies and ultra-high-income individuals. It could generate around Rs180–250 billion.

Several major industries could face additional pressure under the proposal. These include banking, fertiliser, cement and exploration and production companies.

The existing super tax already reaches 10 percent. It currently generates an estimated Rs150–200 billion.

Tax exemptions are another major focus of the plan. Pakistan’s total tax expenditure was estimated at Rs2.35 trillion during FY2025-26.

The amount included sales-tax, income-tax and customs-related exemptions. Around Rs1.2–1.4 trillion could potentially be reviewed after protecting essential exemptions.

These include exemptions linked to food, healthcare, education and defence. Capturing part of the remaining amount could generate Rs450–650 billion over two years.

Lower interest rates could provide another source of fiscal relief. Pakistan’s debt-servicing cost reached around Rs6.9 trillion during FY2025-26.

Domestic debt accounted for approximately Rs6 trillion of that amount. A large portion of domestic borrowing carries floating interest rates.

A 100-basis-point rate reduction could eventually save Rs350–500 billion annually. A 200-basis-point reduction could create savings of Rs700 billion to Rs1 trillion.

However, such savings would depend on inflation remaining under control. The proposal also describes these savings as expenditure reductions, not tax revenue.

The Petrol Levy proposal could therefore significantly reshape Pakistan’s taxation strategy. Its success would depend on rapid implementation and agreement with the IMF.

The government must also balance lower fuel costs with its substantial revenue requirements. Any final decision could have major implications for consumers and public finances.

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