From The Pump To The Budget: The Story Of The Petroleum Levy

September 25, 2026 (MLN): As global prices of petrol and diesel climb, calls to cut the petroleum levy are growing louder. Before we decide what should happen to it, it helps to understand what it is, what it pays for, and what the real choices are.

When fuel prices go up, the first thing most of us notice is the price board at the filling station. The second is everything that follows: the rickshaw fare, the cost of vegetables, the school van, the delivery charge. The debate that follows is usually about one word, the levy, and whether the government should cut it to give people relief.

It is a fair question. It is also one that deserves a clear answer, because the levy is widely discussed and rarely explained.

What You Pay For In A Litre

The price of a litre of petrol or diesel in Pakistan is built up in layers. The biggest part is the cost of the product itself, which follows international prices and the value of the rupee. On top of that come freight, the margins of oil companies and petrol pump dealers, and then the government's charges. The largest of those charges is the petroleum levy.

The levy is a fixed amount of rupees on every litre, not a percentage of the price. There is also a separate climate support levy of Rs5 per litre. Petrol and diesel carry no sales tax, so for practical purposes the petroleum levy is the government's main charge on fuel.

This year, the levy is expected to raise around Rs1.7 trillion. To put that in perspective, it is roughly a tenth of everything the Federal Board of Revenue is expected to collect in taxes, raised from essentially two products.

Why The Government Relies On It So Heavily

Three features make the levy unusually important to the federal government.

First, it is kept entirely by the federal government. Most taxes, such as income tax and sales tax, go into a common pool that is shared with the provinces, and the provinces receive the larger share. The levy is not a tax in legal terms, so it never enters that pool.

Second, it is quick to change. Since April 2025, there has been no legal ceiling on the levy, and the rate can be adjusted every fortnight alongside the regular fuel price revision without going to parliament.

Third, it is easy and reliable to collect. It is paid at a small number of points, by refineries and oil marketing companies, rather than across millions of transactions. There is very little room for evasion.

For a government that struggles to collect enough tax elsewhere, this makes the levy one of the few revenues it can count on. That is why governments of every political colour have relied on it. The levy target is also agreed with the IMF under Pakistan's current programme and forms part of the plan the country has committed to.

What Happens When Global Prices Rise

This is where the current debate comes from. Because the levy is a fixed amount per litre, it does not rise when international prices rise. The increase people see at the pump in a rising market comes mainly from the higher cost of the product itself, not from the levy.

But the levy is the one part of the price the government controls directly. When international prices surge, cutting the levy is the quickest way to cushion people, and it has been done before, including earlier this year when prices spiked.

The difficulty is that every rupee cut from the levy is a rupee missing from the budget. There is also a second effect that is less visible. When fuel becomes expensive, people use less of it. Fewer litres sold means less levy collected, even if the rate stays the same. So in a period of rising prices, the government can find itself short of its target without cutting anything at all.

The Cost Of Relief

It is natural to ask why the levy cannot simply be removed. The answer is that the money it raises is already spent in the budget, on salaries, debt payments, development and everything else. Because none of it is shared with the provinces, the entire gap would fall on the federal government. It would have to be filled through more borrowing, spending cuts or new taxes, and each of those, in time, reaches the same households the relief was meant to help.

Pakistan's own experience is instructive. In early 2022, the levy was brought down to near zero as part of a relief package. The revenue loss was not absorbed. It was recovered later through sharp increases once financing pressure returned, and consumers faced some of the steepest fuel price rises in the country's history. The relief was real, but it was borrowed from the future.

None of this means relief is wrong. It means relief has a cost, and the honest question is who bears it and when.

Is There A Better Way?

The debate is often framed as cut the levy or keep it. The choices are actually wider.

A smaller, temporary cut can soften a price spike while keeping most of the revenue, provided there is a plan to restore it once prices ease.

A clear rule for adjustments would let people know in advance how the levy will respond to price swings, for example lowering it when international prices rise sharply and restoring it when they fall. Predictability itself is a form of relief, because households and businesses can plan.

Relief targeted at those who need it most, such as motorcyclists, public transport and farmers, protects more of the revenue while helping the people most exposed to fuel costs. Pakistan has attempted this before. Making it work depends on delivery systems that are still being built.

A broader rethink of how fuel is taxed, including whether sales tax should return alongside a lower levy, would bring petroleum back into the mainstream tax system. It would also change how the revenue is shared with the provinces, so it is a longer conversation.

Greater transparency would help regardless of the choice. If every fortnightly price notification showed clearly how much of each litre goes to the product, the margins and the government, public debate would be better informed and trust easier to build.

The Real Question

The petroleum levy is neither a villain nor a solution. It reflects a system in which the federal government's own revenue base is narrow, and reliable income is scarce. As long as that remains true, the levy will carry a heavy load, and every attempt to cut it sharply will face the same question: what takes its place?

As global prices rise and the debate heats up, that is the question worth asking. The person at the filling station and the official balancing the budget are part of the same arithmetic. A lasting answer has to work for both.

About Author:

Javed Ahmedjee is a Fellow Chartered Accountant with over 35 years of leadership experience in Pakistan's energy, pharmaceutical and financial sectors, and currently serves as CEO of Hascol Petroleum Limited.

Disclaimer:

The views expressed are personal and intended for general information.

Copyright Mettis Link News