High fuel taxes under the spotlight

June 12, 2026 (MLN): The Federal Board of Revenue (FBR) has officially released its comprehensive Tax Expenditure Report for Fiscal Year 2024-25, highlighting critical structural modifications in how national revenue losses are calculated.

Amid intense public debate surrounding fuel prices and inflationary pressures, the report brings a massive revelation regarding petroleum revenue structures: the government chose to completely bypass standard sales tax structures on petroleum, oil, and lubricants (POL), opting instead to collect a staggering Rs. 1,518.58 billion through the alternative Petroleum Development Levy (PDL) framework. 

The report notes that total federal tax expenditures defined as revenue foregone via selective deductions, preferential rates, exemptions, and tax credits landed at Rs. 2,352.81 billion.

This equates to 2.07% of the country’s nominal GDP (Rs. 113,934.97 billion) and consumes 20.04% of the FBR's total fiscal collection of Rs. 11,744.30 billion.

The Petroleum Paradox: PDL vs. Sales Tax

The most significant structural disclosure in the domestic consumption sector involves the calculated "Gross Sales Tax Expenditure," which initially appeared to be an astronomical Rs. 2,792.56 billion.

However, FBR economists applied a major accounting subtraction to isolate the true fiscal policy deviations.

Under normal statutory guidelines, POL products would be hit with a standard 18% sales tax benchmark.

"Sales Tax expenditure included sales tax exemption on POL products on which Petroleum Development Levy (PDL) is being charged. In presence of PDL, Sales Tax is not levied as consumers are, in any case, paying PDL."

By deducting the unlevied 18% sales tax on POL products amounting to exactly Rs. 1,518.58 billion the government adjusted its Net Sales Tax Expenditure down to a far more sustainable Rs. 1,273.98 billion.

This reveals that what is commonly criticized as a "tax relief or exemption" on fuel is actually a strategic shift where standard sales taxes are entirely swapped out for development levies.

Macro Head-Wise Breakdown: Where Revenue is Foregone

A look at the adjusted federal figures illustrates that sales tax remains the single largest source of government tax expenditure, followed by income tax and customs duties:

While net sales tax concessions rose slightly by 3.0%, customs duty expenditures dropped sharply by 23.5% (down from Rs. 652.39 billion last fiscal year).

The FBR clarified that this massive drop is not due to a sudden withdrawal of industry relief, but rather a methodology refinement that reclassified international trade treaties (such as FTAs/PTAs) and export input remissions as permanent, structural benchmarks of the trade regime rather than discretionary concessions.

Non-Fuel Relief: Major Beneficiary Sectors

Beyond the petroleum dynamics, the state continues to extend substantial tax expenditures to preserve socioeconomic safety nets, agricultural productivity, and industrial supply chains.

1. Sales Tax Concessions (Net Rs. 1,273.98 Billion)

Outside of the POL adjustment, the bulk of sales tax relief was targeted toward critical human development and economic sectors:

●      Health & Medical Sector: Emerged as the topmost beneficiary, securing Rs. 436.79 billion primarily via reduced 1% rates on registered pharmaceutical drugs.

●      Fertilizer & Agriculture: Captured Rs. 407.35 billion through exemptions on essential local supplies like non-DAP fertilizers, certified seeds, and pesticides.

●      Food Sector: Granted Rs. 249.07 billion in relief to lower the cost of staple commodities.

2. Income Tax Exemptions (Rs. 579.70 Billion)

Income tax relief was dominated by Exemptions from Total Income, which stood at Rs. 437.99 billion (75.6% of the total income tax expenditure head).

●      Social Security & Pensions: The primary beneficiaries were the social security sector (Rs. 197.29 billion) and the pension sector (Rs. 147.88 billion), shielding the retirements of federal, provincial, and armed forces employees from steep tax liabilities.

●      Power Generation: Energy and mining projects captured Rs. 42.92 billion under Clause 132, which exempts electric power generation projects to stabilize domestic electricity tariffs.

3. Customs Duty Concessions (Rs. 499.14 Billion)

Domestic industries received significant protection at the import stage:

●      Automobile Manufacturing: Original Equipment Manufacturers (OEMs) and vendors operating under specialized SROs (656 and 655) swallowed up the largest chunk, combining for Rs. 261.30 billion in import duty concessions on completely knocked-down (CKD) kits and electric vehicle parts.

●      Industrial Plants: Import concessions on heavy plant machinery and capital goods under the Fifth Schedule yielded Rs. 38.47 billion to stimulate private sector capital formation.

The government has also allocated Rs 311.8 million for the Petroleum Division under the Public Sector Development Programme (PSDP) for the fiscal year 2026–27.

According to budget documents issued ], the funds have been earmarked for an initiative titled “Accelerated Geological Mapping and Mineral Exploration Using Modern Satellite Imaging-Based Technologies for Unmapped Areas in Pakistan.” 

Clarification on Behavioral Dynamics

The FBR explicitly cautioned parliamentarians and economic analysts that deleting these exemptions would not lead to an automatic, linear influx of Rs. 2.35 trillion to the national treasury.

The report notes that its figures rely on a static revenue foregone approach that completely ignores consumer and taxpayer elasticity.

If the government were to suddenly impose standard sales taxes on fuel alongside the existing PDL, or withdraw pricing reliefs from the pharmaceutical and agricultural sectors, the resulting price shocks would trigger sharp contractions in consumption.

This contraction in economic activity could ultimately diminish the ultimate revenue yields, showcasing the highly delicate balance the state must maintain between funding its fiscal budget and preserving basic consumer affordability.

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