The federal authorities are set to impose a 3–5 percent general sales tax (GST) on petroleum products next fiscal year to assist domestic refineries and preserve the oil supply chain.
The Economic Coordination Committee (ECC) took this decision on May 13, 2025, and the federal cabinet approved it on May 20, reported the Business Recorder.
Since petroleum products are presently exempt from sales tax below the Finance Act 2024-25, unadjusted input tax claims have ended up a value burden amounting to an envisioned Rs. 34 billion for FY2024-25.
The trade war between superpowers of the sector has sent the sector economy, especially the oil and gas quarters, into a recessionary circle, wherein crude oil costs and refinery margins are squeezing, mainly due to projected closure of upstream and downstream organizations worldwide. Simultaneously, opposite to the expectations from the change sources of strength, oil and gas demand continues to develop.
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The oil and gas sector are the biggest contributor to the national economy. The exploration and production sector (E&P), alongside downstream entities such as refineries and oil marketing firm, plays a significant role in bolstering the USA’s budget through petroleum development fees (PDFs), windfall profits, tax incentives, income taxation, and various federal, state, and local government charges and taxes. In view of its significance, budgetary guidelines and measures should be designed in a way to enhance the earning capacity of this sector.
Challenges being faced by the oil & gas sector
Last year, we witnessed some positive developments in the oil and gasoline area of Pakistan as important international players entered the marketing business while all of the local refineries of the country were gearing up to sign their respective upgrade agreements under the Pakistan Oil Refining Policy-2023 for existing/brownfield refineries with potential funding of around US$ 6 billion to the ailing economy of the country.
Preferably, the budgetary measures should have been positively willing to facilitate this funding environment. Unfortunately, the measures adopted were contrary to the expectations, whereby which will solve the operational difficulty of outstanding refunds of OMCs; the major petroleum products had been declared as “sales tax-exempt resources,” disallowing OMCs and refineries from adjusting their input sales tax.
Because of the government’s regulated pricing, this burden cannot be passed on to customers. The petroleum division, in coordination with the Ministry of Finance and FBR, proposed a 3-5 percent GST on motor spirit (MS) and high-speed diesel (HSD) to be introduced via the Finance Act 2025.
Applying the full 18 percent GST became ruled out because of the estimated Rs 45 per liter price hike and the need for earlier IMF approval.
In the interim, the ECC approved compensation of unadjusted income tax claims through the Inland Freight Equalization Margin (IFEM), effective from May 16, 2025, till the end of FY2025-26. Recovery will arise at Rs. 2.09 per liter on HSD and Rs. 1.07 per liter of petrol.
To further stabilize the supply chain, the ECC approved of a boom in OMC margins by Rs. 1.13 per liter and supplier margins by Rs. 1.40 per liter.
The total indicative impact on petroleum prices from these changes is expected to be Rs. 4.12 per liter, combining income tax recovery and dealer and OMC margin hikes.