The largest amount of petroleum levy was collected at a total of Rs 1.567 trillion in the Fiscal Year (FY) 2025-26. This has surpassed the original and revised targets of Rs 1.468 trillion and Rs 1.498 trillion, respectively. The government’s new ambition for FY27 is Rs 1.676 trillion in petroleum levy and Rs 50 billion in top-up under a new climate levy on petroleum products.
These are not just statistically based numbers for every Pakistani who fuels up at petrol station fares. They are effective and existing tax drains on the costs of every litre of fuel bought nationwide.
What is the Petroleum Levy and How Does It Work?
Petroleum Levy is a regressive tax imposed by the federal government on petroleum products, particularly petrol and high-speed diesel. It is nothing like a percentage sales tax. It is an extra charge to the fuel price that is levied per litre of the fuel irrespective of the base price of the fuel.
This distinction matters. A drop in oil prices does not result in a drop in the petroleum levy. With falling crude prices, the government can and often does raise the levy to generate the same amount of revenue. The government levies about Rs. 117 per litre of petrol in petroleum levy and combined customs duty, while the combined customs duty for HSD is about Rs. 43 per litre of fuel.
The petroleum levy is most significantly considered as non-tax revenue. It is not part of the National Finance Commission formula’s Federal Divisible Pool to which provinces are entitled to share. The entire collection is in the care of the federal government. That is why successive governments have depended on this to an excessive degree, and it is exactly because this is not objectionable to the IMF as much as distortionary tax exemptions.
Why Were FY26 Collections a Record?
The collection for FY26 was at Rs 1.567 trillion, 29% more than its level of Rs 1.22 trillion in FY25. The record was mostly due to a series of high petroleum prices in 2026, which occurred in the wake of the US-Israeli attack on Iran in that year, which caused prices to surge as a result of the disturbance to global supply. With the price of fuel increasing, people ended up paying much more at the consumer level while the amount received by the fixed duty per litre remained the same.
The figure of Rs 1.567 trillion does not cover customs duty on petroleum items or Rs 26 billion separately collected via a carbon levy.
The FY27 Target and What It Requires
The target for petroleum levy for FY 2026-27 is Rs 1.676 trillion. It is Rs 109 billion more than the actual collections in FY26 and 7% higher.
The IMF has its own, higher benchmark. The IMF targeted the FY27 petroleum levy in the Extended Fund Facility at Rs 1.727 trillion, up Rs 259 billion or 17.6% from the agreed target in budget documents this year. The government’s planned budgeted deficit of Rs 1.676 trillion, compared to the IMF’s benchmark of Rs 1.727 trillion, brings the possibility of deficit closure through mid-year levy changes.
In addition, the government has drafted a climate levy of Rs 50 billion for petroleum products for FY27, which is a new levy on top of the existing petroleum levy structure. This climate levy was projected to be Rs 48 billion in the current year estimates (revised) but has been raised to Rs 50 billion for FY27.
What This Means for Petrol and Diesel Prices?
The petroleum-based tax is a component of the total pump price of fuel in Pakistan. Base import price, exchange rate, marketing margin, dealer’s commission, and various taxes all contribute. However, the element most readily in the government’s hands has been the petroleum levy on a short-term basis.
Considering the higher target to be achieved in FY27, the government has both the incentive and the mechanism to keep up or increase the per-litre levy rate throughout the year. The Petroleum Division had also separately suggested fixing the levy at Rs 1 trillion along with cutting the levy per litre to Rs 50 to alleviate the burden on consumers. This was not the ultimate resolution recommended. The budget was passed in the original Rs 1.676 trillion amount.
If global crude prices rise, the built-in tax on each litre of petrol will not decrease for drivers this FY either. A relief may be from oil prices, but that will be capped because the government must ensure they do not lose the levy proceeds.
The Broader Fiscal Picture
The petroleum levy is in the larger fiscal improvement narrative for Pakistan in FY26. The fiscal deficit was lowered from high in the previous years to 2.6% of GDP as well. The primary surplus was at a new record level of 2.9% of GDP. The interest payments came down heavily to Rs 6.947 trillion in FY26 from Rs 8.887 trillion in FY25 due to a drop in the policy rate from 22% to 10%. The combined cash surpluses of the provinces increased by 57%, to Rs 1.45 trillion.
These are real upgrades. However, the part of this picture that corresponds to the petroleum levy is paid directly by transport operators, companies, and individual drivers through higher fuel costs.
Conclusion
Now the petroleum levy has become one of the major revenue sources the government uses. It accounts for a large portion of revenue, which remains entirely with the federal government outside the realm of taxes. The target for fuel tax is Rs 1.676 trillion for FY27, with a cap of Rs 1.727 trillion as per an IMF benchmark, implying that the fuel tax rate will be kept high for FY27. It means petrol prices will eventually rise in the coming years, and lower-income citizens will struggle because of that. It is a good time to switch to a better alternative for commute especially affordable electric vehicles.
