Tax Expenditure Report 2026 says exemption on petroleum products remains one of Pakistan’s largest tax expenditures
ISLAMABAD: The Federal Board of Revenue (FBR) forewent an estimated Rs1.52 trillion in sales tax revenue on petroleum, oil and lubricant (POL) products during fiscal year 2024-25 as the government continued to impose the Petroleum Development Levy (PDL) instead of the standard 18 per cent sales tax, according to the Tax Expenditure Report 2026.
The report estimates that the sales tax expenditure on POL products totalled Rs1.52 trillion, down from Rs1.79 trillion in the previous fiscal year, but still representing one of the largest tax expenditures recorded by the tax authority.
According to the FBR, sales tax is not charged on petroleum products that are subject to the Petroleum Development Levy, as consumers already pay the levy when purchasing fuel.
The report states that the sales tax expenditure includes the exemption on POL products on which the Petroleum Development Levy is charged, adding that in the presence of the PDL, sales tax is not imposed because consumers are already contributing through the levy.
PDL remains a major revenue source
While the exemption significantly reduced the FBR’s potential sales tax collections, the federal government generated approximately Rs1.22 trillion through the Petroleum Development Levy during FY2024-25.
Unlike sales tax, however, the PDL is classified as non-tax revenue, meaning the proceeds are credited directly to the federal government’s non-tax receipts rather than being included in the FBR’s annual tax collection.
The levy has become an increasingly important source of government revenue, providing policymakers with greater flexibility in fiscal management while keeping petroleum products outside the standard sales tax regime.
Potential tax collection
The FBR collected Rs11.77 trillion in total taxes during FY2024-25. According to the estimates presented in the report, had the standard 18 percent sales tax been imposed on petroleum products instead of the Petroleum Development Levy, the FBR’s annual tax collection could have approached Rs13 trillion.
The report highlights the fiscal trade-off arising from the government’s fuel taxation policy. While the Petroleum Development Levy generates substantial revenue for the federal government, it reduces the FBR’s reported tax collection because the levy is treated as non-tax revenue.
The Tax Expenditure Report 2026 identifies the exemption on POL products as one of Pakistan’s largest tax expenditures, reflecting the government’s continued reliance on the Petroleum Development Levy as a key revenue mobilisation tool without applying sales tax to petroleum products.