Islamabad, November 13, 2024 – The Federal Board of Revenue (FBR) is contemplating a strategic reversal of the sales tax exemption on petroleum products, potentially introducing a modest 5-7% tax to stabilize fiscal revenues amid a challenging economic landscape.
This proposal, now under review, emerged during recent discussions between the FBR and the International Monetary Fund (IMF), aimed at addressing Pakistan’s budgetary needs while avoiding abrupt price surges in fuel.
During a series of high-level meetings, FBR officials informed the IMF mission that they currently do not foresee the need for extensive additional revenue measures for 2024-25, aside from the possible reintroduction of a reduced sales tax on petroleum. This tax adjustment, while not yet finalized, is being scrutinized as a critical step to offset a substantial revenue deficit without imposing excessive financial burdens on consumers.
Sources within the FBR disclosed that a review of sales tax on petroleum products is ongoing, with emphasis on achieving the year-end revenue target of PKR 12.97 trillion. At this stage, the FBR communicated that initiating contingency revenue measures would be premature, and it prefers to implement a targeted, incremental approach. This measured stance underscores the FBR’s cautious navigation of fiscal policy adjustments, particularly during the early stages of the fiscal year.
The FBR has faced considerable fiscal strain due to prior sales tax exemptions on petroleum products, with a reported revenue loss of PKR 1.25 trillion during the 2022-23 period, as detailed in the Tax Expenditure Report-2024. This report underscores the financial impact of tax exemptions on key petroleum products, including Petrol (MS), High-Speed Diesel (HSD), Kerosene, and Light Diesel Oil (LDO). These products, accounting for a combined 43.99% of total sales tax exemptions, saw a nearly 99% growth in tax expenditures over a short period, underscoring the significant fiscal drain attributable to this policy.
Additionally, discussions during the IMF-FBR meetings highlighted advancements in digital tax management, with the FBR detailing its plan to expand digital monitoring across various sectors. This expansion aims to enhance compliance and track revenue flow in critical industries, including petroleum, beverages, pharmaceuticals, and steel, through a comprehensive track-and-trace system. These technological initiatives form part of a broader effort to streamline the supply chain and optimize tax collection without resorting to abrupt tax hikes.
The IMF team expressed interest in these digitalization strategies, viewing them as instrumental in broadening the FBR’s tax base and curtailing revenue losses. The FBR’s ongoing efforts underscore its commitment to sustainable fiscal solutions, balancing revenue generation with economic stability amid evolving fiscal demands.
As the proposal for a limited sales tax on petroleum advances, stakeholders across the economic spectrum await further updates on this pivotal decision, which holds significant implications for Pakistan’s revenue landscape and the broader fiscal health of the economy.
