Karachi, May 18, 2025 – The Federal Board of Revenue (FBR) has been strongly urged to reinstate the sales tax on petroleum products in the upcoming 2025-26 federal budget, as per detailed tax proposals submitted by the Overseas Investors Chamber of Commerce and Industry (OICCI).
The OICCI, representing major foreign investors in Pakistan, emphasized the need for the FBR to reverse the sales tax exemption granted to petroleum products under the Finance Act, 2024. Until June 30, 2024, Mogas, Diesel, Kerosene, and Light Diesel Oil (LDO) were categorized as taxable supplies under the Sales Tax Act, 1990. However, the Finance Act reclassified these essential petroleum products as exempt, a move that has sparked significant concern within the refining sector.
In its proposal, the OICCI highlighted that this exemption has led to a dramatic increase in both operational expenditures and capital expenditures (CAPEX) for refinery upgrade projects. Since these petroleum products are now exempt, the input sales tax incurred in the production process is no longer fully recoverable. Specifically, any direct input sales tax related to the production of exempt items must now be treated as a cost. Moreover, up to 80% of remaining input sales tax must also be absorbed as cost, with only a limited portion being claimable – that which is directly attributable to taxable sales.
To ease the financial burden on refineries and ensure long-term sustainability, the OICCI has recommended that the FBR restore the taxable supply status of Mogas, Diesel, Kerosene, and LDO. Furthermore, it proposed that these petroleum products be listed in the Fifth Schedule of the Sales Tax Act, 1990, to qualify for zero-rating. This would allow businesses to claim refunds on unadjusted input taxes and enhance the viability of the sector.
The refining industry, being a regulated sector, cannot adjust its pricing freely to compensate for increased tax burdens. Therefore, the call for action urges the FBR to consider the adverse impact of the exemption and support the refining sector through a fair tax regime on petroleum products.