Karachi, January 20, 2025 – The Federal Board of Revenue (FBR) has revealed a staggering Rs 1.42 trillion in sales tax exemptions granted to petroleum products, despite a significant decline in consumption over the past year.
This amount represents approximately 50% of the total sales tax exemptions provided in tax year 2023, according to the FBR’s Tax Exemption Report for 2024.
The report indicates that sales tax exemptions and concessions saw a dramatic rise of 121% during the 2023 tax year, surging from Rs 1.29 trillion in 2022. This considerable increase in tax expenditure is attributed to a range of global and domestic factors, including geopolitical tensions, fluctuations in global fossil fuel prices, and public policy interventions aimed at mitigating these pressures. Such interventions have included exemptions, zero rating, and reduced tax rates across various sectors.
The FBR’s report highlights that sales tax expenditures reached historically high levels in FY 2022-23 when compared to previous years, with petroleum products emerging as one of the largest beneficiaries of these exemptions. The report identifies four key components within the petroleum sector—Motor Spirit (MS), High-Speed Diesel Oil, Kerosene, and Light Diesel Oil—which account for the largest share of the total sales tax expenditure. These four products alone registered an alarming 98.66% increase in tax exemptions, contributing to 43.99% of the total sales tax expenditure.
However, it is essential to note that this increase is partly due to the recalculation of sales tax expenditures. The FBR explained that the comparison between FY 2021-22 and FY 2022-23 is skewed, as the latter period accounted for twelve months of data, while the former only considered five months, as these four items were zero-rated starting from February 1, 2022, under SRO 321(I)/2022. Despite a drop in consumption volumes, the rise in the prices of petroleum products during FY 2022-23 was the primary driver of the surge in sales tax expenditure.
The agriculture sector also experienced significant growth in sales tax exemptions, with a notable 28.1% increase. The value of agricultural production grew from Rs 14.89 trillion in FY 2021-22 to Rs 19.08 trillion in FY 2022-23, which contributed to increased fertilizer consumption. The FBR granted Rs 232.6 billion in sales tax exemptions to local fertilizer producers, while fertilizer imports were provided Rs 19.9 billion in exemptions, totaling Rs 252.6 billion in tax concessions under the Sixth Schedule of the Sales Tax Act, 1990.
Similarly, the Large-Scale Manufacturing (LSM) sector saw growth, with production rising from Rs 7.04 trillion to Rs 8.53 trillion, a 21.2% increase. The corresponding tax expenditure attributed to this sector amounted to Rs 98.2 billion.
In summary, despite a decline in consumption, the massive sales tax exemptions granted to petroleum products and other sectors reflect a complex interaction of global economic factors and national policy decisions, which continue to shape Pakistan’s fiscal landscape. The government faces the challenge of balancing tax exemptions with the need to ensure broader revenue generation and fiscal discipline.