Bankruptcy of ideas—VII The Petroleum (Levy) State

The previous article in this series demonstrated that Pakistan’s fiscal crisis is not simply a consequence of inadequate revenue collection. It is also a product of unrealistic budgeting, repeated forecasting failures and a hidden budget of exemptions, concessions and privileges. The obvious question now is: if taxation remains inadequate and fiscal deficits persist, how does the state continue financing itself? The answer is increasingly visible in Budget 2026-27.

Pakistan is gradually evolving into what may be called a petroleum levy state—not because it possesses vast oil reserves, but because petroleum levies have become one of the most important pillars of federal finance. This transformation carries profound economic, constitutional and political implications.

The federal budget projects petroleum levy collections of Rs. 1.677 trillion during fiscal year (FY) 2026-27, compared to Rs. 1.498 trillion in FY2025-26.

The growth over the last decade is overwhelming.

Table 1: Petroleum Levy Collections

Source: Ministry of Finance Budget Documents, Fiscal Operations Statements and Economic Surveys.

Within a decade, petroleum levy has increased more than eleven-fold. Few taxes have experienced comparable growth. Even more revealing is its relationship with development spending.

Table 2: Petroleum Levy versus Development Priorities (FY2026-27)

Source: Budget 2026-27

The federal government expects to collect substantially more through petroleum levy than it intends to spend on the entire Public Sector Development Programme (PSDP). This single comparison exposes the priorities embedded within contemporary fiscal policy.

Development creates future productive capacity. Petroleum levy extracts resources from present consumption. One builds the future. The other finances current obligations.

Petroleum levy differs fundamentally from income taxation. Income tax is linked, at least in principle, to ability to pay. Petroleum levy is embedded within the price of fuel. Its burden extends far beyond vehicle owners.

Every increase in petroleum levy raises transportation costs. Higher transportation costs increase agricultural costs. Agricultural costs influence food prices. Industrial production becomes more expensive. Supply chains become costlier. Consumers ultimately bear the burden through higher prices.

Petroleum levy therefore functions simultaneously as:

• A revenue instrument;
• An inflationary instrument;
• A regressive instrument.

The poorest households often pay without ever purchasing petrol directly. This is why economists frequently describe such levies as hidden taxes.

Citizens notice higher prices. Few understand how much of those prices represent fiscal policy.

The growth of petroleum levy reflects a broader trend. Instead of undertaking politically difficult structural reforms, governments increasingly rely on instruments that generate automatic revenue. The 2026-27 budget illustrates this reality. The figures below reveal a striking reality.

Table 3: Major Non-Tax Revenues FY2026-27

Source: Budget 2026-27

A substantial portion of federal resources now originates not from broad-based taxation of income and wealth but from levies, monetary transfers, administrative charges and extraordinary receipts. The state increasingly finances itself through mechanisms that avoid the political challenges of comprehensive tax reform.

The petroleum levy also raises important questions of fiscal federalism. Taxes collected under the constitutional framework are subject to sharing arrangements under the National Finance Commission (NFC) Award. Petroleum levy is different. It accrues entirely to the federation. Its expansion has therefore altered the balance between federal and provincial finances. The issue is not merely legal.  It concerns incentives.

A federation that increasingly relies on non-divisible revenues naturally becomes less dependent on broad-based tax reforms and less committed to strengthening the constitutional sharing framework. Meanwhile provinces continue carrying primary responsibility for education, healthcare, agriculture, local government and many social services. The result is growing tension between fiscal centralisation and administrative decentralisation.

Perhaps the most neglected aspect of Pakistan’s fiscal debate concerns public assets. Governments repeatedly claim scarcity while controlling enormous real estate holdings across the country. Prime public land remains occupied by official residences, government colonies, guest houses, rest houses, clubs and other facilities maintained at taxpayer expense.

Large sections of urban land in Islamabad, Lahore, Karachi, Peshawar and Quetta are effectively removed from productive commercial use. Successive governments prefer increasing petroleum levies and indirect taxation to confronting this reality. Yet basic economic logic suggests a different approach.

A government that genuinely faces fiscal constraints should first monetize underutilised assets before imposing additional burdens on citizens. Official residences can be replaced with market-based housing allowances. Public land can be leased commercially. Non-essential facilities can be rationalised. Idle assets can be transformed into revenue-generating assets. These measures would improve efficiency without increasing inflationary pressures. The problem extends beyond real estate.

Pakistan continues maintaining a system of in-kind privileges for segments of the militro-judicial-civil complex that includes official residences, vehicles, domestic staff, utilities, fuel, clubs and numerous ancillary benefits. The issue is not personal. The issue is economic. Every privilege carries an opportunity cost. Resources devoted to maintaining elite consumption cannot simultaneously finance public goods. Every subsidized residence is revenue foregone.

Every publicly funded privilege represents an alternative use of scarce resources. The true cost of VIP governance is therefore not measured by what government spends. It is measured by what society loses.

A productive state finances itself through expanding prosperity. An extractive state finances itself through fuel tanks, utility bills, indirect levies and inflationary charges. The trajectory of recent budgets suggests that Pakistan continues moving toward the latter model.

The growing dependence on petroleum levy reflects a deeper failure of imagination. Rather than broadening the tax base, rationalising privileges, monetizing public assets and stimulating productive growth, policymakers increasingly rely upon instruments that shift burdens onto consumers while preserving existing structures of privilege. The result is fiscal stability without economic transformation. A nation cannot levy its way to prosperity. Nor can it indefinitely finance itself through inflationary extraction while neglecting productive investment.

The next article examines another dimension of this contradiction: how Pakistan evolved into a tax state without taxpayers, where withholding and advance taxes increasingly replaced genuine assessment, voluntary compliance and equitable taxation.

[To be continued]

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Dr. Ikramul Haq, Advocate Supreme Court, Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), holds LLD in tax laws. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He also served Civil Services of Pakistan from 1984 to 1996.