Tax Proposals Budget 2027VII : Petroleum levy: Unconstitutional & oppressive

When historians examine Pakistan’s fiscal trajectory during the last decade, they will certialy conclude that one of the most significant transformations occurred not in income taxation, sales taxation or customs duties, but in the extraordinary rise of the petroleum levy (PL), ehanced and imposed since 2018 unconstitutionally through Money Bills, while claimed as non-tax source falling outside the purview of Aricle 160 of the Constitution.

The development received surprisingly little public attention and/or debate from intelligentia (sic) and self-acclaimed all-knowing vizards despite its profound constitutional, economic and political implications [for history and evolution of PL kindly read: Budget 2027 & Challenges—II: IMF, petroleum levy & constitutional theft, Minute Mirror, May 19, 2026 and Unconstitutionally Levying A Petroleum Levy, Friday Times, June 15, 2024].

Pakistan’s fiscal crisis is often attributed to inadequate taxation. The reality is more complex. Increasingly, the state has chosen to finance itself through mechanisms that bypass the constitutional principles of fiscal federalism embodied in the National Finance Commission (NFC) framework. No example illustrates this trend more vividly than the PL.

The latest International Monetary Fund programme reportedly envisages PL collections of approximately Rs. 1.73 trillion in the forthcoming budget for fiscal year (FY) 2026-27. That figure would have appeared unimaginable only a few years ago. However, it represents the logical culmination of a trend that has steadily accelerated under successive governments.

The following official data, extracted from Ministry of Finance Fiscal Operations Statements, reveal the remarkable growth of petroleum levy collections:

The figures tell a remarkable story.

PL collections increased from Rs. 149 billion in FY2015-16 to Rs. 1.22 trillion in FY2024-25, representing growth of more than 717 percent within nine years. Even more striking is the post-FY2022 trend when sales tax was notified as zero rate and PL rates were enhances astronomically. Collections surged from Rs. 127.5 billion in FY2021-22 to Rs. 1.22 trillion in FY2024-25—an increase of approximately 857 percent in just three years. No major federal revenue stream has expanded at a comparable pace.

This development would be less controversial if PL formed part of the divisible pool under Article 160 of the Constitution. It does not.

Unlike income tax, sales tax and certain other federal taxes distributed through the NFC Award, PL proceeds remain entirely with the federal government. Provinces receive no share despite the fact that petroleum products are consumed throughout the country and despite the fact that inflationary consequences are borne by citizens in every province. This distinction lies at the heart of the constitutional debate.

The Constitution envisages cooperative fiscal federalism. The NFC mechanism was specifically designed to ensure equitable sharing of national resources between the federation and provinces. PL, however, increasingly allows the federation to generate revenues outside that framework without following the supreme lae of the land. The practical consequence is obvious.

A growing proportion of federal revenue originates from sources that bypass provincial sharing arrangements altogether. The issue becomes even more significant when examined alongside the treatment of petroleum products under the sales tax regime.

For years, governments increasingly relied upon PL while maintaining negligible or zero effective GST on major petroleum products through executive measures. The consequence was that revenues which would ordinarily enter the divisible pool and become shareable with provinces were effectively replaced by revenues retained exclusively by the federation. This trend deserves serious constitutional scrutiny.

Articles 160, 161 and 162 of the Constitution were never intended to permit fiscal engineering that undermines the spirit of resource sharing while formally complying with legal requirements. The broader economic implications are equally troubling.

PL is among the most regressive forms of revenue mobilisation available to any government. It does not distinguish between wealthy and poor consumers. It does not consider ability to pay. It applies equally to industrial production, public transport, agriculture and household consumption.

Every increase in PL raises transportation costs that leads to raise cost of production. Every increase in production costs eventually appears in consumer prices. The burden therefore cascades throughout the economy.

Unlike progressive taxation, which targets income and wealth according to capacity, PL taxes necessity. A labourer travelling to work, a farmer operating agricultural machinery and a corporation managing logistics all face higher costs because the levy is embedded within fuel prices. This explains why PL collections frequently rise alongside inflation. Inflation itself becomes a revenue-generating mechanism. It is a tax without legislation!

The state receives higher collections while households experience declining purchasing power. The contradiction is particularly stark when viewed against the background of the preceding articles in this series.

Part I demonstrated that Pakistan imposes high taxes yet generates low yields because the base remains narrow.

Part II argued that meaningful reform requires modernisation of tax administration.

Part III showed how with holdingisation transformed taxation into transactional extraction.

Part IV highlighted untaxed wealth and protected elites.

Part V examined the chaos of fragmented sales taxation.

Part VI explored the constitutional weaknesses of fiscal federalism.

The PL phenomenon brings all these themes together. The federation increasingly depends upon a regressive and non-divisible revenue source because genuine tax reform remains politically difficult. Taxing fuel is administratively easier than documenting wholesale trade.

Increasing levy rates is simpler than reforming Federal Board of Revenue (FBR). Collecting from consumers is politically easier than taxing powerful interest groups. Consequently, structural reform is postponed while indirect extraction expands. This path is economically unsustainable and constitutionally questionable.

Pakistan’s tax potential lies elsewhere. It lies in documentation of retail and wholesale trade and in rational property taxation. It lies in effective taxation of large agricultural incomes. It lies in integrated databases and risk-based assessment. It lies in harmonised federal and provincial tax administration. It lies in broadening the base rather than intensifying burdens upon existing taxpayers.

The solution is not abrupt abolition of PL. Fiscal realities make such proposals impractical. The challenge is reducing dependence upon it by creating alternative and sustainable revenue streams. That requires political courage. More importantly, it requires recognition that fiscal federalism cannot survive indefinitely if the fastest-growing federal revenues remain outside constitutional sharing arrangements.

A federation cannot continuously strengthen non-divisible revenues while claiming commitment to cooperative federalism. Nor can a modern tax state rely permanently on taxation of consumption while substantial wealth remains undertaxed.

Budget 2027 therefore presents a clear choice. Pakistan can continue expanding petroleum levy collections and celebrating short-term revenue gains, or it can finally undertake the structural reforms capable of generating sustainable revenues without undermining federalism, economic growth and social equity. The future of Pakistan’s fiscal stability depends on choosing the latter.