Pakistan’s growing reliance on fuel taxes is becoming an economic risk. For decades, taxes and levies on petrol and diesel have provided the government with an easy and dependable source of revenue. However, this dependence has now reached a scale that deserves much closer attention.
FUEL TAXES
Pakistan’s growing reliance on fuel taxes is becoming an economic risk. For decades, taxes and levies on petrol and diesel have provided the government with an easy and dependable source of revenue. However, this dependence has now reached a scale that deserves much closer attention.
Fuel is not simply another product that people can choose to buy or avoid. It is needed for transport, agriculture, industry, trade and everyday life. When the government raises fuel taxes, the cost eventually spreads across almost the entire economy.
In FY2025-26, Pakistan collected a record Rs1.567 trillion through the petroleum levy. This was around 29 per cent higher than Rs1.22 trillion collected in the previous financial year. The amount was also higher than Rs1.468 trillion originally projected for the year.
The trend continued during the year. According to information presented to the National Assembly, the government had collected Rs1.342 trillion from the petroleum levy between July 2025 and April 2026 alone. Earlier official data showed that collection had already reached Rs1.205 trillion during the first nine months of the financial year.
These figures demonstrate why fuel taxes have become so attractive to the government. They generate large amounts of money without requiring the authorities to identify millions of individual taxpayers.
As of early September 2026, petrol is being sold at around Rs349 per litre, while high-speed diesel costs Rs374.31 per litre. The government is currently charging Rs114 per litre in taxes and duties on petrol and Rs100 per litre on diesel. This means taxes and duties account for about one-third of the retail price of petrol and more than a quarter of the price of diesel.
This is a substantial burden for a country where millions of people depend on motorcycles, cars, buses and other road transport to earn a living. A higher fuel tax also increases the cost of doing business, creating an inflationary chain reaction. A rise in fuel prices can increase the cost of food, transport, construction and other basic goods and services. The impact is particularly damaging when households are already struggling with high living costs.
Fuel taxes can become a convenient substitute for deeper tax reforms. Instead of bringing more people and businesses into the formal tax system, governments can rely on fuel taxation because it is easy to collect.
However, Pakistan needs a broader tax base. The government cannot keep relying on a small number of easily collected taxes while large sections of economic activity remain difficult to tax effectively.
The latest IMF figures underline the scale of the issue. The IMF's latest programme projections show petroleum surcharge revenue rising from around Rs1.55 trillion in FY2025-26 to around Rs1.64 trillion in FY2026-27, with further increases projected in subsequent years.
The government needs revenue. Pakistan has large fiscal requirements, but the solution should not be to keep increasing the tax burden on a product necessary to economic activity.
Petroleum taxes will remain an important source of revenue for some time and removing them suddenly would create another fiscal problem. But the objective should be to reduce the government's dependence on them rather than increase it
Pakistan also imports a substantial amount of its petroleum requirements, leaving it exposed to global fuel prices, international tensions and movements in the rupee. Events in 2026 have shown this vulnerability. Earlier in the year, petrol rose as high as Rs458.41 per litre and high-speed diesel reached Rs520.35 per litre, amid a sharp international energy shock. Although prices later fell, they remained highly volatile.
When international prices rise, consumers face higher costs. When the government also depends on fuel taxation for a large part of its revenue, it faces a difficult choice. Reducing fuel taxes can relieve consumers but creates a hole in government finances. Maintaining or increasing taxes protects revenue but adds to the pressure on households and businesses. This is not a sustainable position.
The government should instead begin a gradual transition towards a broader and more balanced tax system. More efforts are needed to bring undocumented businesses and untaxed economic activity into the formal economy.
The government also needs to examine expenditure. Raising revenue is only one side of the fiscal equation. The government must also ensure that public money is being spent efficiently. Wasteful expenditure, poorly performing state-owned enterprises, and unnecessary administrative costs put pressure on taxpayers and increase the need for additional revenue.
At the same time, Pakistan needs a long-term strategy to reduce its dependence on imported petroleum. Investment in public transport, railways, renewable energy and energy-efficient technology can gradually reduce the economy's exposure to oil prices.
Better public transport would be particularly important. In major Pakistani cities, many people have little choice but to use motorcycles, cars and informal transport because reliable public transport is either unavailable or insufficient. If people had affordable and dependable alternatives, the economic impact of higher fuel prices would be lower.
The government should also be careful about how it designs fuel taxation. A predictable tax system differs from repeated increases that make economic planning difficult. Businesses need to know their costs in advance, while households need some certainty about their monthly expenses. A more sensible approach would be to establish a clear medium-term framework for fuel taxation and gradually reduce dependence on petroleum revenue as other tax sources improve.
The issue also has a social dimension. Fuel taxes affect rich and poor households differently. A wealthy household may be able to absorb a higher petrol bill, but a low-income worker who depends on a motorcycle may have to cut spending on food or other necessities.
The government has recognised the pressure on vulnerable groups to some extent. In response to the rising fuel prices, it has introduced targeted support for motorcycles, public freight and transport, railways and small farmers. The federal budget for FY2026 also allocated Rs716 billion for the Benazir Income Support Programme.
Such measures can provide temporary relief, but they do not solve the underlying problem. Petroleum taxes will remain an important source of revenue for some time and removing them suddenly would create another fiscal problem. But the objective should be to reduce the government's dependence on them rather than increase it.
Pakistan needs a tax system that encourages production, investment and employment rather than making basic economic activity increasingly expensive. Broadening the tax base, improving tax administration, controlling unnecessary expenditure and investing in alternative energy are all part of that solution.
The writer is a seasoned journalist and a communications professional. He can be reached at: [email protected]
