New Tax to Make Petrol and Diesel More Expensive After Budget

The federal government is set to impose a 3–5 percent General Sales Tax (GST) on petroleum products next fiscal year to support domestic refineries and sustain the oil supply chain. The Economic Coordination Committee (ECC) took this decision on May 13, 2025, and the Federal Cabinet approved it on May 20, reported the Business Recorder. Since petroleum products are currently exempt from sales tax under the Finance Act 2024-25, unadjusted input tax claims have become a cost burden amounting to an estimated Rs. 34 billion for FY2024- 25. Due to the government’s regulated pricing, this burden cannot be passed on to consumers. The Petroleum Division, in coordination with the Ministry of Finance and FBR, proposed a 3-5 percent GST on motor spirit (MS) and high-speed diesel (HSD) to be introduced through the Finance Act 2025. Applying the full 18 percent GST was ruled out due to the estimated Rs. 45 per litre price hike and the need for prior IMF approval. In the interim, the ECC approved compensation of unadjusted sales tax claims through the Inland Freight Equalization Margin (IFEM), effective from May 16, 2025, until the end of FY2025-26. Recovery will occur at Rs. 2.09 per litre on HSD and Rs. 1.07 per litre on petrol. To further stabilize the supply chain, the ECC approved an increase in OMC margins by Rs. 1.13 per litre and dealer margins by Rs. 1.40 per litre. The total indicative impact on petroleum prices from these adjustments is expected to be Rs. 4.12 per litre, combining sales tax recovery, dealer and OMC margin hikes.