A litre of fuel in Pakistan carries more than the cost of imported oil. It also carries the burden of a state that fails to tax large parts of the economy.
Today, on October 29 as this is written, petrol costs Rs377.91 per litre and high-speed diesel Rs399.82. Taxes and duties account for approximately Rs114 per litre of petrol and Rs100 per litre of diesel. Global volatility explains part of the price, but Pakistan’s tax structure turns each oil shock into a cost-of-living crisis.
Pakistan is not literally an untaxed economy; it is an unevenly taxed one. Salaried workers, formal firms and consumers of fuel and electricity are easily identified and repeatedly charged. Meanwhile, substantial income from informal retail, real estate, professional services and agriculture remains undertaxed.
FBR taxes equalled 10.3 per cent of GDP in FY2025–26, while consolidated tax revenue reached 11.2 per cent. An IMF assessment exposes the deeper imbalance. Agriculture generated 24.6 per cent of value added but faced an estimated effective tax rate of only 0.3 per cent. Petroleum products, by contrast, carried an estimated effective rate of 166 per cent. These sectoral estimates demonstrate how strongly revenue collection is concentrated on fuel.
Petroleum is attractive because it passes through an organised, measurable supply chain. Unlike income or property, a litre of petrol cannot be hidden from the tax authority. The levy is collected efficiently before fuel reaches consumers. Petroleum-levy receipts reached about Rs1.57 trillion in FY2025–26, and the current budget targets nearly Rs1.68 trillion. Fuel has consequently become not merely an energy source but a central instrument of federal revenue collection.
Fuel taxation is not inherently unjustified. Petroleum consumption creates pollution, congestion and import dependence. The problem is excessive dependence. When international oil prices increase, maintaining the levy protects revenue but intensifies inflation. Reducing it creates a fiscal shortfall. Freezing prices through a universal subsidy shifts the cost to the budget, which may be covered through debt or additional taxation.
The effects extend far beyond vehicle owners. Petrol affects motorcycles, rickshaws and small businesses, while diesel powers buses, trucks, tractors and generators. Higher diesel prices raise the cost of transporting food, medicines and industrial inputs. Businesses then transfer much of the increase to consumers.
This transmission is already visible. National inflation reached 11.1 per cent in August, food inflation 13.89 per cent, and transport inflation 20.17 per cent. Rural inflation, at 12.22 per cent, exceeded the urban rate of 10.43 per cent. Poor households therefore pay for expensive fuel even when they own no vehicle, through higher food prices, fares and delivery costs.
Disclaimer: The views expressed in this article are the author’s personal views and do not necessarily reflect SDPI’s position. A country that taxes movement more reliably than income, property and economic rents will keep collecting at the petrol pump
Fuel inflation also restricts economic recovery. The State Bank has retained its policy rate at 12 per cent and warned that fuel costs are feeding into transport prices and inflation expectations. Expensive energy may keep interest rates high and credit costly for farms and businesses. Higher oil prices also enlarge the import bill, create demand for foreign currency and threaten the current account. Any resulting rupee depreciation raises domestic fuel prices again.
The government has responded with a Rs75 billion fuel-relief scheme. Two- and three-wheelers receive relief equivalent to Rs2000 monthly, while cars up to 800cc receive support of Rs3000 monthly. This is preferable to a universal subsidy because affluent households generally consume more fuel and would capture a greater absolute benefit from a blanket price reduction.
Nevertheless, the programme targets vehicles rather than poverty. A small car or motorcycle is an imperfect measure of household income. A better-off family may qualify, while a poor worker using an unregistered or borrowed motorcycle, or public transport, may receive nothing. Assistance should therefore be linked with the National Socio-Economic Registry and other verified income indicators. Support for public transport should also be conditional on operators maintaining affordable fares.
Immediate relief cannot substitute for tax reform. Provinces must tax large agricultural incomes effectively while protecting small farmers. Real estate should be assessed at realistic values, and speculative gains must be taxed. Retailers, wholesalers and high-earning professionals should enter the system through simplified registration, digital invoicing and risk-based audits. Unjustified exemptions should be withdrawn. The objective is not to burden salaried workers and documented firms again, but to distribute responsibility across all forms of income and wealth.
Pakistan also needs a transparent, rules-based petroleum levy. The government should publish the price composition and allow limited levy reductions when international prices cross an exceptional threshold. Over time, better public transport, freight rail, electric motorcycles and fuel-efficient vehicles can reduce oil dependence.
Pakistan’s oil shocks may be imported, but the severity of the resulting crisis is partly determined at home. A country that taxes movement more reliably than income, property and economic rents will keep collecting at the petrol pump -- and paying through inflation and inequality. The lasting solution is not permanently cheap petrol, but a fairer tax system in which mobility no longer carries a disproportionate share of the state’s financial burden.
The writer is a research assistant at the Sustainable Development Policy Institute (SDPI), Islamabad.
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