Administered Prices, Unchecked Levies

Summary

• We have consistently argued that petroleum levy is easy revenue with a heavy cost, used in place of structural tax reform.
• The import-cost side is governed by administered averages that can leave suppliers under-recovering, and the tax side by a levy with no legislated limit that consumers cannot escape. Together they produce opaque prices, supply risk, inflation and a heavy, regressive burden on the middle and poor classes.
• References New pricing system may halt petrol import, The Express Tribune, 9 Oct 2026 Pakistan hikes fuel levies, keeps pump prices unchanged, by Nukta Fiscal Operations Statement 2025-26, Ministry of Finance, Government of Pakistan Fuel levy poses bigger inflation risks, The Express Tribune Petroleum Levy: Easy Revenue, Heavy Cost (Bukhari and Haq), Minute Mirror Petroleum levy, circular debt and inflation (Haq and Bukhari), The News Higher fuel taxes emerging as major driver of inflation in Pakistan, ProPakistani _____________________________________________________________ Dr.

AI Generated Summary

Pakistan’s petroleum pricing is meant to be simple: take the import cost, add margins and freight, add taxes, and announce the price. The reality has become a patchwork of administered formulas, discretionary levies and lobbying. The latest evidence comes from an oil industry warning that the government’s revised pricing mechanism may force oil marketing companies to halt petrol imports.

What the new mechanism reveals

The Oil Companies Advisory Council (OCAC), an industry lobby, wrote to the Petroleum Division about the mechanism the federal government approved on 19 August 2026. Under it, when Pakistan State Oil has no petrol import cargo in the preceding seven working days, the price uses the calendar-year-to-date average of premium, incidentals and customs duty.

OCAC says this average is a poor proxy for current costs. It points to a CYTD (Calendar Year-to-Date) average premium of about $13 per barrel against $28.47 and $28.76 for PSO’s own cargoes due in late October and early November and estimates an under-recovery of Rs. 16-17 per litre during the gap. The council adds that about 70 percent of petrol requirements are imported, and that the industry is also carrying Rs. 66.7 billion in unrecovered price differential claims.

OCAC is an interested party, and its figures are its own. However, the episode exposes a structural flaw. A mechanism that substitutes a historical average for the actual replacement cost will, depending on the market, either squeeze importers or overcharge consumers. Neither outcome is price discovery. It is administered pricing with a formula attached, and the public cannot see how the inputs are chosen.

The part of the price that never needs a formula

The costs that vary, such as premiums, freight and exchange rates, are debated in letters and committees. The part that does not vary with any formula is the levy. The latest fortnightly review is a good example: the government raised the petroleum development levy on petrol by Rs. 4.62 per litre and on diesel by Rs. 0.80, while keeping pump prices unchanged despite lower global prices. That took the levy on petrol to Rs. 84.27 per litre, with a separate Rs. 2.50 climate support levy on top. Consumers saw a “stable” price while the state quietly captured the benefit of falling oil.

This is no accident. Pakistan relies on petroleum levies as a major non-tax revenue source under commitments to international lenders, and the target keeps rising. According to official report, collection was Rs. 1.567 trillion in fiscal year (FY) 2025-26 and a Rs. 1.67 trillion target for FY2026-27.  The increasing reliance on petroleum levy reflects the deeper political economy of taxation in Pakistan. The system taxes consumption rather than income, penalises the compliant and protects the privileged.

The state’s inability—or unwillingness—to tax wealth, real estate and large agricultural incomes has led to excessive reliance on indirect taxes. The result is a system where the poor subsidise the rich.

A levy without a legislated ceiling

The deeper problem is legal. We have consistently argued that petroleum levy is easy revenue with a heavy cost, used in place of structural tax reform. In our analysis in The News, they note that the Finance Act 2024 still capped the levy at Rs. 70 per litre, while the Finance Act 2025 omitted the Fifth Schedule containing the ceilings and amended Section 3 of the Ordinance, letting the federal government set the levy at any rate by executive notification.

A tax-like charge that Parliament cannot cap escapes the scrutiny every tax should face. The same authors point out that levy is non-divisible, unlike General Sales Tax (GST), which must be shared with the provinces, so shifting from one to the other centralises fiscal resources. The result is a pricing system in which the biggest component is also the least accountable.

Why the mechanism and the levy compound each other