KARACHI: In a significant move to alleviate a mounting financial burden on Pakistan’s petroleum sector, the federal government has approved interim measures to compensate oil marketing companies (OMCs) and refineries for unadjusted input sales tax claims.
This decision, taken by the Economic Coordination Committee (ECC) on May 13th and subsequently approved by the Federal Cabinet on May 20th, aims to stabilize the supply chain and prevent a potential crisis.
The Rs34b burden
Under the current Finance Act 2024-25, petroleum products are exempt from sales tax. However, this exemption has led to an estimated Rs. 34 billion in unadjusted input tax claims for the fiscal year 2024-25, which has become a significant cost burden for the industry. Due to the government’s regulated pricing mechanism, this substantial cost cannot be passed on to consumers, placing immense pressure on OMCs and refineries.
Future GST proposed, interim solution implemented
To address this structural issue, the Petroleum Division, in collaboration with the Ministry of Finance and the Federal Board of Revenue (FBR), has proposed introducing a 3-5 percent General Sales Tax (GST) on motor spirit (MS) and high-speed diesel (HSD) through the upcoming Finance Act 2025. Applying the full 18 percent GST was deemed unfeasible at this juncture, as it would lead to an estimated price hike of Rs. 45 per litre and require prior approval from the International Monetary Fund (IMF).
In the interim, the ECC has approved a mechanism to compensate for these unadjusted sales tax claims through the Inland Freight Equalization Margin (IFEM). This measure will be effective from May 16, 2025, and will remain in place until the end of FY2025-26. The recovery will be implemented at a rate of Rs. 2.09 per litre on HSD and Rs. 1.07 per litre on petrol.
Stabilizing margins & price impact
To further stabilize the petroleum supply chain, the ECC also approved an increase in OMC margins by Rs. 1.13 per litre and dealer margins by Rs. 1.40 per litre.
The cumulative indicative impact on petroleum prices from these combined adjustments – including sales tax recovery, dealer, and OMC margin hikes – is expected to be Rs4.12 per litre. This interim solution aims to provide much-needed financial relief to the petroleum sector while the government works towards a more permanent and sustainable tax framework.
