The federal government is gearing up to introduce a 3–5 percent General Sales Tax (GST) on petroleum products in the upcoming fiscal year, aiming to bolster domestic refineries and ensure the stability of the oil supply chain.

The move, approved by the Economic Coordination Committee (ECC) on May 13, 2025, and subsequently endorsed by the Federal Cabinet on May 20, was reported by Business Recorder. Currently, petroleum products are exempt from sales tax under the Finance Act 2024-25, leading to unadjusted input tax claims that have become a financial burden, estimated at Rs. 34 billion for FY2024-25.

Due to government-regulated pricing, oil companies have been unable to pass this cost on to consumers. To address the issue, the Petroleum Division, in collaboration with the Ministry of Finance and the Federal Board of Revenue (FBR), proposed a 3–5 percent GST on motor spirit (MS) and high-speed diesel (HSD), to be implemented through the Finance Act 2025.

Officials ruled out the possibility of imposing the standard 18 percent GST, which would have resulted in a sharp price hike of around Rs. 45 per litre and required prior approval from the International Monetary Fund (IMF).

In the meantime, the ECC has approved compensation for unadjusted sales tax claims via the Inland Freight Equalization Margin (IFEM), effective from May 16, 2025, until the end of FY2025-26. The recovery will be made at a rate of Rs. 2.09 per litre on HSD and Rs. 1.07 per litre on petrol.

To further stabilize the petroleum supply chain, the ECC also approved an increase in margins: oil marketing companies (OMCs) will see a rise of Rs. 1.13 per litre, while dealer margins will go up by Rs. 1.40 per litre.

Altogether, these adjustments are expected to have a combined impact of Rs. 4.12 per litre on petroleum prices, factoring in sales tax recovery and the increased dealer and OMC margins.