The government is examining a proposal to gradually cut the Petroleum Development Levy (PDL) to Rs5 to Rs10 per litre, but replacing the lost revenue could require a broad new tax drive.
The Ministry of Planning has circulated the proposal to the Finance Ministry, Federal Board of Revenue (FBR) and State Bank of Pakistan (SBP) for comments. It is not yet an approved government policy.
PDL brought in Rs1.557 trillion in 2025-26, above the Rs1.468 trillion target. The government has set a Rs1.576 trillion target for the current fiscal year.
Cutting the levy to Rs5-Rs10 per litre over 12 months would leave only about Rs96 billion to Rs180 billion in annual revenue. This would create a gap of roughly Rs1.45 trillion to Rs1.50 trillion.
The proposal suggests filling that gap through higher taxes on luxury goods and high-income groups, withdrawal of some tax exemptions, stronger enforcement and lower government borrowing costs.
Higher taxes on luxury imports, first and business-class air travel and luxury vehicles could raise Rs200 billion to Rs280 billion. An additional surcharge on the largest corporations and ultra-high-income individuals could bring another Rs180 billion to Rs250 billion.
The government is also looking at tax exemptions. Total tax expenditure stood at about Rs2.35 trillion in 2025-26. After protecting exemptions for food, health, education and defence, the proposal sees Rs1.2 trillion to Rs1.4 trillion as potentially available for reform.
Another major proposal is to bring more retailers into the tax net. A fixed levy linked to commercial electricity connections and wider use of digital sales records could eventually raise Rs150 billion to Rs250 billion a year.
The plan also includes taxes on agricultural income, wealth and carbon emissions, while AI-based data matching across banks, utilities, property and retail transactions could help the FBR identify tax evasion.
However, replacing PDL will not be straightforward. Unlike most FBR taxes, PDL is federal non-tax revenue and is not shared with provinces under the National Finance Commission Award.
The proposal also faces political and legal hurdles because agriculture and property taxation fall largely within provincial jurisdiction. Any reduction in PDL would also need agreement with the International Monetary Fund, which treats the levy as a committed revenue measure.
For this reason, the proposal favours a gradual cut rather than an immediate abolition. It estimates that the replacement measures, combined with possible savings from lower interest rates, could cover the revenue gap more fully within two years.
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