ISLAMABAD: The International Monetary Fund (IMF) has rejected the government’s proposal to impose a 1-2% sales tax on petroleum products, including petrol, high-speed diesel (HSD), kerosene oil, and light diesel oil (LDO), instead calling for an 18% sales tax.
An 18% sales tax would increase petrol prices by Rs45 per litre, a politically sensitive move the government is hesitant to adopt. This stance has jeopardized the $5-6 billion upgrade projects of local refineries under the Brownfield Refinery Policy 2023, a senior official involved in IMF discussions revealed.
Refineries argue that removing the sales tax exemption renders their operations unsustainable, negatively impacting project returns and the viability of upgrade investments. The annual foreign exchange loss due to the unresolved issues is estimated at $1 billion.
The government’s initial proposal to impose a 1-2% tax aimed to balance revenue without drastically raising prices, but the IMF insisted on treating fuel as a non-essential item, suggesting an 18% tax. The Fund also recommended imposing a 15% sales tax on essential items, including food, to meet fiscal targets.
Despite IMF flexibility on reducing the petroleum levy (currently Rs60 per litre) to accommodate the higher sales tax, the federal government is cautious, as 55% of sales tax revenue is shared with provincial governments, while it retains full revenue from the petroleum levy.
The standoff threatens to derail the refinery upgrade plans, which are critical to reducing import dependence and enhancing energy security.
Story by Khalid Mustafa
