FBR Likely to Impose Lower Sales Tax Rate on Petroleum Products

The Federal Board of Revenue (FBR) is considering imposing a lower rate of sales tax between 3 to 5 percent on petroleum products to overcome revenue shortfall in 2024-25. During the budget preparation exercise for 2024-25, the proposal to impose a standard rate of 18 percent sales tax on POL products was turned down by the prime minister as it is inflationary having an immediate impact on the general public. Sources told ProPakistani that the proposal to impose a lower rate of sales tax on petroleum products has not been finalized, but it is under consideration by the FBR as a revenue generation measure in the remaining period of 2024-25. The FBR has conveyed to the IMF that there is no urgency to enforce contingency revenue measures at the end of the first quarter of 2024-25. At this stage of the fiscal year, the implementation of the contingency revenue measures would be too early, FBR has conveyed to the IMF. In the Finance Act 2024, motor spirit (petrol), high-speed diesel, kerosene, and light diesel oil (LDO) have been changed from taxable supplies to exempt from the levy of sales tax. The change of status would have a positive revenue impact of Rs. 18-20 billion, the sources added. The refineries/oil marketing companies are requesting the government to change the said amendment made through the Finance Act 2024. Resultantly, up to 80-85 percent of the input tax will be disallowed resulting in a substantial increase in the operating cost as well as project cost, as per refineries. The Federal Board of Revenue (FBR) has suffered a revenue loss of Rs. 1.25 trillion during 2022-23 on account of sales tax exemption granted to petroleum products, according to the last Tax Expenditure Report-2024. The FBR’s Tax Expenditure Report-2024 revealed that more specifically within the largest tax expenditure availing sector of POL products there are four main components namely MS (Petrol), High-Speed Diesel Oil, Kerosene and Light Diesel Oil having the greatest share of Sales Tax Expenditure. These four items recorded a growth of 98.66 percent. The share of these four items is 43.99 percent of overall sales tax expenditure. It is, however, appropriate to point out that the said increase of these four major POL items is based on sales tax expenditure calculated for 2021-22 over the period of five months as compared to sales tax expenditure calculated over a period of twelve months for 2022-23 due to the fact that the said four items were zero-rated from February 1, 2022, vide SRO 321(I)/2022, dated 01-03-2022. Consequently, the Sales Tax expenditure for five months duration (Feb-June) of 2021-22, incurred on aforesaid four POL products was reported as Rs. 633.0 billion while the sales tax expenditure for the entire year (12 months) duration (July-June) of 2022-23, incurred on said four POL products is reported as Rs. 1,257.50 billion.