Islamabad, Nov 13: FBR Expected to Implement Reduced Sales Tax on Petroleum Products. The Federal Board of Revenue (FBR) is contemplating the introduction of a reduced sales tax rate ranging from 3 to 5 percent on petroleum products to address the expected revenue shortfall in the fiscal year 2024-25.
In the discussions for the 2024-25 budget, the proposal to apply an 18 percent standard sales tax on POL products was rejected by the prime minister due to its inflationary effects, which would immediately affect the general population.
According to sources, the proposal for a lower sales tax rate on petroleum products is still under review by the FBR as a potential revenue enhancement measure for the remainder of 2024-25 but has yet to be finalized.
The FBR has informed the IMF that there is no pressing need to implement contingency revenue measures at the beginning of the first quarter of 2024-25. They indicated that it is too soon in the fiscal year to enforce such measures.
Under the Finance Act 2024, items such as motor spirit (petrol), high-speed diesel, kerosene, and light diesel oil (LDO) have been exempted from sales tax. This change in classification is expected to positively impact revenue by approximately Rs. 18-20 billion, as reported by sources.
Refineries and oil marketing companies are urging the government to reverse the amendments made through the Finance Act 2024, as this results in disallowance of 80-85 percent of input tax, significantly raising operating and project costs, according to the refineries.
The Federal Board of Revenue (FBR) experienced a revenue shortfall of Rs. 1.25 trillion in the 2022-23 fiscal year due to the sales tax exemption granted to petroleum products, according to the latest Tax Expenditure Report-2024.
The FBR’s Tax Expenditure Report-2024 highlighted that the largest tax expenditure sector, POL products, includes four main components: MS (Petrol), High-Speed Diesel Oil, Kerosene, and Light Diesel Oil, which account for a significant share of sales tax expenditure. These four categories showed a remarkable growth of 98.66 percent.
These four items contribute to 43.99 percent of the total sales tax expenditure. It is important to note that this increase in sales tax expenditure for these major POL items is based on a comparison of the spending calculated for five months during 2021-22 against the spending for twelve months of 2022-23, as these items were zero-rated starting February 1, 2022.
As a result, the reported sales tax expenditure for the five-month period (Feb-June) of 2021-22 for the aforementioned four POL products was Rs. 633.0 billion, while the full-year (July-June) sales tax expenditure for 2022-23 for these four products was reported at Rs. 1,257.50 billion.
