Region 
 

Karachi

An Economy of Lies and Levies…

The continued reliance on petroleum levies, regulatory duties, and broad-based indirect taxation suggests a narrow, administratively convenient approach rather than a coherent strategy for structural transformation

By M. Abbas Raza | July 2026

Pakistan’s current economic trajectory reveals a widening disconnect between fiscal maneuvering and the lived realities of households and businesses. While selective macroeconomic indicators, such as temporary exchange rate stability, primary surpluses, or short-term reserve improvements, are presented as signs of stabilization, the underlying policy framework remains regressive and strategically shallow. This approach generates immediate liquidity but embeds inflationary pressures, industrial stagnation, and declining welfare.

At the heart of this contradiction lies the government’s entrenched reliance on indirect taxation, with the Petroleum Development Levy (PDL) standing out as its most visible and controversial instrument. By leaning on PDL, the state shifts the burden onto ordinary citizens, masking structural weaknesses in revenue collection while deepening inequality. From a fiscal standpoint, its appeal is straightforward: petroleum products offer a high-yield, low-administration revenue stream. Collections are immediate, predictable, and difficult to evade. In the last ten months, the PDL collections have exceeded Rs. 1.35 trillion, with targets continuing to rise under IMF-supported programs and FBR’s inability to meet its revenue targets.

In the Parliament, a minister and treasury bench members defended the Petroleum Development Levy (PDL) on the grounds that “citizens were not paying taxes.” Yet this justification exposes a deeper problem: PDL has morphed from a regulatory tool into a blunt revenue instrument. Its continuous escalation raises deep and serious economic, fiscal, moral and legal concerns.

Taxation is meant to reflect income, profitability, and capacity to pay. PDL does the opposite; it is a flat, consumption-based charge that treats all fuel users alike. A wealthy industrialist and a daily-wage worker are both charged the same levy per litre, eroding the principle of equity and undermining the doctrine of ability to pay. In effect, PDL functions as an indiscriminate indirect tax, disproportionately burdening the poor while sparing those with greater means. By substituting broad-based taxation with PDL, the government risks entrenching fiscal injustice and weakening the very foundations of a fair tax system.

Economically, persistent dependence on high PDL produces severe inflationary consequences. Petroleum products are a universal input for production and transportation. Increased fuel costs elevate (a) freight and logistics expenses, (b) industrial production costs, (c) agricultural input costs, (d) electricity generation costs, and (e) retail prices of consumer goods, thus creating cost-push inflation across the economy. Unlike demand-driven inflation, cost-push inflation suppresses economic activity while simultaneously increasing prices, thereby reducing purchasing power and real household incomes. The result is a contraction in consumer demand, lower savings, declining business activity, and worsening poverty levels.

Another major adverse effect of excessive PDL is the distortion of fiscal policy priorities. Easy revenue collection through petroleum levies discourages structural tax reforms aimed at widening the direct tax base, documenting the economy, and taxing undertaxed sectors. In fiscal terms, while PDL provides short-term revenue support and may help meet IMF-driven revenue targets, its long-term economic costs may outweigh the immediate fiscal gains. Sustainable taxation systems rely primarily on progressive direct taxation and broad-based economic growth, rather than excessive reliance on regressive consumption levies. In effect, fiscal consolidation is being achieved through the erosion of household welfare.


Morally and socially, the claim that “people do not pay taxes, therefore PDL must be charged” is deeply flawed. A large share of Pakistan’s population already contributes indirectly through sales taxes, withholding taxes, electricity duties, telecom levies, customs duties, and the hidden burden of inflation. Imposing PDL as a compensatory measure punishes everyone alike, taxpayers and non-taxpayers, including the poor, unemployed, pensioners, and informal workers who are legally exempt from direct taxation.

Morally and socially, the claim that “people do not pay taxes, therefore PDL must be charged” is deeply flawed, as a large share of Pakistan’s population already contributes indirectly through sales taxes, withholding taxes, electricity duties, telecom levies, customs duties, and the hidden burden of inflation

Its most regressive feature is that it disproportionately burdens low-income groups who should be protected. Fuel is not a luxury; it is a fundamental input for transport, agriculture, electricity generation, logistics, manufacturing, and daily life. When PDL drives up fuel prices, the impact cascades through the economy. Even those who do not own vehicles feel the squeeze through rising food costs, transport fares, utility bills, and essential commodities. In effect, PDL functions as a hidden tax on survival, eroding equity and amplifying hardship for those least able to bear it.

Although the government may have statutory authority to impose the Petroleum Development Levy (PDL), using it primarily for revenue generation rather than regulation raises a serious constitutional question; in substance, PDL functions as a tax regardless of the label attached to it. Constitutional jurisprudence makes clear that a levy, fee or surcharge amounts to a tax when four conditions are met: (a) its core purpose is revenue collection, (b) it is imposed compulsorily, (c) there is no direct quid pro quo or service rendered, and (d) the proceeds flow into general government expenditure rather than a specific regulatory objective. By this test, PDL is not merely a regulatory levy but an indirect tax in disguise. The government’s reliance on nomenclature cannot obscure its true legal character, making the contention that PDL is constitutionally a tax both credible and arguable. Under Articles 73 and 77 of the Constitution of Pakistan, the imposition, alteration, or regulation of federal taxation falls within the exclusive legislative domain of Parliament, particularly through the mechanism of a Money Bill.

The broader macroeconomic consequences are already visible. Inflation has remained persistently elevated, exceeding 25 percent in early 2026. Food inflation has been particularly severe, with staple commodities such as wheat flour, rice, and edible oil registering year-on-year increases of 30-40 percent. For the average citizen, the petroleum levy functions as a regressive tax. Rising fuel prices translate directly into higher costs of transportation, utilities, and basic goods, disproportionately affecting lower- and middle-income groups who spend a larger share of their income on essentials.

This raises fundamental questions about the strategic depth of the current policy framework. The continued reliance on petroleum levies, regulatory duties, and broad-based indirect taxation suggests a narrow, administratively convenient approach rather than a coherent strategy for structural transformation.

A credible economic framework must balance revenue mobilization with growth. This requires expanding the tax base, improving documentation, rationalizing expenditure, reforming state-owned enterprises, and enhancing industrial productivity. Instead, the prevailing approach prioritizes ease of collection over economic efficiency, favoring instruments that are administratively simple but economically distortionary.

The continued reliance on petroleum levies may provide short-term fiscal relief, but it simultaneously deepens inflation, weakens industry, and aggravates social hardship

The implications for investment are significant. Both domestic and foreign investors require policy predictability, cost competitiveness, and a clear long-term vision. Volatile and artificially inflated energy costs, combined with frequent policy shifts and ad hoc interventions, undermine investor confidence. This is reflected in persistently low levels of private investment relative to regional benchmarks.

The social contract is also under strain. Fiscal policy is not merely technical; it carries political and ethical dimensions. When the state relies heavily on regressive taxation while failing to deliver affordable energy, healthcare, and education, it weakens its own legitimacy. Rising food insecurity illustrates this disconnect vividly. Escalating prices of essential commodities have reduced purchasing power to the point where many households are forced to compromise on both the quantity and quality of food consumption.

It is important to recognize that Pakistan’s inflation is largely cost-push rather than demand-driven, driven by POL and energy pricing, currency depreciation, and indirect taxation. Addressing such inflation requires reducing input costs and improving supply-side efficiency. However, current policies continue to amplify cost pressures.

The core issue is the trade-off between short-term fiscal gains and long-term economic stability. While petroleum levies provide immediate liquidity, they simultaneously suppress growth by raising production costs and weakening demand. Fiscal balance achieved at the expense of economic activity and public welfare is neither durable nor desirable. The key question is how long this model can persist. Without structural reforms, such as broadening the tax base, addressing circular debt, and investing in domestic energy, the economy risks remaining trapped in a cycle of recurring crises.

To break this cycle, the government must adopt out-of-the-box reforms and measures, including (i) broadening the tax net to bring untaxed sectors into compliance and rigorously pursue tax evaders, (ii) shifting from import parity pricing, especially for commodities like fuel, energy, or key industrial inputs, to cost reflective domestic production, reducing artificial inflationary pressures, (iii) streamline distortions in petroleum pricing formulae, ensuring transparency and fairness in energy costs, (iv) publish clear breakdowns of levies, subsidies, and IMF conditionalities to restore public trust, (v) expand targeted subsidies for food and energy, diligently shielding vulnerable households from inflationary shocks, (vi) expedite coal supply arrangements for power generation, lowering electricity costs through greater utilization of Thar coal reserves, and (vii) encourage local industrial production to reduce dependence on imports and strengthen domestic competitiveness.

Ultimately, Pakistan’s economic recovery depends on moving beyond levy-driven fiscal management towards a model anchored in productivity, transparency, and sustainable growth. The continued reliance on petroleum levies may provide short-term fiscal relief, but it simultaneously deepens inflation, weakens industry, and aggravates social hardship. Without meaningful reform, the burden of adjustment will continue to fall disproportionately on citizens, while structural vulnerabilities remain unaddressed.

Read More