Senate panel rejects carbon tax on petroleum products

• Govt proposes Rs2.5 per litre tax on fuels in FY26 budget.
• Sherry Rehman says carbon levy burden on common man.
• Adds levy should be imposed on industries.
  

The Senate Standing Committee on Finance Thursday rejected two key budget proposals for the fiscal year 2025–26 — the imposition of a carbon levy on petroleum products and a tax on small cars.

Initially, the proposal was unveiled by Finance Minister Muhammad Aurangzeb during his budget speech on June 10, 2025.

Under the proposed amendments to the Ordinance of 1961 — already incorporated into the draft Finance Bill 2025–26 — the government had aimed to phase in a carbon levy of Rs5 per litre on petrol and diesel over two years, starting with Rs2.5 per litre in FY2025–26, and to apply both carbon and petroleum levies on furnace oil.

The meeting, chaired by Senator Saleem Mandviwalla, turned down the finance ministry's proposal to introduce a carbon levy of Rs2.50 per litre on petroleum products in fiscal year 2025-26, with a planned increase to Rs5.00 per litre in the following year.

The finance ministry officials informed the committee that the proposed levy was expected to generate Rs45 billion in annual revenue.

During the session, Senator Sherry Rehman termed the carbon levy a burden on the common man and argued that it could not be introduced through the Finance Bill 2025–26. 

She added that such taxes should target industries with high carbon emissions and must be part of a broader climate strategy.

Senator Shibli Faraz also criticised the government for proposing levy on petrol and diesel in the budget 2025-26.

In a separate development, the committee rejected a proposal to impose a 1%, 2%, or 3% levy on small vehicles. Senator Sherry Rehman pointed out that vehicle registration and taxation are provincial matters and warned that federal intervention in this domain could raise legal and administrative complications.

Earlier this week, the Ministry of Energy (Petroleum Division) sent a summary to the federal cabinet, seeking approval to amend the Petroleum Products (Petroleum Levy) Ordinance, 1961, to introduce new levies on petrol, diesel, and furnace oil in line with Pakistan’s commitments under the IMF’s Resilience and Sustainability Facility (RSF), The News learnt.

The summary states that the petroleum levy on furnace oil will be imposed at Rs77 per litre (Rs82,077/MT) effective July 1, 2025, contingent on the enactment of the amended ordinance through the upcoming Finance Act. A carbon levy of Rs2.5/litre (Rs2,665/MT) on furnace oil will also be introduced in FY26 and doubled in FY27.

The amendments also empower the federal government to determine and notify petroleum levy rates. The carbon and petroleum levy frameworks, including rates and implementation timelines, have been finalised jointly with the IMF by the Finance and Petroleum Divisions.