What is the Petroleum Development Levy — one of the govt’s largest non-tax revenue sources

With the budget season almost upon us, one of the most important factors to watch out for will be the Petroleum Development Levy (PDL). This is one of the only levers the government has to increase or decrease the price of fuel, but also one of its safest bets to collect revenue that it does not have the share with the provinces. 

It is one of those things that will feature in the budget, but which the government tweaks throughout the year (every fortnight when petrol prices are revised) and can during drastic times become front page news. This is everything you need to know to understand what it is, and why it might matter to you.

What is the PDL?

The PDL is essentially a surcharge that the government charges on every liter of fuel that you consume, including petrol, diesel, kerosene oil and so on. Though it isn’t billed as a tax, it effectively functions like one, with one key difference: the government has the power to modify the amount on a fortnightly basis, whenever it decides to change the prices of petrol, if at all. 

The reason it can do that is because petrol prices in Pakistan are not simply prices of petrol. First, there is the ex-refinery price of petrol, which is essentially the price at which refineries sell fuel to OMCs. This ex-refinery price makes up the bulk of the price you finally pay at a fuel station. To these are added inland freight margins, essentially the transportations charges, the OMC’s margins, and the dealer’s margins. On top of this is added the PDL, and then the sales tax. 

What’s important to understand is that of all of these components it is by changing the PDL which is the means through which the government usually controls the prices of petroleum products. Essentially, the PDL functions as the lever through which the government - short of an actual subsidy or tax - can modify the prices of fuel on a short-term basis. 

For instance, when the oil prices rocketed after US-Israeli attacks on Iran, it was primarily through a hike in the PDL to approximately 160 rupees that the government increased the prices of petrol to record levels (although the removal of some fuel subsidies also contributed to the price hike). Yet, at the same time, the government reduced the PDL on diesel to zero rupees to mitigate the impact of this hike on freight costs and food inflation. And when, a few weeks later the government decreased the price of petrol, it did so primarily by slashing the PDL by around 80 rupees.

We can see, therefore, how it is essentially by changing the heft of the PDL that the government is able to change prices of petrol and modulate demand for fuel. Therefore, the Levy functions as a rapid means for the government to respond to any emergency changes in the global prices of oil, or other urgent need for general revenues to meet a particular revenue collection shortfall. Of course, the latter would not make sense if the PDL was insubstantial, and that brings us to the Levy’s importance to our annual budget.

PDL and the Budget

The budget is a balance between the estimated earnings the government is expected to generate and the projected expenditures the government is expected to make during the course of a fiscal year. 

In the budget for FY26, the government set a target to collect 1.468 trillion rupees through the PDL. This not inconsiderable amount represented 28.5 percent of the total non-tax revenue (5.14 trillion rupees) the government expected to come its way. Similarly, the target revenue from the PDL constituted 8.4 percent of the total income the government projected to generate.  The PDL, therefore, is an integral part of the framework through which the government finances its expenditures. 

During the current fiscal year, for example, the government had already raised 1.234 trillion rupees through the PDL by the end of April, with the remaining amount slated to be collected by the end of June 2026. Effectively, the Levy proceeds are used to finance any tax shortfalls in the government’s collection.

It is far from perfect 

One might already have heard of a few criticisms levied at this Levy. One of the major points of concern is that the PDL is classified as non-tax revenue. This means that unlike revenues from some of the other taxes - such as the general sales tax - the proceeds aren’t shared by the federal government with the provincial governments. This is a source of consternation with the provinces, which feel that they should have a share in these revenues as well. However, the fact remains that the federal government is responsible for some of the biggest expenditures in the budget, such as debt financing and defense. A dedicated pool of revenues available to the federal government allows it to deal with any emergencies and to tweak its collection in light of any fiscal exigencies.

The other major criticism has to do with the burden the PDL places on the common citizen. Pakistan’s inability (or worse, unwillingness) to effect meaningful tax reforms means that the government concentrates its revenue collection on avenues where it can do so without the need of doing the hard yards. We have already seen how the salaried class is taxed more than its fair share merely because it’s caught in the tax net, and massive businesses and whole informal economies aren’t just because they aren’t caught in the tax net. 

The hikes in PDL are used to finance any targets missed in tax collection. And here, since the tax applies uniformly across all income segments, the lower-income segments have to bear the brunt of any shortcomings in the government’s tax collection performance. The government has been relying on this low-hanging fruit to reliably generate revenues; this allows it to eschew any widespread reforms which would represent a more sustainable way of dealing with taxation revenue shortfalls. Moreover, there’s a limit to how much you can extract by the way of the PDL; of course, fuel prices get priced into just about everything we need to live. 

Yet given the nature of our situation, we also have to factor in IMF’s recommendations, which ,according to the latest staff-level report, suggest that the PDL target for the upcoming fiscal year, due to be announced in a few days, might be set at 1.727 trillion rupees, an increase of 17.6 percent over the target set in last year’s budget. With such pressures on the government’s head, in case there is no real increase in demand for fuel in the coming fiscal year, the government might have to finance this target by raising the amount of the PDL, effectively driving higher the prices of petrol.