Senate Committee rejects carbon tax on oil products

• Govt proposes RS2.5 per liter of fuel tax on FY26 budget.
• Sherry Rehman says that carbon load for the common man.
• He adds that the contribution should be imposed on industries.
  

The Senate Finance Committee rejected on Thursday two basic budget requirements for the financial year 2025-26 – the imposition of carbon levy on oil products and a tax on small cars.

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

According to the proposed amendments to the 1961 decree – already incorporated into the funding plan of the bill 2025-26 – the government aimed to phase in a carbon levy of RS5 per liter in gasoline and diesel over two years, starting with RS2.5 per liter of FY2025-26 oven.

The meeting, chaired by Salem Mandviwalla Senator, rejected the Ministry of Finance’s proposal to introduce a carbon contribution of RS2.50 per liter for oil products in the financial year 2025-26, with a planned increase in RS5.00 per liter next year.

Treasury officials informed the Commission that the proposed levy was expected to produce an annual revenue of 45 billion Rs.

During the meeting, Senator Sherry Rehman described the imposition of a carbon burden on the public and argued that it could not be introduced through the 2025-26 funding bill.

He added that these taxes should target industries with high carbon emissions and should be part of a broader climate strategy.

Senator Shibli Faraz also criticized the government for Levy’s proposal for oil and diesel in budget 2025-26.

In a separate development, the Commission rejected a proposal for a 1%, 2%or 3%levy on small vehicles. Senator Sherry Rehman pointed out that vehicle registration and taxation are provincial issues and warned that federal intervention in this area could increase legal and administrative complications.

Earlier this week, the Ministry of Energy (Division Petroleum) sent a summary to the federal cabinet, seeking approval for amending the oil decree (RSF) in 1961 to introduce new contributions to gasoline, diesel and oil oven.

Summary states that the oil levy to the furnace oil will be imposed on RS77 per liter (RS82,077/MT) in force from 1 July 2025, depending on the establishment of the amended decree through the upcoming economic law. An RS2.5/liter carbon levy (RS2,665/mt) in the furnace oil will also be inserted into FY26 and doubled in FY27.

The amendments also authorize the federal government to determine and inform the oil levy rates. The frames of carbon and oil levy, including interest rates and application schedules, have been finalized jointly with the IMF by the funding and oil departments.