IMF, petroleum levy & constitutional theft Dr. Ikramul Haq "In 2025, agricultural income tax rates were increased significantly to align with tax rates for other income; however, revenues remained below expectations reflecting implementation delays and enforcement challenges. Textiles, real estate, and business services also account for a large share of value added compared to net tax collection. At the other extreme, petroleum products carry an effective tax rate of 166 percent, leaving revenues heavily reliant on fuel taxation and vulnerable to shocks"- IMF Country Report No. 26/101, May 2026 The third review by International Monetary Fund (IMF) cited above has finally ended the pretence that Pakistan's fiscal crisis is merely a story of weak tax collection. It confirms something far more disturbing: the ongoing US$7 billion 37-month Extended Arrangement under the Extended Fund Facility (EFF), approved on September 25, 2024, has effectively institutionalised a constitutional breach against the federating units through manipulation of petroleum taxation. A news report states that the IMF has fixed the petroleum levy collection target for fiscal year 2026-27 at Rs. 1.73 trillion, an increase of Rs. 259 billion over the current year. This single figure exposes the real and ugly framework of Pakistan's existing fiscal regime. The federation is no longer interested in broadening the tax base or reforming elite privileges. Instead, it has discovered an easier route: deprive provinces of their constitutional share by shifting revenues from divisible taxes to non-divisible levies. This is not merely bad economics. It is a frontal assault on Article 160(3A) of the Constitution, which says: "The share of the Provinces in each Award of National Finance Commission shall not be less than the share given to the Provinces in the previous Award". Article 160(3A), inserted through the Constitution (Eighteenth Amendment) Act 2010 [Eighteenth Amendment], was meant to protect provincial fiscal autonomy by mandating that the share of provinces in the National Finance Commission (NFC) Award "shall not be less than the share given to the Provinces in the previous Award." The spirit behind this provision was clear: the federation could no longer unilaterally erode provincial finances through administrative gimmickry or fiscal engineering. What has happened in practice is precisely the opposite. By reducing General Sales Tax (GST) on petroleum products to zero through statutory regulatory order (SRO) 321(I)/2022 with effect from March 1, 2022 , the federal government has effectively removed petroleum consumption from the divisible pool. Had GST remained applicable on petroleum products, 57.5% of its proceeds would have flowed to provinces under the current Seventh NFC Award. Instead, the federation collects petroleum levy entirely for itself. This is fiscal appropriation disguised as reform. For years, this constitutional distortion has been defended as a temporary fiscal necessity. The IMF report now confirms it has become a permanent structural feature of Pakistan's revenue model. The Fund is not merely aware of this arrangement; it is actively supervising and enforcing it. The implications are devastating for fiscal federalism. The provinces bear the burden of education, healthcare, agriculture, water management and local governance after the Eighteenth Amendment. Yet the federal government continues to centralise fiscal resources through devices that bypass the divisible pool. Provinces are then blamed for accumulating surpluses, although these so-called surpluses often represent unpaid constitutional entitlements withheld through fiscal manipulation. The irony is painful. The same IMF that routinely lectures developing countries on "institutional reforms," "good governance" and "rule of law" is effectively party to the weakening of Pakistan's constitutional compact. The petroleum levy itself suffers from a deeper constitutional defect. Unlike taxes recognised under Part I of the Federal Legislative List, Fourth Schedule to the Constitution, petroleum levy is admittedly a non-tax levy. Historically, levies and cesses in constitutional jurisprudence are distinguishable from taxes because they are supposed to have a specific purpose or regulatory nexus. Yet in Pakistan, the petroleum levy has become a permanent revenue extraction instrument functioning exactly like a tax but without constitutional safeguards applicable to taxation. Its legislative history is equally problematic. The petroleum levy framework was pushed through Parliament as a Money Bill. Under the Constitution, Money Bills are confined to matters strictly falling within Article 73, mainly taxation and expenditures charged upon the Federal Consolidated Fund. A non-tax levy masquerading as a Money Bill bypasses the Senate's meaningful legislative role. This becomes even more questionable when the levy proceeds are used not for a narrowly defined regulatory purpose but as general budgetary support. The constitutional contradiction is glaring: the federation insists petroleum levy is not a tax whenever provincial sharing is discussed, but treats it exactly like a tax for budgetary and revenue purposes. This duplicity lies at the heart of the present fiscal crisis. The IMF's endorsement of ever-higher petroleum levy targets also reveals the intellectual bankruptcy of Pakistan's adjustment programme. Instead of dismantling elite exemptions, taxing speculative wealth, reforming real estate privileges, rationalising military-commercial enterprises, or addressing undocumented sectors, the adjustment burden is repeatedly shifted onto fuel consumers. Petroleum levy is among the most regressive forms of extraction imaginable. It directly increases transport costs, electricity generation costs, agricultural input costs and industrial production expenses. Every increase in levy cascades through the economy, intensifying inflation and eroding purchasing power. The poorest citizen pays the levy every time a motorcycle is refuelled. A farmer pays it through diesel costs. A labourer pays it through higher food prices and transport fares. Export industries pay it through rising logistics and energy costs. In a country already facing stagnation, shrinking industrial output and worsening inequality, this model is economically destructive and socially incendiary. Even more alarming is the constitutional normalisation of this practice. The federation today increasingly relies on non-divisible revenues such as petroleum levy, windfall levies, surcharges and other extra-divisible instruments precisely because they avoid NFC sharing obligations. This effectively nullifies the spirit of the Eighteenth Amendment without formally amending the Constitution. Fiscal federalism is thus being hollowed out through administrative devices rather than democratic debate. The tragedy is that the provinces themselves have largely failed to mount a coherent constitutional challenge. Provincial governments routinely complain about resource shortages while remaining politically silent about the systematic erosion of the divisible pool. The result is a federation drifting toward fiscal centralisation despite constitutional commitments to decentralisation. The IMF report should therefore be read not merely as a revenue document but as evidence of how external financial conditionalities are reshaping Pakistan's constitutional order. One cannot ignore the broader constitutional implications either. If the federation can indefinitely replace divisible taxes with non-divisible levies through executive manipulation and IMF-backed targets, then Article 160 becomes little more than symbolic text. The constitutional guarantee of provincial participation in national revenues loses substantive meaning. This is why the petroleum levy controversy is not a technical taxation issue. It goes to the heart of the federal compact itself. Pakistan's fiscal crisis cannot be resolved through perpetual extraction from fuel consumers while constitutional principles are sacrificed at the altar of short-term revenue targets. Sustainable reform requires rebuilding the tax system around constitutional legitimacy, equitable sharing and genuine broadening of the tax base. The present model represents the exact opposite. It centralises revenues, weakens provinces, bypasses parliamentary scrutiny, punishes consumers and deepens economic stagnation-all while being celebrated as "stabilisation." History shows that federations weaken not merely through political conflicts but through fiscal injustice. When constitutional guarantees become administratively reversible, distrust between the federation and provinces inevitably intensifies. The IMF may consider the Rs1.73 trillion petroleum levy target a fiscal benchmark. Future historians may remember it differently: as another milestone in the slow erosion of Pakistan's constitutional federalism. ___________________________________________________________________ Dr. Ikramul Haq, Advocate Supreme Court, Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), holds an LLD in tax laws. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He also served Civil Services of Pakistan from 1984 to 1996.
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