Tk36 tax from Tk135 diesel: How govt's revenue drive fuels inflationary fire

The government is collecting Tk35.82 in duties and taxes from every litre of diesel sold at Tk135, raising sharp questions over whether its revenue drive is unfairly burdening consumers and businesses.

The tax load on fuel has escalated significantly since June 2025, when the interim government replaced the fixed "Tariff Value" tax regime with a variable "Invoice Value" system.

Under the old framework, total duties and taxes were capped at Tk16.76 per litre regardless of global price fluctuations. Under the present structure, a cumulative 25% tax rate, comprising 6% customs duty, 15% VAT, 2% advance tax, and 2% advance income tax, is levied directly on the import invoice value.

Consequently, when international oil prices rise, government tax yields per litre automatically expand. At current market prices, the state collects Tk19.06 per litre more than it would have under the former tariff system.

This increased tax burden comes alongside a recent rise in retail fuel prices, heightening costs for transport, irrigation, and industrial production, and heaping further pressure on households already struggling with elevated inflation.

Infographic: TBS

Compounding inflationary pressures

Industry operators and economists warn that higher fuel costs ripple swiftly through the broader economy.

Higher fuel prices raise irrigation, transport and production costs, eventually increasing the prices of goods and services and putting additional pressure on household purchasing power.

Businesses are also facing higher operating costs.

Restaurant owners recently noted that escalating fuel and ingredient expenses have squeezed margins, whilst a 30% drop in sales has left them unable to pass costs on to consumers through menu price hikes.

Dr Fahmida Khatun, distinguished fellow at the Centre for Policy Dialogue (CPD), highlighted the policy dilemma facing authorities:

"On one hand, the government needs revenue and must finance Bangladesh Petroleum Corporation's (BPC) mounting losses. On the other, higher domestic fuel prices are stoking inflation and distressing the public."

She urged the government to review whether this additional tax load is being disproportionately passed to consumers, recommending targeted subsidies for lower-income groups, small businesses, and farmers rather than broad-based relief.

Professor M Shamsul Alam, energy adviser to the Consumer Association of Bangladesh (CAB), argued that the strategy undermines public interest:

"Many nations cut fuel taxes during volatile periods to cushion their economies. In Bangladesh, the government has instead leveraged the crisis to boost revenue, which hurts economic growth and risks depressing overall long-term tax yields."

BPC's import strain and tax reform proposal

The revenue collection shift has also directly impacted BPC's finances. Under the current invoice-value framework, Tk35.82 is stripped from the Tk135 retail price of diesel in taxes, leaving BPC with tighter margins to cover import costs.

At the Parliamentary Standing Committee on Public Undertakings meeting on 29 September, chaired by Chief Whip Nurul Islam Moni, BPC formally proposed either reverting to the fixed Tariff Value system or slashing the overall tax rate.

The proposal followed the government's 21 September decision to raise major petroleum product prices by an average of 15%. Diesel jumped 17.4% from Tk115 to Tk135 per litre. Although the government maintained the increase was necessary to curb smuggling to neighboring countries and offset BPC's losses, BPC had actually accumulated losses of Tk22,875.66 crore between March and August 2026 as Middle East tensions escalated global crude prices.

Currency depreciation has compounded BPC's woes: the US dollar's rise from Tk86 in 2021 to Tk123.50 in 2026 added roughly Tk55 to the landing cost of every litre of diesel. To cover import bills, BPC was forced to divert Tk19,500 crore from its project funds.

BPC's proposal was aimed partly at increasing the corporation's share of revenue from fuel sales.

Temporary financing postpones structural fixes

The urgency behind BPC's tax reform push has eased temporarily following a Tk4,500 crore government intervention on 29 September. Delivered via the Finance Division as an interest-free loan with a five-year repayment schedule and a six-month grace period, the funds will cover BPC's import tenders through December.

A senior BPC official acknowledged that whilst returning to the old tariff system would have netted BPC an extra Tk19.06 per litre to cover costs directly, the fresh loan provides short-term liquidity. BPC Chairman Md Rafiqul Islam confirmed the structural tax proposals were submitted in committee working papers but were not discussed in detail due to the immediate relief provided by the credit facility.

BPC's submission also outlined broader long-term measures, including establishing a dedicated national Fuel Stabilisation Fund; expediting the operationalisation of the Single Point Mooring (SPM) project and Eastern Refinery Limited (ERL) Unit 2; and expanding national fuel storage reserves to a 90-day capacity.

For now, the government's cash injection has bought time, but the underlying issue remains: the current fuel tax regime continues to extract record yields from consumers at a time of heightened economic stress.