Taxing the masses by increasing POL prices

Oil, Gas and Power

Written By: M. S. Qazi

Tax revenue target for current fiscal year initially projected at Rs1.664 trillion was reviewed twice and plunged to Rs1.585 trillion, despite the announcement of several tax measures worth Rs53 billion in a recent mini budget and increase in prices of petroleum products. Petroleum prices witnessed a rising trend this fiscal year as the government enhanced them twice, by 4.9 per cent and 13 per cent, with the aim of raising tax revenue and containing fiscal deficit to 5.5 per cent of GDP. Surge in POL prices fuel inflation and increase transportation and production costs. The government claims to have taken a blow of Rs35 billion in an attempt to shield consumers from the impact of mounting oil prices in international markets, therefore it has no choice but to pass on the hike in global oil prices to the consumers.

However, many analysts think otherwise. The government failed to reform tax regime and escalate tax-to-GDP ratio during last three years and instead relied too heavily on indirect taxes, such as increase in prices of POL products because this is the easiest way of collecting taxes and it does hurt vested interests. But, what it fails to realise is how detrimental this move is to the helpless common people and to boost economic growth and suppress rising inflation and discount rate. The political leadership needs to boost tax revenue collection by bringing a larger number of people and sectors under tax net, make the tax system equitable, and reform futile state-owned enterprises.

Consumer oil prices constitute ex-refinery price, government levies comprising of excise duty, petroleum development levy and sales tax imposed at the import stage and on domestic sale, inland freight and distributor and dealer margins. Ex-refinery price of a product paid to local refineries equates to the landed cost of the product as if the same were to be imported. Other elements like freight, L/C and bank charges, wharf-age, etc. are also added to arrive at the refinery price.

Inland freight equates prices of POL products across the country at uniform rate includes actual cost of transportation from refineries to depot locations and retail outlets.

This cost is over and above the fixed sale price determined by Oil and Gas Regulatory Authority (OGRA). The government fixes the margin or profit for oil marketing companies (OMCs) and petroleum dealers. The margins prior to December 2010 were a percentage of the fixed sale price that benefited the OMCs and the dealers. The government in order to share the burden of increase in oil prices fixed the margin of dealers at Rs1.87 per litre of petrol, Rs2.15 per litre of HOBC and Rs1.50 per litre of diesel from December 2010. Since then the Pakistan Petroleum Dealers Association (PPDA) has been seeking to raise the margin by at least 50 paisa per litre.

Petroleum products are an important source of any government’s revenue and Pakistan is no exception. But the government levies are much higher than they ought to be and are the cause of high cost of POL products. In last fiscal year, the leadership collected more than Rs351 billion, around 27.0 per cent of the total tax revenue generated by FBR. It collected Rs25 billion customs duty, Rs100 billion sales tax at import stage, Rs114 billion sales tax in domestic market and Rs112 billion Petroleum Developmental Levy (PDL). During first six months of current fiscal year, the government collected Rs163.8 billion which encompassed Rs7.8 billion customs duty, Rs54.9 billion sales tax at import stage, Rs63.3 billion on domestic sale, Rs2.3 billion federal excise duty and Rs35.5 billion PDL.

These figures reflect a high rate of taxation through different levies. It makes the ruling party’s claim of paying subsidy on POL products hardly sustainable. In fact, the real problem starts with the projected full year collection of Rs110 billion from petroleum levy in the budgetary estimates. The government collected Rs35.4 billion during first six months of current fiscal year and is to collect Rs74.6 billion during H2 to meet the projected target.

The change in USD-PKR parity is another factor that disrupts prices of POL products. Three years earlier in 2008 it was Rs62 per USD. Since then it has enhanced to Rs85 per USD, showing a decline in PKR by 31 per cent. It has hiked the basic price of petroleum by the same percentage for taxation for boosting revenue, but these actions have made the lives of ordinary citizens miserable. The effect could have been diluted considerably had the government focused on tax compliance. According to a World Bank report: Pakistan Tax Compliance Report 2009, “Total tax evaded stood at Rs796 billion against a collection of just over Rs1.1 trillion during 2007-08 which is fairly high.” Frequent slippage of tax collection vis-à-vis the projected targets since then hardly reflects any improvement in tax compliance.

Oil revenue figures for last and current fiscal years clearly indicate that the cost-push mechanism of oil prices is highly skewed. There is hardly any justification for levying sales tax twice; first at the import stage and then at the sales stage. Removing sales tax from either one of the stages and passing-on increase in prices of global oil markets provides some rationale for augmenting the POL prices. The measure, if implemented, would dilute the impact of spiralling prices on the back of high petroleum prices. But, the government hardly looks at oil revenue collection from such perspective. It is fixed on decreasing fiscal deficit through indirect taxation.

According to an analysis each shortfall of around Rs17 billion in revenue collection adds 0.1 per cent to fiscal deficit and a 10 per cent increase in oil prices adds 1.5 percentage points to CPI. Government’s focus is on reducing fiscal deficit by increasing levy on POL products to meet the fiscal deficit target mutually agreed with the IMF. SBP and Asian Development Bank have already projected inflation at 15.5- 16 per cent respectively by end of current fiscal year on account of cost-push measures introduced by the government. It is likely to create an environment for maintaining status quo in discount rate by the SBP in its next monetary policy review. Revenue and fiscal issues would be resolved only if the government increases tax-to-GDP ratio, documents economy, brings into tax net untaxed and under-taxed sectors of economy and ends corruption and exemptions in tax system.

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