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Petroleum taxes: The forgone quarter

The quarter ending September 2021 saw the tax incidence on petrol and diesel at the lowest in almost seven years. Last time, the combined Petroleum Levy (PL) and General Sales Tax (GST) on petrol and HSD were lower than Rs16.4/ltr in 1QFY22, was back in 2QFY14. The tax collection of Rs85 billion is the lowest in 10 quarters – but this government has seen a worse quarter in terms of total tax on petroleum – soon after it assumed office in 2QFY19.

The low collection met with highest ever quarterly combined petrol and HSD sales at 5.2 billion liters. This is 20 percent higher than quarterly average sales of last five years. That is what took the taxes to inch up to Rs85 billion for the quarter, saving the embarrassment of lowest-ever.

How long can this go is the favorite question these days in the economists’ circles. There have been proponents of maximizing taxes on petroleum to discourage consumption. The lens they use is the import pressure and the resultant impact it has on currency. That translates into petrol priced at Rs162/ltr at last fortnight rates, with tax incidence maximized at Rs54/ltr. It is currently Rs14/ltr.

There is little doubt that some incremental consumption will be discouraged as a result. But mind you, prices today are significantly higher than ever before, yet the consumption has been rising. How significant would the impact be on consumption that would lead to savings on import bill is guesswork. But the direct impact an increase of such magnitude will have on overall inflation is more obvious.

Nobody knows where oil prices are heading. There is always hope that the commodity price curve will flatten and bend one day. If it does not, hard luck. But when and if it more likely does, there is still time and room for having all the revenues you want from petroleum in the second half of the fiscal. Quoting Rs650 billion would not cut it – as the target was never realistic to begin with.

Around Rs150 billion have been forgone in PL during 1QFY22, by lowering taxes. Even some of the GST revenue has also been forgone in the bid to maintain prices. Petrol prices have entered unchartered territories and the demand has not responded all that badly. If and when the oil prices cool down, there is a high base to work from and a precedence that petrol at Rs127/ltr still yielded double-digit demand growth. That will create the room to levy higher taxes.

Even if crude oil goes back to only $70/bbl, PL can go up to Rs15/ltr without moving the retail prices much from current level. The GST can be tinkered with, if the goal is to maximize revenue that is not part of divisible pool. All this while, let us remember the FBR has been able to surpass the 1QFY22 target by Rs186 billion.

If the assumption is that commodity cycle will not reverse throughout the year, then it is a fair assumption to make that FBR revenues will keep coming too, as imports stay up. So, one asks why the need for more taxes on petroleum, where the overall machinery is doing a decent job at collecting revenues. Hampering growth early and inviting high inflation. Is curtailing imports worth that much?

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