Transparency in petroleum prices

High interest rates and heavy currency devaluation has already taken its toll.

SYED AKHTAR ALI March 10, 2020

International oil prices (Brent crude) fell to $50.52 per barrel in the end of February. The highest peak in recent times was $85 in the last months of 2019 — a godsend for the government and the people of Pakistan. In 2016-17, oil prices came down to this level which greatly benefitted the PML-N government. In the beginning of March, the Government of Pakistan (GoP) reduced both petrol and diesel prices by Rs5 per litre. However, the people are not happy as the full benefit has not been passed on to the consumer. While there has been a reduction of Rs2.46 in taxation for High Speed Diesel (HSD), a tax reduction of Rs6.85 was made for petrol. These are rough estimates due to the lack of transparency in the petroleum sector wherein the GoP has stopped releasing firm data in this respect. This is an issue worth considering by the government. We will discuss it a little later in this space.

It should be noted that petroleum prices and taxation are still lower in Pakistan than in other countries in the region. In India (New Delhi, where the prices are the lowest in India), petrol costs Rs154.38 per litre as opposed to Rs111.59 in Pakistan. Similarly, HSD costs Rs138.42 per litre in New Delhi as opposed to Rs122.26 in Pakistan. In other areas in India, these prices can be higher by 10%.

The GoP would earn Rs35.96 per litre out of petrol sales, resulting in an annual revenue earning of Rs358.83 billion, provided prices and taxation remain the same for one year. Similarly, the taxation earning on HSD is Rs42.81 per litre and can result in a projected one-year revenue of Rs461 billion. Together, petrol and HSD enable the GoP to earn a revenue of Rs820 billion — with quite some help by the poor consumer. However, in a country where the elite and businessmen do not like to pay their due tax liabilities, there are few other options left.

This earning is not without quid pro quo in terms of political and socio-economic costs. Productivity and economic competitiveness go down with undue increases in energy prices. A mid-point should be calculated. One wonders if some analytical tools are available in our system to determine this mid-point. Conceptually speaking, there is a case for fixed taxation on energy. As an opportunity develops in terms of lowering energy prices, all or majority of the savings should not be devoured by the government. There is no apparent logic of earning more taxes/GST on price changes.

There is a case for taxing energy consumption, as it has externalities, harming other sectors in terms of health, pollution and climate change. Earlier, there used to be excise duty to cover these aspects which continues to be the case in India. In Pakistan, it is called the Petroleum Development Levy (PDL), originally meant for development projects of the petroleum sector. A decade earlier, the courts created quite a hue and cry on it, like the present-day protests on GIDC. It is time, perhaps, to change the nomenclature. An appropriate name would be the Carbon Tax which is increasingly being demanded by climate change activists. PDL may be divided into two parts: one, Carbon Tax, which may remain as a fixed component; and the other variable, the Petroleum Levy.

Petroleum has been traditionally considered a luxury good and thus eligible for heavy taxation. However, it is no more a luxury but a necessity, especially, HSD, which is used by the public transport sector. Almost 40-50% of gasoline in Pakistan is used by poor motorcyclists and Suzuki loaders also consumer petrol, the latter being used for intra-city transport of goods and even as a public transport vehicle. Europe continues to tax petroleum heavily. In Norway, despite being a petrol producer and exporter, the current petrol prices are Rs250 per litre or more, almost double that of the price in Pakistan. Similar is the case in other European countries like France, Germany, Italy and the UK. The US, however, indulges in moderate taxation and its petroleum prices are used as a benchmark by the policymakers.

It has taken this scribe quite some time and effort to calculate the taxation impact under the current price announcement. The PML-N government stopped issuing price build-up data apparently for no good reason. The purported reason was competitive pricing at petrol pumps. The negative impact is that all kinds of inaccurate data circulate in the electronic and print media. It hurts the government image amidst confusion. In our region, in India, there is price competition as well, however, price build-up transparency is maintained there. I have more reliable data on India than I have on Pakistan. One has to do backward calculations on the basis of widely dispersed data for Pakistan’s case. Earlier, Ogra used to publish this data and it continues to post historical price build-up data on its website. Serious consideration may be given by the GoP to eliminate this vestige of the past and announce its own well-considered policies.

In conclusion, the GoP would be well advised to make some more downward adjustment in petroleum prices to save its political capital and boost economic growth and output through its taxation policies. High interest rates and heavy currency devaluation has already taken its toll. No further space appears to be there on this account.

Published in The Express Tribune, March 10th, 2020.

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