Fuel prices have hit record levels after yet another increase, with the price of petrol for the next fortnight set at almost Rs160, an increase of over Rs12. Diesel, kerosene and other fuel prices have also gone up, with increases across the board ranging from about 6.5% to slightly over 8%. While government officials have justifiably blamed rising international prices caused by increased global demand and geopolitical tensions, this fact is of little use to the average Pakistani, who will also have to deal with the knock-on effect that fuel prices have on inflation.
Those international factors are also why most people were unsurprised by the increase itself. The unwelcome surprise was the amount, which was higher than several analysts had predicted. Part of the increase is also being attributed to the IMF loan programme, under which levies on petroleum products are being steadily increased until they hit a threshold of Rs30 per litre on most products. Some reports said the PM was initially reluctant to let prices rise as much as they eventually did. However, members of his economic team changed his mind by pointing to the upcoming IMF quarterly review and increasing stress on the exchequer of maintaining lower prices.
At the same time, fuel remains a cash cow for the government, and the ‘burden’ on the national exchequer from artificially low fuel prices actually translates to a reduction in tax revenue, rather than an outright subsidy. This is most clearly illustrated by the FBR’s recent data, which says over Rs287 billion in indirect taxes from petroleum products have been collected in the first seven months of the current fiscal year, representing a 72% increase. Also, despite much-touted cuts in sales tax on petroleum products, the government is still imposing the full 17% sales tax on crude oil and has increased customs duties on imported petrol. Both of these are passed on to consumers. Oil and petroleum taxes now account for 8.5% of total FBR revenue this year. It was about 6.5% last year.
About two-thirds of total FBR revenue is now from indirect taxes. However lucrative, this is not a sustainable model. Unfortunately, this number keeps widening, as half-hearted efforts to increase direct tax collection continue to fail.
Published in The Express Tribune, February 17th, 2022.
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