The most taxed product

In Pakistan, the heavy dependence on petroleum taxes is mainly due to the failure to raise direct taxes.

A senator recently claimed on the floor of the house that the government collects Rs46.18 per litre in taxes on fuel. This double taxation, according to him, is morally wrong. The minister for water and power, Naveed Qamar, presented the alternative figure of Rs20 per litre on diesel and Rs30 on other petroleum products. He also said that if these taxes were removed they would widen the government’s annual fiscal deficit by Rs200 billion. He was referring only to the petroleum development levy of Rs120 billion in the budget for 2011-12, development surcharge on gas of Rs24.9 billion, royalty on oil of Rs15.2 billion, royalty on gas of Rs32.8 billion and discount retained on local crude oil of Rs25.1 billion. All told, the amount comes to Rs218 billion, Rs18 billion more than the Rs200 billion mentioned by the minister.

However, there is more, actually, a lot more. He was merely talking about the levies and charges collected by the petroleum ministry. All major taxes collected by the Federal Board of Revenue (FBR) are also levied on petroleum products. Our analysis here relates to 2010-11, which is the last complete fiscal year in terms of data availability. First, the FBR collects General Sales Tax (GST) on the domestic side. The collection on petroleum products in 2010-11 was Rs153.3 billion or 47.2 per cent of the total collection. This was the biggest GST spinner on domestic goods and services. Secondly, GST on the import of petroleum products is also a major contributor on the import side. Twenty-seven petroleum products yielded an amount of Rs110.5 billion in revenue, or 36 per cent of the total GST on imports. Thirdly, tariff reform of the past two decades, aimed to reduce the role of customs duties and increase the role of GST. In the case of petroleum products, however, the customs duty continues to be important, in addition to the GST on its imports. In 2010-11, import duty on petroleum products stood at Rs21.4 billion. With a share of 11.1 per cent in total customs receipts, it was the second largest item on the list of dutiable imports. Fourthly, the federal excise duty is levied on petroleum and natural gas. Its yield from petroleum was Rs5.1 billion, while natural gas contributed Rs11.6 billion. Together, the contribution total federal excise duty was 12.2 per cent, making it the third largest component in the total collection of federal excise duty. Finally, on top of the indirect taxes listed so far, the withholding income tax is the largest component of direct taxes. Separate information on its collection from the petroleum sector was not available.

There are thus nine taxes on petroleum products. Without the withholding taxes, their collection totalled Rs503.5 billion in 2010-11. This means that about half of the indirect tax revenue of the country comes from petroleum products. Is this too high? Taxes in petroleum products in other countries have also risen substantially. The objective is to contain demand in view of the rising prices. Is it morally wrong? Not quite, as these taxes have been instrumental in achieving environmental and conservation objectives. In the case of Pakistan, however, the heavy dependence on petroleum taxes is mainly due to the failure to raise direct taxes. What is worse is that, demand in the past five to six years has been at around six per cent per annum — above GDP growth, despite high prices.

Published in The Express Tribune, February 10^th, 2012.