Don worry about VAT, its the levy!

Few would have thought VAT to be in the headlines for as long as it has and continues to be. Not a day passes by before one business association or another expresses its dissent against VAT citing its inflationary nature.
Widespread criticism of VAT has made the public believe that its imposition will also inflate petroleum products prices a great deal.
People are not aware of the extent of the price hike in petroleum prices should VAT get implemented. Just as there is no consensus on its implementation between the centre and provinces, there is a visible lack of consensus among the petroleum industry stakeholders, regarding its impact on consumer prices.
Everybody seems to be waiting for the official decision to be taken and directives to be given, as some folks in the regulator, Ogra, do not seem too sure about the working of VAT on the pricing mechanism.
Sharing his views upon the condition of anonymity, an Ogra official told BR Research, "VAT on petroleum products should be implemented the way it should be". Make whatever you want to make out of it.
Another official from a leading refinery believes, albeit with a sense of ambiguity, that VAT is already built-in the existing pricing mechanism for petroleum products, therefore, its introduction should not bring about any change in the end price.
Basic number crunching, however, does lead to an increase in petrol prices, although a minimal one. Keeping the ex-refinery prices for May 2010 as the base price, the retail price of petrol would increase by roughly Re1/litre or 1.3 percent only from the current level of Rs75/litre.
The likely increase would be caused by a slight change of Re0.5/litre in ex-refinery price. Inland Freight Equalization Margin (IFEM) should be the only component in the pricing formula is to be effected by VAT, as all other components are either government taxes or profit margins for dealers and OMCs.
This is good news for the dealers and marketing companies as an increase in IFEM escalates the profit margins based on the pricing formula. End consumers, therefore, will end up paying a rupee per litre more (based on May prices) than what they pay in the current regime of 16 percent GST.
VAT, however, could well become irrelevant for the consumers if there is any reality in the rumours of government increasing Petroleum Levy (PL) by Rs5/litre on petrol. There are contrasting views on this proposal as many believe it is the best time for the government to increase the levy, given that petrol prices are all set to go down considerably in June owing to a slump in Arab Light oil price.
Based on the prices of May, a Rs5/litre increase in PL is likely to increase Petrol price by Rs7-8/litre, which certainly wouldn go down well with the public - a considerable number of which now keeps track of international oil prices.
The government may want to increase its revenue collection target, but increasing levy may not go down well with the consumers once PL jacks up prices. Plus, the judiciary might also want to have a look into the matter.