“Sales tax measures are mostly focused…. enhancing the sales tax of petroleum products,” read the Letter of Intent to the IMF. The GST on petrol in absolute terms for August 2019 is the highest ever at Rs17.12 per liter – the previous high was in October 2013. The media in its customary “petrol bomb” coverage from petrol stations, was surprised why the Finance Ministry did not issue the notification.
Had the LoI to the IMF been read in detail, or just read, it would have saved some confusion. Recall that the government had committed to the IMF to put a floor on both GST and Petroleum Levy on petroleum products at 17 percent and Rs15 per liter, respectively (see: Petroleum taxes to go high, published Jul 10, 2019).
Now on to the meat. Petrol price in rupee terms is now at the highest ever level with 4.6 percent increase for August 2019. The benchmark Arab Gulf reference cured oil went dearer by 10 percent during the period, which was the chief reason for this hike. Also, Pakistan’s oil fields have not suddenly started to overspill in Naya Pakistan, which means oil still has to be imported. And somehow, Pakistani rupee has not become the currency of choice in international trade overnight, which means imports are still traded in dollars. And the dollar went dearer by another 4.3 percent in July 2019. This should be enough for those trying to find conspiracies in petrol price hike, for the umpteenth time.
As for diesel (HSD), the prices reached all-time high in April 2019, and from thereon, every month, has seen a new all-time high. But in terms of GST, both absolute and percentage terms, it is far from any record at the current rate of Rs19.25 per liter or 17 percent.
What the future holds for petroleum prices is of great significance. The budgeted revenue on account of PL in FY20 is Rs260 billion – which in simple terms amount to an average Rs18 per liter – 30 percent higher from FY19’s collection of Rs200 billion or Rs14/liter. Similarly, GST averaged 13 percent for petrol and HSD combined in FY19. With the flooring of 17 percent on GST, the increase in rupee terms would be a minimum of Rs5/liter, assuming dollar stays at 160 and crude oil at current levels of $65/bbl. This additional collection in lieu of GST would be around Rs70-75 billion in FY19, and the rate could be lowered or increased, as per the international crude oil movement, keeping revenue requirement at top most priority.
Here is hoping that the petrol price revision is understood for once and for all. Dollar has appreciated considerably. Comparisons saying “petrol was priced at Rs70/liter in our era when crude oil was $65/bbl” by seasoned experts, won’t cut the deal. Taxes on petroleum products are a reality. And a minimum of Rs32/liter on HSD and petrol will continue to be charged for the rest of FY20. It should be news only when anything beyond these very well defined variables takes place.
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