Islamabad’s Petroleum Levy daydream

Have a number in mind. Work backwards to plug in various heads. And what you get in the end is the tax target for the fiscal year. One would like to know if it is any different at the budget making exercise. The Petroleum Levy (PL) collection target for FY21 at Rs450 billion – more than double from FY20’s budgeted number and 73 percent higher from FY20’s revised collection.

Almost the entire non-FBR taxes come from PL – and for FY21, PL collection target makes up for 8 percent of total tax revenue. This was 4 percent of total tax revenue budgeted for FY20. Now on to the chances of PL collection coming even anywhere close to the lofty target. The chances are as high as international crude oil going back to the teens – and staying there for the whole year.

Let’s do some numbers. Petrol and High Speed Diesel (HSD) combined sales has averaged around 15 billion liters a year in normal times. Let us assume the sales will be back to normal at 15 billion liters for FY21. The maximum allowed limit on PL is Rs30/ltr for both petrol and HSD, and the recent budget has not altered the upper limit, against expectations from some corners. Place these numbers against the target of Rs450 billion – and you have the maximum PL charged on both petrol and HSD for the entire year.

Let us put this in context. The combined PL and GST collection on petrol and HSD for FY20 is estimated around Rs480 billion. And the government intends to collect that amount in PL alone for FY21. Only if there was an indication to substitute PL for GST – which is certainly not the case. Although, there is no breakup of category-wise sales tax – seeing the steep collection target for GST – it can be safely assumed the government intends to continue with the existing GST policy of 17 percent standard rate.

Both the PL and GST for the ongoing month are exactly at Rs30/ltr and 17 percent, respectively. So, there is precedence for sure. Only that for that to happen, the ex-refinery price of Rs24/ltr on petrol or Arab Gulf averaging at $25/bbl – continues for just another 12 months. Bear also in mind, the inflation target for FY21 ahs been set at 6.5 percent. Good luck doing that with these lofty PL and GST collections – without having to increase the retail price, in a normalized oil price scenario.