Oil price decline

According to a Business Recorder exclusive, the government has decided not to pass on the entire decline in the international price of oil and products to domestic consumers as recommended by Oil and Gas Regulatory Authority (Ogra). Given that the tax on oil and products is a percentage of the total price charged to domestic consumers, any reduction in the price has a negative impact on the revenue collected. Or, in other words, to keep budgeted revenue from oil and products unchanged a decline in their international price effective 1st July necessitated raising the sales tax on motor spirit from 19.5 percent to 20.5 percent and reducing the sales tax on high speed diesel from 34.5 to 33.5 percent.
It is therefore relevant to note that Federal Finance Minister Ishaq Dar had at one time imposed a flat rate (instead of a percentage) to ensure that projected revenue was not compromised irrespective of fluctuations in the international price of oil and products. His decision to abandon the levy of a sales tax on oil and products as a flat rate was reportedly due to a rise in the oil price that made it more profitable for the government to revert back to a percentage tax.
The decision to raise sales tax on motor spirit at the present time, therefore, can be assumed to have been taken with the objective of ensuring that the government does not suffer a revenue loss with a consequent negative impact on the budget deficit. As per the 2017-18 budget documents, considered overly optimistic, the budget deficit was cited as negative 4.2 percent for the outgoing year and negative 4.1 percent for the current year. The over-optimism for the year past is sourced to the failure of the Federal Board of Revenue (FBR) to meet the revenue target by 100 billion rupees - a failure that can be attributed to Ishaq Dar's tendency to give highly unrealistic budgetary targets to FBR which enables him to show a lower fiscal deficit at the start of a fiscal year as well as the failure of the administration to undertake the required far-reaching tax reforms that would link greater productivity to higher tax revenue and render the tax system fair and equitable.
The recent government decision revealed through a statutory regulatory order does not envisage merely sustaining its budgeted revenue from this source but to generate an additional 1.5 billion rupees through raising the sales tax on motor spirit. This has legitimately caused serious concern amongst economists as well as Pakistani taxpayers as the decision to generate higher than budgeted revenue has been taken at the start of the new fiscal year, ie, from 1st July, a time when there is a considerable margin for the government to meet its budgeted targets, rather than at the tail end of an outgoing year. Additionally, it was taken in spite of the Sharif administration being embroiled in considerable political challenges at present which, during past administrations accounted for a rise in subsidies. In effect, the decision to raise the tax on motor spirit by one percent is therefore perhaps a better indication of the poor state of the economy than the dire prognosis by independent economists citing alternate data.
It is relevant to highlight the two major impacts of any government decision not to pass on the decline in the international price of oil to domestic consumers: (i) the applicable sales tax determines the cost of transportation of goods, including perishable consumer items, and passengers in the country with a consequent impact on the value of each rupee earned; and (ii) a key input in determining electricity tariff with a negative fallout on the costs of production of manufacturing sector, particularly large-scale manufacturing sector, as well as the services sector, including wholesale and retail traders.
To conclude, the sales tax levied on both petrol and HSD is simply too high - 20.5 and 33.5 percent, respectively - and this one may assume is acknowledged by the Finance Ministry team, as sales tax on most of the other products, including luxury items, is 17 percent.