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If the Prime Minister and Asad Umar could unsay one of many statements they would want to, the criticism on petroleum prices would top the list. ‘Petrol bomb’ was often used by print and electronic media – electronic taking the lead – whenever petroleum prices were raised or crossed a so-called ‘psychological barrier’. Yesterday was no different. Only that petrol bomb was also trending on Pakistan twitter – and political twitter gives one a really good hiding.

It is hard to digest that the media at large is that naïve to know why and how the petroleum prices work. But the current government surely invited this criticism because of the equally naïve statements made in the past. Leaving that aside, a 6 percent month-on-month hike in petrol is not in unchartered territories. Petrol at Rs99 per liter also is not a place where we have not been before. That the petrol is now at a 55-month high, though, does warrant discussion, not necessarily criticism.

Fingers are being pointed towards the benchmark crude oil (Arabian Gulf) prices, which averaged $71/bbl in March 2019. Back in January 2015, the benchmark crude oil was also at $71/bbl, but petrol was priced at Rs78/liter and high speed diesel (HSD) at Rs86/liter, 26 and 36 percent cheaper, respectively. So did the taxes go up? No. The GST on both petrol and HSD was 22 percent back then, compared to 17 percent today. Make room for higher Petroleum Levy applicable in current scenario; the taxes would be around the same rate. In dollar terms, petrol and HSD prices today are $0.7/liter and $0.84/liter - way below the highs witnessed between 2010 and 2014.

What changed? More than two-third of petroleum products consumption is based on import. And the very important variable in the equation, the rupee-dollar parity changed. The rupee is now dearer by 38 percent from January 2015. With taxes at similar rates, it is the rupee depreciation that is at play. And that must not be rocket science for commentators in the media. Political opponents will always find a way to criticize, but should the media not be any different? Only takes common sense over sensationalism. Too much to ask?

Enter the tax part of the equation. The Finance Minister should have known better, when in opposition, that revenues on petroleum products are the easiest and often the most important item on the list. Even then, GST on petrol and HSD combined today averages 12 percent in 10MFY19 – lowest in ten years (avg 17%). The GST collected on petrol and HSD to date totals Rs160 billion in 10MFY19 – down by 28 percent year-on-year. At this rate, the full year deficit on petroleum GST would be around 25 percent or Rs68 billion year-on-year. The fact that HSD sales have tanked from last year owing to economic slowdown, worsens the prospects of revenue collection on GST front.

Herein comes the window of opportunity that is the Petroleum Levy (PL). Recall that the PL on petrol and HSD were limited to Rs10/liter and Rs8/liter, respectively, until the outgoing PML-N government decided to raise the upper limit to Rs30/liter. The proceeds do not form part of the divisible pool, giving ore incentives to the governments to use the tool in circumstances as telling as today. So while the PML-N can criticise all it wants for the government charging PL to the tune of Rs14/liter (in 3QFY19) on petrol, it would do well to share some blame. Had it not been for the amendment, the government today would have faced massive difficulty in raising the GST to 26 percent, in order to collect what it is collecting today.

PL on petrol and HSD have exceeded GST on the two products, two quarters in a row. The PL to GST quarterly ratio in the past five years has been 65 percent. Faced with dwindling petroleum volumes and high fiscal deficit – PL give the government good opportunity to raise some much needed revenues, without pushing the normal GST limits of 17 percent, or the upper limits of PL. Even with increased PL in absolute terms, the government is going to fetch at least 12-15 percent (Rs60-70 bn) lower on account of all petroleum taxes.

To recap, taxes on petroleum are not as high, petroleum prices have been much higher both in rupee and dollar terms in the past, it is nice to use common sense at all times, not only while at the helm. And no, the Saudi deferred oil payment facility has nothing to do with retail oil prices, in case you are one of those social media curios types.

Copyright Business Recorder, 2019

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