A seven percent month-on-month petrol price increase last month was widely termed a ‘petrol bomb’. Signing on Ogra’s recommendation of 14 percent increase in petrol prices would have been termed a ‘mother of petrol bombs’. The government decided to ‘defer’ the bombing, as it already battles too many on the inflation front. The psychological barrier of petrol at over Rs100 per liter also seems to have played a part in the bombing being deferred.
So what merited a 14 percent increase in prescribed oil prices? Surely the dollar was not as much at play – as the currency depreciation impact works out to be 1.4 percent. The benchmark Arab Gulf crude oil prices had soared by 9.1 percent month-on-month to $78 per barrel. Ogra recommends prices keeping the last GST rate as a constant – which was 17 percent in April 2019.
Incidentally, Arab Gulf prices had averaged $78/barrel in May of last year as well – and petrol was priced 13 percent cheaper – with a15 percent GST. Come May 2019, and crude at $78/bbl at 15 percent GST would have resulted in 26 percent dearer petrol – because the rupee has depreciated by as much.
The government, instead, reduced the GST on petrol to 2 percent through an SRO – which happens to be the lowest GST rate on petrol in at least ten years. GST on petrol in absolute terms for May 2019 at Rs1.94/liter is no comparison to the 10-year average monthly GST of Rs12/liter. The GST collection on petrol for May, assuming sales in May stand at the trailing 9MFY19 average, would not cross Rs1.16 billion – also the lowest monthly collection in over nine years and lower by six times from previous 24-month average monthly collection. The average GST on petrol so far in11MFY19 has been 11.1 percent – which pales in comparison to the preceding 9-year average GST of 17.5 percent.
The story on the diesel (HSD) front is not very dissimilar. While the reduction in GST rate has not been as drastic as petrol’s, the overall impact on tax revenue is as telling. The GST on HSD has been slashed to 13 percent – which will fetch around Rs7.7 billion in revenues for May 2019, down from Rs10 billion in April 2019. The bigger worry is the falling HSD sales – which are expected to be 17-18 percent, lower from last year. The revenue forgone by maintaining the price on petrol and HSD on account of GST amounts to Rs9.4 billion.
With a month left in the fiscal year, the government is likely to fall short of revenues on petrol and HSD by a considerable margin. The government has taken the wisest route by maintaining the Petroleum Levy, since it is not to be shared with the provinces. But even with higher PL in absolute terms, the total revenues are expected to remain 10-12 percent lower than last year – and way lower than the overall tax collection growth targets. The PL has of late taken over the GST in terms of absolute collection, and could well be the way forward in the months to come.
The outgoing FM had hinted at fixing the monthly tax in absolute terms so as to streamline the whole process and minimize government’s intervention. As great as it sounds, it will be difficult implementing, especially if Arab Light stays around current rates or increased further. That said, it is worth a try.
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