Another round of petrol price increase is just around the corner. The dollar has gone dearer by the day, and the price increase is inevitable. How does the government go from here in terms of pricing petrol is the next question. The answer is rather simple, but simpler routes are often the least taken by governments.
Just as the power pricing has become a bane for the government despite improved generation mix, a similar sort of a problem faces the government in terms of revenue collection from petroleum products. In both cases, the constant is lack of demand growth. Both power and petroleum consumption this year have gone down in double digits. In case of power, this means added burden on consumers through fuel cost, while in case of petroleum, this means lower revenues in lieu of taxes due to lower consumption.
The government in FY19 is expected to collect less than Rs400 billion on accounts of Petroleum Levy and GST on Petrol and diesel. This could be the lowest tax collection on petroleum in four years. The slide in petroleum products ‘demand especially that for diesel is rather pronounced. The combined consumption of petrol and HSD in FY19 is expected to be lower by 14 percent year-on-year, and even lower than levels seen in FY17.
Tax collection in relative terms on petroleum at nearly Rs27/ltr (GST+PL), is virtually at the same level as last year – and in line with five year average of Rs27.3/ltr. The 14 percent dip in demand is single-handedly responsible for the 13 percent anticipated dip in tax collection on petroleum products. Tax collection on petrol has averaged 10.5 percent of total tax revenue in the last seven years, with the lowest expected at 8.8 percent for FY19.
If the government aims to target 10 percent of tax revenues from petroleum in line with historical practice, it will be looking at fetching around Rs500 billion in FY20. That is based on the assumption that tax collection target for FY20 would be revised to Rs5000 billion, if not more. Now going up from Rs385 billion in FY19 to Rs500 billion in FY20 would be a tough ask. With the deteriorating dollar and increasing global crude oil prices – it will be a daunting task.
The government should be aiming to fix the tax collection target for the year in absolute terms, and divide it on a per liter basis across the year, without having to worry about dealing with Ogra summaries every month. To collect Rs500 billion from the existing demand base – the taxes will have to go up to Rs35/ltr, from current Rs27/ltr.
Alternatively, efforts can be made to increase the demand. Of course, demand cannot be manufactured overnight, as part of it is directly linked to overall economic slowdown. Efforts can be made to discourage the inefficient use of CNG, which could create an additional 10 percent demand. Either this or simply fix the system. Just collect more direct taxes.
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