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It was surprising in the first place to see Ogra having recommended a cut in petroleum prices for October 2019. The government decided to maintain them, and looking at the numbers, it made all the more sense too. The detailed computation of prices, provided by none other than Ogra itself, shows that the benchmark Arab Gulf mean prices for gasoline, averaged more than the previous month.

The reference crude oil price for gasoline averaged $71.77 for the period, as the prices soared in the latter half of the month, following the attack on Saudi fields. This was 5.7 percent higher from the average Arab gulf reference price for previous month.

The currency meanwhile, appreciated by 1.3 percent, against the greenback. This took the overall impact to Rs70.7 per liter for gasoline – still up 4 percent, month-on-month.

The numbers don’t add up for Ogra to have recommended a price cut in petroleum prices, especially, when the GST as well, has now been fixed at 17 percent, across products. The fact that there was no SRO on sales tax, as agreed to with the IMF, tells that the only way the government has been able to maintain petrol prices for October 2019, is by way of slashing the Petroleum Levy (PL), from the previous month.

And PL does have enough room on either side, to be tinkered, as and when needed. The government faces a steep challenge in terms of achieving the tax collection target – and the onus has fallen on PL. Taxes in absolute terms, on petrol, are already near all-time high, and applying the maximum limit of Rs30/ltr anytime soon, seems out of question, unless international oil price suddenly decided to nosedive from here.

A lot will rest on the demand side of things, especially diesel. The tax collection on HSD was the lowest in six years in FY19, and has only started to pick up of late. From how things have shaped up, in the last three to four days, where international oil prices have again decreased, a cut in petroleum prices for next month cannot be entirely ruled out.

Alternatively, this could also present the government with an opportunity to generate some much needed revenue, without passing on the impact, in times of lowering oil price.

The government will be entirely within rights to do so – as the law allows PL to be raises up to Rs30.ltr, if deemed necessary. But that could also backfire politically, when seen in the context of government’s own stance on the subject, while in opposition. That said, the tax incidence, currently on petroleum products, is not anywhere close to the highs seen in yesteryears.

 

 

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