The Pakistan Tehreek-e-Insaf government has opted for a historic increase in prices of petroleum products in one go and that too just five days before its due timeframe.
This decision was taken mainly because of two major reasons. Firstly, the inability of the government to generate tax revenues through FBR, and secondly its desire to generate revenues through non tax revenues to avoid them becoming a part of the federal divisible pool. The latter means that the centre does not have to share anything with the provinces from this new resource.
If the government opted for raising general sales tax (GST) on petroleum oil and lubricants (POL) products it would have become part of the federal divisible pool (FDP) out of which 57.5 percent share would have gone to the provinces under the National Finance Commission (NFC) distribution formula arrangement.
In last February 2020, the International Monetary Fund (IMF) and Pakistan had evolved consensus for increasing reliance on non-tax revenue side, especially through petroleum levy amid decreasing POL prices in the international market. Then the prices in the international market witnessed the lowest dip in the aftermath of the Covid-19 pandemic because of depressed demand.
That forced the government to reduce oil prices in the domestic market, but it still kept petroleum on the higher side. Under the existing arrangement, the government could slap petroleum levy maximum Rs30 per litre on all petroleum products. Thus, on June 26, 2020, the government decided to fully pass on the burden on to the voiceless consumers, instead of waiting for July 1, 2020.
In the budget for 2020-21, the PTI government jacked up the amount of petroleum levy to Rs450 billion against revised estimates of Rs260 billion for the outgoing fiscal year ending on June 30, 2020.
It clearly indicated plans of the incumbent regime that it would maintain petroleum levy at maximum level of Rs30 per litre on POL products in the whole fiscal year in order to fetch Rs450 billion.
The government had initially envisaged Rs216.025 in the last budget for 2019-20, which was jacked up to Rs260 billion in the revised estimates for the outgoing fiscal year.
The government had brought changes in recovery of non-tax revenues through the Finance Bill 2020-21 with the aim to recover tax amount effectively because the oil marketing companies (OMCs) had been delaying the payment of collected taxes for several months.
Now, the Inland Revenue Services (IRS) of the Federal Board of Revenue (FBR) has been granted powers to collect tax on monthly basis. If the amounts as per sections 40B and 40D are not paid within ninety days of having been due, the Finance Division, in consultation with the concerned Division might refer any defaulter’s case to the Commissioner (Inland Revenue) concerned for recovery as it were an arrear of income tax.
The Finance Ministry high-ups argued in background discussions that the lowering of prices created an embarrassing situation for the government, so the government took the decision to jack up the prices all of a sudden in one go and prior to the due timeframe. Secondly the prices of Brent Oil rebounded and touched $41.02 per barrel in international market up from $20 per barrel. This left the government no choice but to jack up the prices in the domestic market as well.
Now the latest estimates suggest that the Brent Oil prices would hover around $ 47 per barrel, so the prices in domestic market would remain in the existing range. Prices surged up to 66 percent and the government increased petrol prices from existing Rs74.52 to Rs100.10 per litre, depicting an increase of 34.32 percent. Diesel prices increased to Rs101.46 from current Rs80.15 with an increase of 26.58 percent. Kerosene price has been jacked up by 66 percent to Rs59.06 per litre from the current Rs35.56 per litre. Light diesel oil (LDO) prices were also raised by 46.77 percent to Rs55.98 per litre from Rs38.14 per litre.
This conservative estimate of additional revenue of Rs190 billion will help the centre substantially in the next fiscal year 2020-21 in order to curtail the budget deficit within the desired limits. The centre’s plan for generating surplus from the provinces dashed to the ground, because the envisaged target of Rs244 billion revenue surplus from the provinces could not be achieved at the beginning of the next fiscal year. All four provinces presented their budgets in deficit or flat and none of them presented budgets with revenue surplus.
Earlier, the government had estimated to generate Rs295 billion through the petroleum levy in the outgoing fiscal year, but the revised estimates suggest that it might generate only Rs260 billion till June 30, 2020. So this addition might go up anywhere between Rs190 billion in the next fiscal year.
At a time when POL prices have touched the lowest ebb on the international market and the FBR’s revenues face a major hit, the government decided to increase its reliance on the petroleum levy in the next budget, said one top official.
The government increased prices of POL products from June 26, 2020 instead of July 1, 2020 because it wanted to foil the impression that a mini-budget would be introduced from day one of the next fiscal year. Second reason could be to avoid stocks. However, the official added that this sudden decision to jacking up prices also resulted in non-availability of petrol in different parts of the country on Friday night.
The GST on petroleum products would be kept at a standard rate of 17 percent and no change would be brought in it. The decision for keeping petroleum on higher side has been taken at a time when the economic managers felt other avenues of non-tax revenue might not yield positive results for them in the coming fiscal year.
Product New Price/litre Old Price/litre % Increase
Petrol Rs 100.10 Rs 74.52 34.32 percent
Diesel Rs 101.46 Rs 80.15 26.58 percent
Kerosene Rs 59.06 Rs 35.56 66 percent
Light diesel oil Rs 55.98 Rs38.14 46.77 percent
The FBR’s tax collection was slashed down to Rs4,963 billion for 2020-21, as it was the wish of the incumbent regime to convince the Fund on lowering down the target. But on the other hand, the non-tax revenues were increased to compensate for the revenue requirements at the federal level.
The failure of the government to increase FBR’s tax to GDP ratio has affected everyone living in Pakistan, as the government could not increase pay and pension. It was also on the back of the IMF, which argued with the government to either reduce expenditure or increase revenues.
In the wake of persistent Covid-19 the government opted to reduce expenditure side, but did not move ahead with rationalisation of expenditures by abolishing ministries/divisions that were already devolved in the aftermath of the 18th Constitutional Amendments. The FBR’s revenue growth remained flat in last two years under the PTI regime.It happened for the first time in the country’s history that expenditures increased phenomenally on the higher side with the FBR’s revenue growth standing still at zero growth. One might ask how the affairs of the state could be run in such a dismal situation.
The PTI government’s leader had made very tall claims when he stood on containers. It is time to now deliver on those claims. Otherwise, the economic miseries of the people of Pakistan will continue to multiply with each passing day.