The caretaker government has revised the general sales tax (GST) on petroleum and products for the second time in less than one month - effective 12 June and 1 July - ostensibly to pass on the increase in the international price of oil to consumers. While this appears to be a plausible rationale at first glance, and has been used to provide several administrations with the excuse that they had little if anything to do with a rise in the price of oil and products, yet it ignores two extremely important components of the petroleum and products pricing formula.

First, general sales tax on petroleum products accounts for around 40 billion rupees per month to the exchequer. And effective 1 July, the Caretaker government decided to raise sales tax on petrol by 5 percent (from 12 percent on 12 June to 17 percent on 1 July), on High Speed Diesel by 7 percent (from 24 percent on 12 June to 31 percent on 1 July), on kerosene by 6 percent (from 12 percent on 12 June to 17 percent on 1 July) and on light diesel oil by 8 percent (from 9 percent on 12 June to 17 percent on 1 July). In other words, the focus of the caretakers was to minimize the alarming raise in fiscal deficit at the cost of disposable income. Given that a sales tax is an indirect tax, its levy on the poor relative to the rich is much higher. The trickle-down effect of a raise in petroleum prices is significant and raises not only transport costs, but also impacts negatively on electricity prices and thereby on costs of production of the manufacturing sector as well as farm output prices. Consequently, the impact of a rise in petroleum and products’ prices is across the board.

Economic theory notes that a widening budget deficit has an inflationary impact with consequences on disposable income; however, there has been no study in this country to determine whether the impact on inflation of heavy taxation on petroleum and products is greater and more immediate compared to the impact of a rise in the budget deficit to unsustainable levels.

Secondly, a margin is provided in the pricing of petroleum and products for Oil Marketing Companies (OMCs) and dealers – a margin that was raised by the Abbasi-led administration on the last cabinet meeting held on the last day of its tenure, i.e., 30 May 2018. This decision was ostensibly taken in line with the Oil Companies Advisory Council’s (OCAC’s) claim in a letter dated 2 March 2018 that its members suffered a cumulative loss of almost 845 million rupees (from November 2017 to February 2018) due to the failure to formulate a GST recovery mechanism on HSD margins under deregulation that was decided by the Economic Coordination Committee in December 2017; OCAC suggested that the margin be notified based on Consumer Price Index in line with the procedure approved for petrol by the Economic Coordination Committee on 6 October 2017.

The revised margin of OMCs for petrol was 2.64 rupees per litre from 2.55 rupees per litre (a raise of 0.09 rupees per litre – a 3.5 percent rise), and the dealers margin was raised to 3.47 rupees from 3.35 rupees per litre (a raise of 0.12 rupees per litre – a 3.5 percent rise); the OMCs margin on HSD was raised by 0.23 rupees per litre to 2.64 rupees (a raise of 2.41 rupees per litre - a 9.95 percent raise) whereas dealers margin on HSD was raised to 2.93 rupees per litre from 2.67 rupees per litre (an increase of 0.26 rupees per litre – a 9.97 percent raise). What is ironical is that the Abbasi-led administration had no compunction to defer the decision to raise petroleum products’ prices till 7 June this year as per Oil and Gas Regulatory Authority’s recommendations (instead of on the last day of May which is when POL prices are revised) for political reasons while on the same day surreptitiously raising the margins that would raise prices for all times to come.

Petroleum levy is also payable by consumers on petroleum and its products at a flat rate and therefore its collections vary only according to actual sales. However, the Abbasi-led administration budgeted around 300 billion rupees under this head in the current year as opposed to 170 billion rupees realized in 2017-18.

To conclude, the government’s heavy reliance on taxes as well as the decision of the Abbasi-led administration to deregulate prices of petroleum products in a phased manner (prices of furnace oil, High Octane Blanding Component (HOBC), 97 RON, petrol, and diesel, HSD Euro IV and V have been deregulated so far) have a major input into the domestic prices of petroleum and products belying subsequent administrations’ claims that they simply pass on international price fluctuation onto consumers.