The Khan administration’s decision to reduce petroleum products’ prices effective from 1 September is being viewed as divergence from the overarching objective of the PML-N administration: reducing the unsustainable budget deficit through not passing on any reduction in the international price of oil and products by raising taxes on these products, widely believed to be the easiest and perhaps the most unfair form of indirect taxation in the country. In addition, high taxes on petroleum and products raise the cost of doing business in the country with a consequent negative impact on exports. While the PML-N government did, on occasion, play to the gallery and reduced taxes as and when the international price of oil declined yet by and large, it raised taxes to generate ‘fiscal space’ that, disturbingly, it then frittered away through heavy external and domestic borrowing.
The notified prices have been reduced by 2.4 rupees per litre for MS petrol, by 6.37 rupees per litre for high speed diesel (HSD), by 46 paisa per litre for kerosene and by 59 paisa per litre for light diesel oil (LDO). Oil and Gas Regulatory Authority (Ogra) had recommended the following decrease in prices: MS petrol by 2 rupees, HSD by 6 rupees, kerosene by 30 paisas and LDO by 70 paisas.
It is relevant to note that Ogra’s recommended change in monthly prices is based on an established formula that includes taking existing taxes (or those prevalent in the month just past) as remaining unchanged. Ogra’s recommended price is then routinely onsent to the government to approve and notify it with the objective of allowing the government to adjust, if it deems appropriate, the taxes levied on the products. Thus for the PTI government to reduce prices by more than what was recommended by Ogra indicates that taxes have been reduced on all products which would imply that revenue would be lower than what was projected in the budget for the current fiscal year.
The Khan administration’s logic for reducing POL prices could be twofold: that lower energy and transport costs would lead to lower costs of production thereby fuelling output, and promoting exports, as well as increasing employment opportunities – elements that would automatically increase tax collections from productive sectors; and secondly, lower POL prices would provide relief to the common man, increase his disposable income, which, in turn, would raise consumption and reduce the stockpiles of products thereby rising output.
The logic is impeccable; however, there is one caveat which has been consistently pointed out by Business Recorder: the current state of the economy is dire with the PML-N administration leaving an unsustainable budget and current account deficit that requires urgent remedial measures and losing out on existing revenue sources, however unfair those sources may be, would simply place greater pressure on the government to raise taxes later. Each day that the government follows the budget 2018-19 as approved by the previous parliament it loses not only in terms of revenue generation, given the unrealistic target set by the previous government, but also disburses public money for those projects that do not reflect PTI’s priorities.
To conclude, the Finance Ministry has indicated that the government would finalize a set of revenue measures which would be first approved by the cabinet and later by parliament this week; however, the matter is of the utmost urgency and one would hope that decisions in this regard are taken sooner rather than later.
