The federal government's decision to raise petroleum levy by 26.20 percent - from 23.76 rupees per litre to 30 rupees per litre, the highest statutory limit on the levy - while keeping sales tax at 17 percent may further vitiate the trust between the centre and the provinces on fiduciary matters. The reason: revenue collected from petroleum levy is not part of the federal divisible pool of imposts and accrues to the centre in totality, while sales tax as per the constitution is a component of the divisible pool and distributed as per the seventh National Finance Commission formula: 57.5 percent provinces with 46.5 percent for the centre.
Sales tax is levied as a percentage of the price, i.e., on ad valorem basis, therefore any raise in price would raise total collections while any decline would reduce collections. Given that the international price of oil has plummeted in recent months keeping sales tax constant implies that the divisible pool would suffer a loss of between 7 to 10 billion rupees and therefore the provinces would receive lower than budgeted revenue. At the same time the federal government, by raising petroleum levy to its upper limit, would more than recover its share of the lower sales tax collections. Pakistan is a federation and therefore a decision that would financially hurt the provinces while raising the centre's resources is likely to cause heartburn and discontent in the provinces. The proper step would have been to increase the quantum of sales tax and convert it to a specific amount per litre, as done in the past by PML-N government when crude oil process fell, so that the provinces do not have to bear the disproportionate brunt of reduction in prices of POL products.
A Federal Board of Revenue (FBR) official while talking to Business Recorder has further revealed that in its drive to raise more revenue the federal government is considering raising the maximum statutory limit of petroleum levy of 30 rupees per litre. This should be a source of serious concern to the provinces, a major component of the federation, as well as the general public because it clearly indicates two disturbing continuing trends: first, that the federal Ministry of Finance, like its predecessors, remains focused on raising revenue from a source that is easy to collect and requires little, if any, effort from the FBR. And secondly, it is consumers who are expected to foot the bill - a fact that would have negative implications on household income as well as compromise the capacity of the industrial sector to compete either internationally or domestically (given Pakistan's long porous borders remain extremely susceptible to smuggling notwithstanding the recent much more stringent rules against this illegal practice).
The Oil Marketing Companies' (OMCs') margin has remained unchanged at 2.81 rupees per litre. In this context, it is relevant to note that due to the decline in oil prices coupled with a marked decline in demand, OMCs are suffering an inventory loss of value prompting many to keep minimum inventories. This may lead to supply shortages whose impact would be exacerbated in the event of a national emergency. Be that as it may, in May 2020 the OMCs claimed a loss of 34 billion rupees (Attock Refinery claiming a loss of 7.75 billion rupees, National Refinery of 4.35 billion rupees, Byco of 40 million rupees and Pakistan Refinery Limited of 2.69 billion rupees) prompting them to write to the Petroleum Division for a bailout package.
To conclude, one can only hope that the federal government begins to act as a component of a federation rather than misusing its prerogatives granted by the constitution to shortchange the federating units. Moreover, the government must seek to undertake reforms in the tax system itself rather than on raising revenue and focuses on widening the tax net instead of levying taxes on existing taxpayers further crippling the industrial sector and eroding the quality of life of the general public. And in the short-term, to make this possible the need to curtail expenditure is critical.
