Every month the nation is pelted with fuel price-hike stones and every month the government reconsiders its decision by slightly lowering the rates in response to the people's strong reaction or to please its coalition partners (sic). Adding insult to injury, Prime Minster of Pakistan, Yousuf Raza Gilani, on April Fools' Day claimed that Oil and Gas Regulatory Authority (OGRA) was responsible for price increase in petroleum products and the government could not do anything about it.
This was certainly a very disagreeable way of absolving his government from dropping the latest petrol bomb on the masses. After all, what are the perplexities of this extremely fluctuating nature of petroleum price rigmarole [see Table A] that leaves the common man stripped of his earnings, increases inflation to a non-receding position and makes the lives of the poor miserable, but despite all these, brings in super duper profits to the petroleum companies; and on an average of more than two trillion per annum in taxes (per Rana Bhagwandas Commission Report on Petroleum Prices dated 9 July 2009 submitted to Supreme Court of Pakistan) to the government. What are the facts behind this recurrent shock wave that unleashes a tsunami of fiscal terror on the nation?
-- Table A: Petroleum Prices in April 2009, April 2010 and April 2011
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Product April 2011 April 2010 April 2009
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HOBC 98.12 87.56 94.36
Premium 83.56 73.14 79.67
Light Speed Diesel 78.98 62.20 70.97
Kerosene Oil 84.01 64.81 74.99
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To understand the concept of price fixation and frequent rises, one may analyse composition of the price [Table C] of petrol per litre [it applies to all other items in somewhat same proportion] that shows that share of government taxes and levies is more than 55% from the stage of importation to final ex-refinery supply point. A cursory look at the figures confirms that taxes constitute the major part of the price of each litre of petrol and diesel that is consumed heavily by the public for personal and business purposes. During fiscal year 2009-2010, the FBR collected Rs 191.42 billion as indirect taxes from POL products. The figure for July to December of the current financial year is Rs 112 billion.
Government advertisements in print and electronic media these days claim a loss to national exchequer by way of subsidies of Rs 25 billion during the last 4 months (from December 2010 to March 2011) and in April 2011, expected loss is Rs 10 billion. Interestingly, during these months, the government collected nearly Rs 60 billion as taxes (customs duty, sales tax, federal excise duty and special excise duty) from POL products so if the loss in the form of subsidies is reduced from this amount, the government has actually made a gain of Rs 35 billion. By concealing facts from the public, the government appears to be showing great mercy on the masses whereas it is passing on burden of huge taxes on them while bestowing greater benefits to the oil giants [Table B]. Some points mentioned in the report submitted to Supreme Court by Rana Bhagwandas Commission dated 10 July 2009 are as under:
-- From 2002 to 2009, the Government of Pakistan made Rs 10.23 trillion in taxes on petroleum products.
-- In 5 years profits have surged of petroleum companies including PSO, Shell Pakistan, Caltex, Attock Petroleum, Parco, National Refinery, Pakistan Refinery and Attock Refinery while Bosicor Refinery's profit has also risen massively over 3 years.
-- Over five years the government had made severe mistakes when it came to oil pricing, leading to the impression that ill intentions were at play.
-- From 2002 to 2009, while government collected Rs 10.23 trillion in taxes, oil companies were also allowed to reap unusual profits.
-- Oil companies and refineries did not give customs officials pricing proof either.
-- OGRA was not involved in the pricing decisions for four years, something which was illegal.
On the extraordinary profits of these oil companies, had excess profit tax been levied there would have been substantial decrease in fiscal deficit and government would not have to offer any subsidy. Anyone analysing/observing this situation would definitely agree that no business in Pakistan has such an exorbitant rate of return in terms of accounting profit. One really wonders why successive governments have failed to introduce excess profit tax which was once enforceable in Pakistan but was later on abolished like all other progressive taxes. The charging section of repealed Excess Profit Tax of 1940 reads as under:
"Subject to the provisions of this Act, there shall, in respect of any business to which this Act applies, be charged, levied and paid on the amount by which the profits during any chargeable accounting period exceed the standard profits a tax (in this Act referred to as "excess profits tax") which shall, in respect of any chargeable accounting period ending on or before the 31st day of March, 1941, be equal to fifty per cent of that excess and shall, in respect of any chargeable accounting period beginning after that date, be equal to such percentage of that excess as may be fixed by the annual Finance Act".
Another noteworthy feature in the price is petroleum levy [of late the word "development" is omitted] but no government has mentioned how this amount has ever been used towards serving this purpose. If it was collected just to meet subsidy then it was a total waste. These funds should have been utilised to improve the quality of POL products in order to curtail pollution, provide public transportation and to cut down the oil import bill. Had funds collected from this source gone into developing mass transit systems in the major cities of the country, there would be no doubt that reliance on petroleum products could have been manifestly reduced.
Table C: Break up of petrol prices as on July 1, 2009 and April 1, 2011 (in Rs)
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July 1, 2009 April 1, 2011
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Ex-refinery price 36.59 Ex-refinery price 59.35
Oil marketing companies' margin 01.60 Oil marketing companies' margin 01.50
Petroleum development levy 10.00 Petroleum levy 03.16
Dealers' margin 02.00 Dealers' margin 01.87
Sales tax 08.57 Sales tax 12.14
Inland freight 03.37 Inland freight 05.54
Total 62.13 Total 83.56
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In ex-factory prices [see Table C], the taxes at import stage are nearly 45%. Thus for the government both at import and supply stage, POL products are the main revenue spinners. While comparing petroleum prices of Pakistan with India, UK, Japan and Germany, our government conveniently overlooks that in these countries, the public transport system is in place and majority of the people in big cities, including bureaucrats and public functionaries, use it and are therefore not hit by high POL prices.
It is shameful that during these 63 years we have failed to provide effective mass transit facility to at least 2 large cities even though great champions of Pakistan holding unlimited control, boast about their sincerity to the nation. On the contrary, in the name of boosting economy, consumer loans were vastly disbursed to encourage purchase of personal vehicles in the guise of which both the petroleum and foreign car manufacturing industries were being promoted at the expense of the common man.
More cars on the roads are causing pollution, wastage of resources - increasing our oil import bill - and traffic mayhem. From July 2010 to February 2011, our crude oil imports surged to US $2.85 billion, compared with US $2.29 billion in the corresponding period of the preceding year. We need for the masses, a decent public transport system that can solve all the prevalent problems.
The challenge before us is to build good public transport system and a clean energy economy. In a policy statement, the US President in 2009 said, "The nation that harnesses the power of clean, renewable energy will be the nation that leads the 21st century. Today, we export billions of dollars each year to import the energy we need to power our country.
Our dependence on foreign oil threatens our national security, our environment and our economy. We must make the investments in clean energy sources that will put Americans back in control of our energy future, create millions of new jobs and lay the foundation for long-term economic security". In May 2009, President Obama announced the first-ever joint fuel economy/greenhouse gas emissions standards for cars and trucks.
Our rulers follow USA in most of the matters, where their personal interests are involved, but not in areas where public welfare can be achieved. In recent months, the USA made great strides toward changing energy future. The Recovery Act constituted an unprecedented and historic investment in the clean energy economy.
Our government must realise that investments in the development of renewable energy and clean technologies can lead to the energy sources of the future. We have destroyed our rail system-depriving the poor and business houses of cheap and efficient transportation mode-while other countries are making huge investments in high speed rail and advanced car batteries, considered as the transportation systems of the future.
It is sad that the government is using higher taxes on POL products as means to reduce its fiscal deficit, without realising that price hikes in these items affect economy as a whole and poor masses especially, retard growth in all sectors besides accelerating inflation. Our tax system benefits the wealthy at the expense of the overwhelming majority of poor Pakistanis.
The government, instead of restoring fairness to the tax system by reducing taxes and levy on POL products, is extending extraordinary benefits to a few powerful oil companies and making life of 95 percent of people miserable. By plugging loopholes that prevent wealthy companies and individuals from paying a fair share of taxes, the government can generate enough revenues through levy of excess profit tax to build public transport system that would save billions that we mercilessly spend on import on oil.
(The writers, tax lawyers, are Adjunct Professors at Lahore University of Management Sciences.)
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