POL prices

Caretaker Federal Minister for Energy Ali Zafar stated over the weekend that the government has decided to reduce petroleum prices to provide relief to the public. This decision was taken subsequent to the Supreme Court of Pakistan's direction to the federal government to reconsider the raise in prices of petroleum and products effective 1 July 2018 with the objective of providing relief to the public, while taking a suo motu notice of the increase in oil prices on 4 July 2018.
The decision of the federal government to reduce taxes effective 8 July, and thereby absorb a loss of revenue of a little over 10 billion rupees, a mere 8 days after they were raised, consisted of the following sales tax revisions: (i) from 17 percent to 12 percent on motor spirit and kerosene oil, (ii) from 31 percent to 24 percent on high speed diesel; and (iii) from 17 to 9 percent on light diesel oil. These new tax rates are not low by any standard and constant references are made to the high taxes imposed by India's government(s) - Union and states - on oil and products as a justification. What is however ignored is that the India's economy is much stronger compared to ours and the export sector has access to other major utilities that are a lot cheaper than those available to our industrial sector.
With Pakistan's fiscal deficit projected to reach unsustainable levels without reduction in total revenue collections by the end of this month sourced to petroleum products, it stands to reason that the performance of the caretakers with respect to taking mitigating economic measures would be even more disturbing than at the end of the Abbasi-led administration's tenure on 31 May 2018. And reflect poorly on the performance of the caretaker cabinet of ministers.
Fiscal deficit, according to finance minister Shamshad Akhtar during her press conference on 12 June 2018, reached the unsustainable level of 6.1 percent of Gross Domestic Product (GDP) while the figure till the end of the fiscal year 2017-18 was, she stated, 'anybody's guess.' After the recent revision in taxes on petroleum products the projection of a deficit of well above 8.5 percent of GDP on the day the caretakers hand over the reins of control to the elected government, around end of July or early August 2018, is being estimated by independent economists.
The foregoing reveals two disturbing aspects of the economic imbroglio that would be the legacy of the former Justice Nasirul Mulk-led caretaker setup. First, that the caretaker minister of finance was unable to convince or indeed educate her cabinet colleagues, and the apex court, that reducing taxes on petroleum products and thereby reducing total revenue collections at a time when the budget deficit has already reached unsustainable levels is a highly inflationary policy. The widening of the deficit would necessitate a heavier reliance on borrowing and given that Pakistan is currently not on an International Monetary Fund programme access to external borrowing would be at a higher rate than the prevailing market rate.
And secondly, while it is true that the taxation system in this country is unfair, inequitable and anomalous and there is a need to increase revenue collections from direct taxes as opposed to indirect taxes (sales tax be it on services or goods is an indirect tax) whose incidence on the poor is greater than on the rich, yet a caretaker setup neither has the time available nor the mandate to reform and revise the tax system. In other words, reducing revenue from any source at present, however unfair it maybe on the general public; will have disastrous consequences for the budget deficit.
To conclude, there is a need for the caretaker finance minister to try to educate the cabinet as well as the apex court about the merits and demerits of the recent decision and at the same time offer to begin to draft a white paper proposing changes in the existing tax structure that would allow the next government to begin implementing the compelling need for tax reforms.