One of the challenges faced by Finance Minister Ishaq Dar these days is to keep the balance between sales tax revenues from petroleum products and the prices consumer pay in the days of rising international oil prices. The fiscal revenues are getting hit from right and left; numbers for both tax and non -tax revenues this year so far are not encouraging for the Ministry of Finance.
One windfall the government had in the past two years was the steep fall in oil prices which had given the government a cushion to generate higher sales tax revenues on petroleum products, as it intelligently did not pass the full impact of lower prices to consumers. Even without passing the full impact, the retail prices had fallen substantially and consumption increased significantly.
Hence, the sales tax revenue did not only increase due to high rates but also due to high consumption. The bonanza was clearly there in HSD and motor spirit - the tax collection on these products, including petroleum levy and GST increased by 48 percent and 28 percent respectively in 1HFY16. In the case of GST, the share of petroleum products was close to 40 percent in the last two years.
The use of FO was in decline at that time as imported gas has become preferable fuel for incremental demand. Tax revenues from FO halved in 1HFY16. The cumulative tax collection from three top consuming fuels was Rs253 billion in Jul-Dec 2015; a yearly increase of 20 percent.
The party in HSD and MS is not there anymore, as oil prices are heading north. Slowly the government is reducing the GST, and smartly it is again not passing the full impact to the consumers. The move is right as this reduces the volatility in retail prices but has an externality on tax collection. In FY15 and FY16 the externality was positive for government and this time its eating the potential revenues.
During Jul-Nov 2016, tax revenues (GST and PL) from HSD and MS fell by 10 and 1 percent respectively. The government is partially passing the buck of higher prices on HSD but is reluctant on doing so with MS. The government kept on favoring rich consumers who own a vehicle over those who use public transport or are in agriculture business. Even after keeping GST on HSD at an average of 32 percent this fiscal year, so far tax revenues from HSD is falling. Its consumption increased by 15 percent but revenues dipped by 10 percent.
Despite slower pace of growth in petrol consumption of late, petrol consumption has doubled in the last four years. In the case of HSD, the increase in consumption is not significant; but the fuel has been milked by tax collectors. The best days are seemingly over from the lens of FBR.
Nonetheless, the use of Furnace Oil is on rise as the government is fulfilling its commitments to slowly reducing the load shedding to zero. After a decline of 5 percent last year, FO consumption is up by 10 percent in 11MCY16. However, sales tax collection on it is much less as compared to HSD and MS combined. Long story short: FBR has to find other avenues to come anywhere close to its optimistic revenues targets.
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