Cut in global POL prices: Dar failed to cash in on opportunity

The Dar-led Finance Ministry was unable to channel the fiscal space created due to a decline in the international price of petroleum products on GDP growth due to an inordinate focus on budget deficit reduction. Dar's decision to increase rate of tax on petroleum products as a major source to enhance revenue collection, a decision premised on the ease of collection, increased manufacturing sector's input costs with a resultant negative impact on their competitiveness in the international as well as the domestic market - the latter as it fuelled smuggling along Pakistan's porous borders.
Prices of petroleum products plummeted to $35-40 per barrel after the PML-N formed the government in 2013 - though more recently its price has risen to $63.4 per barrel.
While talking to Business Recorder, former economic advisor to Finance Division Sakib Sherani stated that decline in oil prices had a positive impact on the import bill and inflation. "Pakistan's import bill was reduced by $8 billion to $10 billion due to decline in oil prices," he added.
However, the focus on increasing tax collections by enhancing tax rates instead of broadening of tax base impacted negatively on the growth prospects that could have been created after the decline in the price of petroleum products in the international market.
Sherani maintained that around 1.5 percent growth was hampered due to former finance minister's decision to increase tax rates on petroleum products. A review of FBR's SROs on petroleum products reveals that sales tax on petrol in September, October, November and December 2017 as well as January 2018 was 17 percent. In August 2017 the applicable rate was 23.5 percent.
In case of high speed diesel, FBR's notification reflects sales tax rate ranging from 25.5 percent to 35.5 percent during the last five months. In August 2017, sales tax on HSD was 35.5 percent, in September 30 percent; October 31 percent, November 2017, 31 percent, December 31 percent and 25.5 percent in January 2018. The main objective of the higher tax rate on petroleum products is not to discourage its use, but to enhance revenue collections.
FBR claimed that the main reason behind the shortfall in sales tax collection in 2016-17 was reduction in petroleum prices despite the fact that higher rates of sales tax were charged on POL products during this period including 33 percent sales tax on HSD in November 2016; 28 percent in December 2016 and January 2017.