As the government reduced petroleum prices earlier this week, eyebrows were raised. Skeptics were quick to relate it to the possibility of Pakistan saying goodbye to the stalled IMF program. Only that there was nothing out of the ordinary and the reduction was simply a result of reduced benchmark price for the fortnight. Even the IFEM in case of HSD went to positive zone, for the first time since December 2022. There were no significant exchange rate adjustments either – at least nothing that has not been dealt with before in the recent past. Taxes on both petrol and HSD remained at the upper limit of Rs50/ltr.

The government has expectedly scrapped the cross subsidy program aimed at motorbike consumers – for obvious reasons. The petroleum revenues for 3QFY23 reached Rs185 billion – highest in nine quarters. Bear in mind the entire revenue is made up of Petroleum Levy (PL) as GST has been abolished on both MS and HSD. There has been no GST contribution to petroleum tax revenues in the last three quarters – and there is no evidence that is going to change anytime soon.

The IMF, in an ideal scenario, always advises application of standard GST on petroleum products, in addition to a corrective tax, which varies from one country to another. Pakistan’s corrective tax that accounts for environmental and accidental externalities has been worked at 31 cents per liter. The existing corrective tax (PL) on both MS and HSD is 17 cents per liter despite being at the maximum limit. That creates a post-tax corrective subsidy of Rs39/ltr on account of PL alone. Adding the standard GST rate of 18 percent that has been forgone, the combined post-tax fuel subsidy on petrol amounts to a staggering Rs89/ltr. In simpler words, if the IMF could have its way, they would want petrol to be dearer by another Rs89/ltr,

For the ongoing fiscal year, Pakistan can be expected to add another Rs160-170 billion in lieu of PL during 4QFY23 – to take the full year PL collection close to Rs500 billion. Still awfully short of the target, yet highest-ever by some distance. A nearly 30 percent drop in consumption of both petrol and HSD has played its part. Record high retail prices, in theory, are supposed to lead to higher smuggling incidence, particularly in HSD’s case, where a 30 percent year-on-year drop sounds excessive, despite price increase.

But the combined tax collection on petroleum products still remains lower than 1HFY21 as GST was in place back then. It is almost certain that whoever is in charge would raise the upper limit of PL in theupcoming budget. The GST route may not be taken given how Islamabad and Washington both prefer petroleum revenues to not be part of the divisible pool.