On February 1, 2016, Pakistanis were expecting a reduction of at least Rs 15 per litre in petrol's price as Arab Light Crude Oil reached a new low in the last 13 years. A source in Ministry of petroleum said on January 30, 2016 that the price of petrol was "likely to go down by Rs 10.37 per liter, while high speed diesel would by Rs 15, high octane by Rs 9, kerosene oil by Rs 8, while price of light diesel would be slashed by Rs 11 per liter." To everybody's utter dismay, the government provided just Rs 5 relief for all petroleum products, which was totally unjust. In its summary, the Oil and Gas Regulatory Authority (Ogra) proposed a cut of Rs 7.56 per litre (9.9 percent) in price of petrol. Petrol is a fuel widely used in cars and motorcycles owned by middle class commuters. The price of high-speed diesel (HSD) oil, a fuel used by transportation businesses and farmers, was proposed to be reduced by Rs 11 per litre (13.6 percent).
The nominal reduction of Rs 5 in all petroleum products and imposition of fixed sales tax on these items with effect from February 1, 2016 once again proves that the present government is working against open and fair markets (not ready to deregulate petroleum prices) and hurting businesses and low-income groups through excessive taxation. Collecting a fixed amount of sales tax as high as Rs 29.57 on every litre of HSD oil will certainly fetch extraordinary tax for the Federal Board of Revenue (FBR) as this is the largest selling product, consumed in heavy vehicles and generators. But it will certainly hurt business growth and make products expensive. For exports, this tax hike means more uncompetitive commodities to compete in international markets. After levying excessive sales tax, the worthy Finance Minister said "the prices announced for the month of February are another manifestation of the government's resolve to provide maximum facilitation to the general public." This is factually incorrect as fixed sales tax has denied the real benefit of low POL prices to the public.
The Federal Government imposed fixed sales tax per litre on all petroleum products with effect from February 1, 2016, violating statutory requirement of charging sales tax on percentage basis under section 3 of the Sales Tax Act, 1990. The fixed sales tax levied through Statutory Regulatory Order (SRO) even otherwise offends Article 77 of Constitution of Pakistan. According to SRO 57(I)/2016 dated January 30, 2016, the sales tax on motor spirit, excluding HOBC (Hi-octane Blending compound), is fixed at Rs 14.48 per litre, on HOBC Rs 18.57 per litre, on high speed diesel oil at Rs 29.57 per litre, on light diesel oil Rs 9.63 per litre and on kerosene at Rs 10.40 per litre. SRO 57(I)/2016 is issued under section 3(2)(b) of the Sales Tax Act, 1990 which does not mandate fixed sales tax.
Section 3(2)(b) of the Sales Tax Act, 1990 says: "the Federal Government may, subject to such conditions and restrictions it may impose, in the official gazette, declare that in respect of any taxable goods, the tax shall be charged, collected and paid in such manner and at such higher or lower rate or rates as may be specified in the notification."
The exorbitant taxation of petroleum products through SRO 57(I)/2016, without the approval of Parliament and in utter disregard of the judgement of Supreme in the Engineer Iqbal Zafar Jhagra and Senator Rukhsana Zuberi v Federation of Pakistan and Others (2013) 108 TAX 1 (S.C. Pak), is highly lamentable. In this judgement, the apex court held:
"It is well settled proposition that levy of tax for the purpose of Federation is not permissible except by or under the authority of Act of Majlis-e-Shoora (Parliament). Reference in this behalf may be made to the case of Cyanamid Pakistan Ltd v. Collector of Customs (PLD 2005 SC 495), wherein it has also been held that such legislative powers cannot be delegated to the Executive Authorities. Also see Government of Pakistan v. Muhammad Ashraf (PLD 1993SC 176) and All Pakistan Textile Mills Associations v. Province of Sindh (2004 YLR 192)." [Page 18, Para 20]
As evident from plain reading of section 3(2)(b) of the Sales Tax Act, 1990, it only authorises the Federal Government to vary tax rates in case of taxable goods and not to impose fixed amount of sales tax as has been done through SRO 57(I)/2016. Imposition of fixed sales tax is thus void ab initio even under delegated powers, notwithstanding the fact that such powers are in violation of Article 77 of the Constitution.
Issuance of SRO 57(I)/2016 also exposed the tall claim made by the Finance Minister in a press conference on May 11, 2015, that "through Finance (Amendment) Ordinance, 2015, power of FBR to issue SROs has been withdrawn." He said that such powers were transferred to the Economic Co-ordination Committee of Cabinet [ECC] in "exceptional circumstances." If this was the case, why no approval was sought from EEC? The fact is that section 3(2)(b) of the Sales Tax Act, 1990 does not require approval of EEC and ironically, this has never been acknowledged by our worthy Finance Minister in the Parliament or in public. This is a clear case of hoodwinking the masses. The International Monetary Fund has also ignored it (intentionally or unintentionally) even after demanding the government to end SRO culture for levying taxes or extending concessions/exemptions.
Levy of fixed sales tax under section 3(2)(b) of the Sales Tax Act, 1990, as discussed above, is patently unlawful. In the wake of Supreme Court pronouncement in the Engineer Iqbal Zafar Jhagra and Senator Rukhsana Zuberi v Federation of Pakistan and Others (2013) 108 TAX 1 (S.C. Pak), imposition of taxes, or varying tax rates or granting exemptions and concessions through SROs, amount to contempt of court. The perpetual violation is evident at website of Federal Board of Revenue (FBR) but no action is taken by the Supreme Court so far. The National Assembly or Senate has also not debated this crucial issue from the constitutional perspective.
On the one hand, FBR through SROs has been extending numerous reductions in duties and tax concessions to cartels and on the other, the government imposes exorbitant taxes on petroleum products hurting the economy and low-income groups. The government has failed to pass on to the public, the benefit of global reduction in petroleum prices by imposing higher sales tax and other indirect levies which is instrumental in retarding economic growth and making our exports uncompetitive in the international markets.
Pakistan is a unique country where the government can conveniently undo tax laws passed by the Parliament through executive orders (SROs) which is a gross violation of Articles 77 and 162 of the Constitution. Article 162 debars even the National Assembly to grant exemptions without the prior approval of the President, but interestingly, this power has been delegated unconstitutionally to EEC first, through Finance (Amendment) Ordinance, 2015 and then by passing Finance Act, 2015 by the Parliament itself in blatant disregard for Article 77 of the Constitution and obviously under these circumstances, there is little hope that the Parliament will undo this grave and blatant violation of supreme law of the land.
The only hope to enforce Article 77 read with Article 162 of the Constitution is implementation of Supreme Court's judgement in Engineer Iqbal Zafar Jhagra and Senator Rukhsana Zuberi v Federation of Pakistan and Others (2013) 108 TAX 1 (S.C. Pak) by filing contempt application. This judgement is binding on all State organs under Article 189 of the Constitution. Usurping the exclusive power of Parliament to levy taxes by SROs, even after approval by EEC, is clear contravention of Constitution but unfortunately the august apex court has yet not taken any notice as yet. It is high time that Supreme Court Bar Association should move a contempt application for perpetual violation by the government of the dictum laid down by Supreme Court in Engineer Iqbal Zafar Jhagra and Senator Rukhsana Zuberi v Federation of Pakistan and Others (2013) 108 TAX 1 (S.C. Pak) in public interest.
By imposing fixed sales tax on petroleum products and not allowing deregulation of oil prices, the government is denying the citizens the actual benefit of reduction of POL prices internationally. The sinister aim behind unlawful and excessive taxation is to extort maximum money from the consumers to show lower fiscal deficit to the IMF. It is disturbing that while petrol hit the lowest price of $25 per barrel in international market in January 2016, the Pakistan government decided to charge more than twofold per litre under taxes to deny its benefit to the citizens. As per official admission, the present PSO cost of supply/E-10 base price is Rs 37.58 per litre. Inland Freight Equalisation Margin (IFEM) is Rs 3.76, margin of oil marketing companies (OMCs) Rs 2.35, dealer margin Rs 3.08, petroleum levy Rs 10 and General Sales Tax (GST) Rs 14.48. In Petrol (Super) retail price of Rs 71.25 per litre, element of taxes comes to 65.14%. In HSD oil (Rs 75.79/litre), the element of tax is as high as 70%. Knowing that petroleum prices cause major impact on our economy and directly affect general public, the Finance Minister after resorting to exorbitant taxes claims that he was providing maximum facilitation to the general public! This is simply a laughable statement, though highly lamentable.
The high price fixation of diesel price through exorbitant taxes (petroleum levy and sales tax), IFEM and OMC's margin is one the major factors adversely affecting the economy. Transportation cost through heavy vehicles consuming HSD oil has gone up substantially in the last 10 years. This makes prices of all the products go on increasing, adversely affects the middle and the lower middle class. Due to ever high electricity load shedding, the use of diesel run electricity generators has increased in houses and industries resulting in the increased consumption of diesel.
There are essentially four elements that constitute the price that the consumer pays on petroleum products. The import parity price is the first element. This comprises the import price, adjusted for government subsidies and duties. To this cost is added IFEM that is charged by OMCs to sell petroleum products at a uniform price across the country. To these two elements is added a 2.5 per cent margin for the OMCs and 3.08 percent for dealers, of the combined cost of the two elements described above. There is a fixed petroleum levy per litre of Rs 10 and finally GST (a fixed amount from February 1, 2016).
Time and again, the margins of OMCs and dealers become subject of criticism in media. However, the most ignored aspect is linking of margins to a proportion of the import parity price and IFEM that is fundamentally unjust and irrational. It is illogical as distribution or dealership has no link whatsoever with fluctuations in international oil prices. Rent-seeking by the OMCs, however, is not limited to margins only. IFEM is another source of undue profiteering by these entities. IFEM is used to equate the prices of POL products across Pakistan and covers primary transport costs incurred by OMCs to transport petroleum products. IFEMs are recommended by the Oil Companies Advisory Committee (OCAC) and are subject to adjustment on the basis of actual monthly freight computations. Since IFEMs are added to IPPs to calculate OMCs' and dealers' margins; it creates incentives for OCAC to set IFEMs at higher than actual levels, which not only increases their actual reimbursement but their margins as well. Though the Competition Commission of Pakistan (CCP) in August 2014 suggested to Ogra and the Petroleum Ministry to eliminate IFEM and create a level-playing field for all refineries and OMCs, no action has been taken till today.
In the pricing formula are also included deemed duty benefits for refineries. They receive this windfall gain in the import parity price, primarily for diesel but also for other products. In 2001, it was decided to allow the refineries to retain the duty that was charged on local finished products for one year to upgrade their capacity. While some products have been taken off the list, seven years later the refineries were still charging this amount on diesel which constituted the bulk of the volume consumed in the market. There was/is no justification in allowing this pilferage on the part of refineries to continue.
The solution lies in fair oil pricing system through open and transparent markets, ensuring complete deregulation of prices with reasonable fixed sales tax for fiscal stabilisation. Ishaq Dar must study the successful models of countries where fiscal stabilization is achieved through deregulation and fixed tax regime.
For his information, we highlight some case studies:
-- Fuel taxes in Germany are €0.4704 per litre for ultra-low sulphur Diesel and €0.6545 per litre for conventional unleaded petrol, plus Value Added Tax (19%) on the fuel itself and the Fuel Tax. That adds up to prices of €1.12 per litre for ultra-low sulphur Diesel and €1.27 per litre (approximately US $6.14 per US gallon) for unleaded petrol.
-- Indian Prime Minister Narendra Modi after taking the oath of office took bold steps to free the economy from the clutches of fuel subsidy by deregulating diesel and formalising the price formula for natural gas. This insulated his government from politically-sensitive decisions in future. After a Cabinet meeting, Finance Minister Arun Jaitley announced that diesel price stood deregulated to allow it to move as per market conditions, just like petrol. The government no longer decides the selling price of diesel in the country and such decisions are taken by oil retailers such as Indian Oil Corp, BPCL and HPCL.
-- The UAE's Ministry of Energy deregulated fuel prices from August 1, 2015.
-- The sale of fuels in the Netherlands is levied with an excise tax. As of 2015, petrol excise tax is EUR 0.766 per litre and diesel excise tax is EUR 0.482 per litre, while LPG excise tax is EUR 0.185 per litre.
-- The fuel tax in Sweden comprises a carbon tax and an energy tax. The total tax (including value added tax) is, from January 1, 2014, 8.285 kr per liter petrol.
The research teams of Ministry of Finance and FBR (if we really have these) must concentrate on professional studies available and then suggest a viable tax model for petroleum products in Pakistan that can achieve fiscal stabilisation without hurting the economic growth and the buying power of low-income groups. (The writers, lawyers and partners in law firm, Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences)