- Increase in tax rate for petroleum products is almost 60 per cent, making it the largest SRO in Pakistan’s history in terms of revenue impact
- Hike in GST rate has not only compensated fall in revenues, as per govt claims it has also generated additional revenues of over Rs 36b
The Institute for Policy Reforms (IPR) an independent and non-partisan think tank has released a fact sheet about the recent hikes in taxes levied on petroleum products.
The report highlights various issues with the government’s actions relating to the issue.
The IPR talks of the high rate of taxation that has been levied on petroleum products.
“Three types of taxes are levied on these products, namely, import duty, general sales tax (GST) and the petroleum levy. The combined revenue generated from these taxes on petroleum products was Rs 520 billion in 2013-14, equivalent to 35 per cent of the total revenue from indirect taxes at the federal level. The contribution of the GST on these products was Rs 400 billion, followed by Rs 103 billion from the petroleum levy and Rs 17 billion from the import duty,” the report states.
The report goes on to address the decline in the international prices for oil and that this drop was going to result in a loss of revenue as large as Rs 70 billion on an annual basis. “Consequently, the government has moved recently through promulgation of SRO 1152(1)/2014 to raise the GST on petroleum products (excluding furnace oil) from 17 per cent to 22 per cent initially and then to 27 per cent,” the report informs.
“In proportionate terms the increase in the tax rate is almost 60 per cent. This is the largest SRO in the history of Pakistan in terms of its revenue impact,” it states.
The problem does not just end with the high rate of tax. There is also the question of whether the government’s actions are legal to begin with. “Ideally, this should have been done by an extension to the Money Bill of 2014-15 and subjected to approval by the National Assembly. It also conflicts with the commitment made earlier by the government not to bring about changes in the taxation system through the promulgation of SROs,” the report says.
The National Assembly was neither taken into confidence and nor was it asked its opinion on the matter. This has resulted in token walkouts being orchestrated day in and day out ever since the taxes were levied.
Moreover, the GST has been increased at a rate that was not only unprecedented but also not required. As per IPR’s estimate, the government has over compensated for the drop experiences in prices through the GST that it has levied.
The IPR reports, “The largest GST share in collection within petroleum products is from High Speed Diesel (HSD) of over 40 per cent. The prescribed price for this product has been reduced by 32 per cent and the retail price by almost 27 per cent between June 2014 and February 2015. In the absence of a tax rate, enhancement revenues would have fallen by over 30per cent.
“However, with the increase in the tax rate to 27 per cent, the GST per liter of HSD has risen from Rs. 15.58 in June 2014 to Rs. 17.06 in February 2015. Therefore, the adjustment in the tax rate will lead to a net gain in revenues of Rs. 12billion over the level of revenue that would have been generated if the price of HSD had remained unchanged at the June 2014 level of Rs. 109.34 per liter and an unchanged tax rate of 17 per cent.” Other petroleum products have experienced a similar trend because of the taxation policies adopted by the PML-N led government.
Whether the government decided on these taxes by mistake or on purpose should also be questioned. As the IPR points out, the estimates suggest that the current revenues are much higher than if the prices had never changed. “Under conservative assumptions, the increase in revenues is 15 per cent in the case of HSD, seven per cent in motor sprit, six per cent in kerosene oil, and five per cent in LDO. In effect, the government has raised the GST rate not only to compensate for the fall in revenues due to the decline in prices, but also to generate additional revenues of almost Rs 36 billion on an annualized basis,” it states.
The main problem at the end of the day is that the government acted without thinking of ensuring that their methods are transparent. The IPR report rightfully highlights that the government gave the impression that the steps they were taking were meant to partially compensate for the loss of revenues, while they will result in a substantial net increase in revenues. “A revenue-neutral transition could have been, more or less, achieved by a lower enhancement in the tax rate of up to 5 percentage points. The important point is that in an effort to generate higher revenues from petroleum products, the government has deprived the people of Pakistan from a welfare gain of almost Rs. 80 billion,” the IPR explains.
While this opportunity could have been a substantial one for the government to control inflation and enhance economic growth, their focus seems to be elsewhere.