COLOMBO: A prerogative tax on diesel that was imposed by mid-night gazette last month on diesel may generate losses at fuel retailers with petrol already taxed at high levels, analysts have warned.
Sri Lanka had taxes of about 15 rupees on diesel and 65 rupees a litre on petrol. With an increase in diesel taxes by 6 rupees in July and 10 rupees in August, diesel taxes have gone up to 32 rupees a litre, and still remains below petrol. JB Securities, a Colombo based equities brokerage said in a note to clients that fuel distributors including publicly traded Lanka IOC may suffer losses from both petrol and diesel distribution after the tax hike.
Petroleum distributors suffered a loss of around 12 rupees on petrol and they had a profit of a similar amount on diesel, the brokerage noted.
JB Securities said while the increase in tax was a move in the correct direction, by not allowing a retail price increase, diesel continued to be mis-priced and the distributor’s will suffer losses.
There was heavy selling in Lanka IOC the day the tax was imposed by mid-night gazettes, by those who had learned of the tax early in the day. Sri Lanka’s rulers hatches taxes secretly and springs them on the country in a blatant policy of prerogative taxation despite the existent of a parliament through which consent has to be sought publicly.
The ruler-centric parliament docilely rubber-stamps the taxes later, in a travesty of representative democracy, liberty advocates say. Sri Lanka’s rulers also price diesel below petrol, with most members of the elected ruling class owning diesel guzzling luxury sports utility vehicles imported tax free. Vehicles of ordinary citizens are taxed over 250 percent with diesel vehicles attracting higher rates.
The elected ruling class and some others also genuinely believe that diesel has something to do with inflation (and petroleum and car imports cause monetary instability), rather than the central bank and have printed money to keep energy prices down, creating currency collapses and high inflation.
In Sri Lanka Mercantilism is the dominant ideology and has largely overshadowed economics per se, 226 years after the death of Adam Smith, 193 years after death of David Ricardo, and even before Milton Friedman died in 2006.
Meanwhile JB Securities said based on current tax levels, petrol was estimated to bring around 7.8 billion rupees in taxes to the Treasury, and diesel 6.4 billion rupees. The taxes on domestically refined fuel was also kept at a lower level, to make up for the inefficiency of a state-run refinery owned state, which sometimes operated on negative crack margins due to its high output of furnace oil, critics say.
The transport fleet estimated to consume about 130 million litres of petrol and 200 million litres of diesel a month or 38 percent for petrol and 62 percent for diesel. About 10 years ago, diesel was 77 percent of the total. Until 2001, diesel was severely under-priced in a worse state intervention than now, leading to a flood of imports of diesel vans and pick-up trucks for private transport.
To try and correct the state intervention, two other state interventions – higher taxes for diesel vehicles and an annual tax – was brought in. Diesel however pollutes more and has now been classified as a carcinogen compared to lead free diesel, but the fuel continues to be under-priced. The import cost of diesel is higher.
