KARACHI: State Bank of Pakistan (SBP) has said that the collection of sales tax from petroleum products sharply declined by 17.7 percent in fiscal year 2016-17.
In its annual report on State of Economy, the central bank said that during FY17 the government absorbed most of the increase in international oil prices (which had bottomed out by Q3-FY16) by reducing the sales tax on POL products.
“While some upward adjustments to the tax rates has been made, for full-year FY17, the sales tax collection from POL declined sharply by 17.7 percent to Rs 226.6 billion, from Rs 275.3 billion in FY16,” the SBP said.
The SBP said that though POL product prices have been deregulated since 2011, when oil refineries and marketing companies were allowed to fix and announce ex-refinery and ex-depot prices of POL products (including motor spirit, HOBC, light diesel oil, and jet fuels).
Yet, the government has a considerable control over the fixing of retail prices through changes in sales tax rates.10 The ex-refinery or ex-depot prices of POL products for regular consumers consists of ex-refinery import parity price or PSO weighted average cost of purchases, inland freight equalization margin (IFEM), distribution margin of oil marketing companies, dealer’s commission, petroleum levy (PL) and general sales tax on depot price.
The government separately notifies the sales tax rates for POL products at varying rates. For example, sales tax on the motor spirit was 20 percent on June 30 2017, while the same was levied at the rate of 14.5 percent and 33.5 percent on HOBC and HSD. Moreover, the government keeps changing the sales tax rates over time, depending on its policy and/or revenue objectives. For example, to provide relief to low income segments, sales tax rate on kerosene and LDO was brought down, from almost 30 percent in August 2015, to zero by December 2016.
Besides sales tax, the government can also indirectly influence POL product prices through adjustment in the petroleum levy. The petroleum levy, which was originally designed to finance development and up gradation activities of the petroleum sector, had been used actively in the past to finance the fiscal deficit, and it continues to contribute significantly to the exchequer; in FY17, it yielded revenues of almost Rs 167 billion. The IFEM, which is supposed to maintain equalized prices at the 29 depots located across the country, can also be employed to influence retail prices.
More recently, the government has used the sales tax on POL products more actively to keep domestic retail prices stable. During FY16, when international oil prices were declining, the government raised sales tax rates on POL products instead of fully passing-on the impact of lower international prices to domestic consumers. As a result, collection from POL increased to Rs 275 billion, raising its contribution to 40.3 percent in overall domestic sales tax collection during FY16.
