Government Raises Petroleum Levy, Hopes to Collect Rs 1.3 Trillion amid Looming Fuel Price Spike

Islamabad: Petrol prices will rise as expected in the wake of the federal budget for the next fiscal year, mainly because the government has decided to increase the maximum petroleum levy on petroleum products by Rs 20 from Rs 60 to Rs 80. 

This target represents a significant increase of Rs 321 billion from the revised estimate of Rs 960 billion for the current fiscal year 

2023-24.

The petroleum levy is a major source of income for the government, While this hike will boost federal revenue, it is also expected to further raise the already high prices of petroleum products. Already inflationary pressures have caused the usage of petrol to fall over the past year, and as the Pakistan Economic Survey 2023-24 revealed, the usage of fuel dropped by nearly 8% in the past fiscal year. So how exactly will this increased levy mean for petrol prices? And was it the best route for the government to take?  

How the pricing works 

Petrol prices in Pakistan are determined by a number of factors. The main input is the international price of crude oil, which is imported into the country by oil refineries which then process it and turn it into fuel. The price of fuel after processing is what is known as the ex-refinery price. But then other things get tagged along onto this. A margin is added to make sure the price is uniform throughout the country and not cheaper in areas close to the refinery, distributors naturally take a cut, and then dealers and petrol pumps also charge their own service premiums. On top of this, the government also takes a cut.

The current petroleum levy is Rs 40, which up until this budget could have gone up to a maximum of Rs 60. The government has now increased this maximum levy by Rs 20 to Rs 80 per litre. As we mentioned at the beginning, the government is not good at collecting taxes because there is only one tax collector with not enough infrastructure to keep an eye on everything. So the levy is charged to the end consumer and directly transferred to the FBR.

Will the IMF be happy with this? 

The IMF has long held, and correctly so, that this is a counterproductive system. The fund’s argument is that a VAT system should be implemented in which the value added at each stage of a product getting to the end consumer should be taxed. Without getting into too many details, this would mean the refinery would be charged a tax first, then the transporters, then the distributors and so on and so forth until the final price hits the markets and the tax is passed on to the consumer. This would not just mean that the tax on petrol would not be arbitrarily set (as the petrol levy is right now), it would also help document the economy better. 

As part of this, the IMF wants the government to increase the sales tax on petrol at different stages. In the previous budget, the fund had recommended 18% GST be charged on petrol products. But this poses a problem for the government. One of the biggest earners for the federal government is in fact petrol. The government actually budgeted in a way that it expected to collect nearly Rs 900 billion from the petroleum levy. But the sales tax on petrol would be subject to the NFC award, which means the government would have to share the spoils with the provinces.

Finance bill’s provisions 

According to the Finance Bill 2024, the maximum petroleum levy rate will now be Rs. 80 per liter, an increase of Rs. 20 per liter over the previous rate of Rs. 60 on both petrol and high-speed diesel. The levy on Light Diesel Oil (LDO), High octane blending component (HOBC), and E-10 gasoline will also increase by Rs. 25 per liter to Rs. 75 per liter.

Originally, the budget for the current year set the PL target at Rs 869 billion. Thus, the new target is a 47.4% increase over the previous year’s goal and it is expected that prices of petroleum products will be increased due to increase in the rate of PL.

Additionally, the government aims to maintain the Gas Infrastructure Development Cess (GIDC) collection at Rs 2.5 billion for the fiscal year 2024-25, the same as the revised target for 2023-24.

The original budget for GIDC in the current fiscal year was Rs 40 billion. For the Natural Gas Development Surcharge (GDS), which is the difference between the prescribed and sale price of gas that goes to the provinces, the government projects Rs 25.618 billion next year.

This is down from the original budget of Rs 40 billion and the revised estimate of Rs 27.169 billion for the current year. The Auditor General of Pakistan (AGP) is auditing the GDS claims of Sui Northern Gas Pipeline Limited (SNGPL) and Sui Southern Gas Company (SSGC) to confirm the actual collections.

The government also plans to collect Rs 3.537 billion through the PL on Liquefied Petroleum Gas (LPG) in fiscal year 2024-25, slightly up from the revised target of Rs 3.516 billion for the current year. The original budget for PL on LPG for this year was significantly higher at Rs 12 billion.

Additionally, the budget for fiscal year 2024-25 includes Rs 25 billion to be retained as a discount on local crude oil prices, the same as the revised estimate for the current year but up from the original budget of Rs 20 billion.

The budget for next year proposes a decrease in the royalty on crude oil and an increase in the royalty on natural gas for provinces. The royalty on crude oil is set at Rs 58.654 billion for next year, up from the revised estimate of Rs 57.017 billion for the current year.

The royalty on natural gas is budgeted at Rs 103.751 billion for the next year, compared to the revised target of Rs 93.567 billion and the original budget of Rs 75 billion for 2023-24.

The budget also includes Rs 28 billion for a windfall levy on crude oil, up from the Rs 20 billion budgeted for the current year. The windfall levy on gas is budgeted at Rs 400 million, an increase from Rs 220 million this year. Miscellaneous receipts from oil and gas companies are expected to generate Rs 1,528.46 billion next year, compared to a revised target of Rs 1,197.8 billion and the original estimate of Rs 1,141 billion for the current year.

It is pertinent to mention that the substantial increases in the Petroleum Levy and other taxes and levies on oil and gas products indicate the government’s reliance on this sector for revenue generation. However, these measures may have significant implications for consumers and the broader economy, particularly in terms of fuel prices and the cost of living. Furthermore, the government’s strategy reflects its commitment to leveraging the energy sector for fiscal stability, but it also underscores the challenges of balancing revenue generation with economic affordability.