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Pakistani Finance Minister Muhammad Aurangzeb has decided to increase the levy on petroleum products. This has aroused concern among consumers, economists, and the automotive industry. The changed policy will impact petrol prices and consumers’ everyday lives.

Furthermore, the increase of levy from Rs 60 to Rs 80 will significantly increase the federal revenue. With it, the petrol prices increase is not negligible. 

The government raised its budget to Rs 321 billion in revenue to reach its total revenue target of Rs 1.821 trillion from the previous estimate of Rs 960 billion for the current fiscal year.

  It is expected that the petrol price in Pakistan will further increase after this announcement. However, this article will delve into some major topics. It includes how petrol prices work, the IMF’s perspective on it, the impact of the increased levy, and provision in the finance bill 2024. So, let’s explore it!

Importance Of Petrol Levy

The petroleum levy is one of the significant sources of government income in Pakistan. By increasing the levy, the government can increase its revenue. It is essential for funding various public services and infrastructure projects.

Fuel usage has dropped by 8%, so what does this increase in the levy mean? Will it be the best decision the government has made? It can impact consumers’ overall fuel consumption and seems very disappointing for the inflation-stricken public of Pakistan. 

Previously, the levy was Rs 40 per liter. Then, there was a sudden hike from Rs 60 to Rs 80. The current levy has added Rs 20, ultimately making it Rs 80.

Major Factors & Working Of Petrol Prices

Some significant factors petrol determine the price of petrol in Pakistan.

Crude Oil Prices 

International crude oil costs are one of the major factors in determining petrol prices. Pakistan imports crude oil, which domestic refineries refine into various fuel products, including petroleum.

Ex-Refinery Price

The price of petroleum after its processing, without including any additional costs, is its ex-refinery price. It is actually the base price of oil.

Distribution Cost

The distribution cost actually uniformly sets the same price of petroleum across all areas. It is a kind of margin added to the ex-refinery price of petroleum. The distributors and petrol pumps add their own price premiums to it.

Government Levy

The government imposes a levy on petrol, which the consumer charges directly. The levy is a component of the ultimate petrol price, which is actually for the consumers. The consumers are assuming that the levies will be the cause of petrol price increase in country.

IMF’s Perspective On Pricing

The International Monetary Fund (IMF) is actually advocating the introduction of standard GST on petroleum products. It has long been argued that the current system of petroleum levies should transformed into VAT system. In other words, it  actually supports the Value Added Tax (VAT) system. The goverment urge to implement levy is to generate the maximum profit and revenue for the country’s economy. Moreover, it can actually add value to the taxes added at each stage of petroleum production. It can have several benefits.

Non-Arbitrary Pricing

Unlike the current system, in which the arbitrary system applies levy, this VAT system would be more systematic and accurate. It should be apply across all the sectors of the economy without any exemptions or prefrential treatments.

Better Documentation

The government can accurately record the data to improve the overall economy and help in policy making.

Revenue Sharing

The NFC (National Finance Commission award) distributes revenue between the federal government and its provinces. In addition, the sales tax is given to the NFC award, and then the federal government shares the revenue with its provinces.

The IMF recommended an 18% GST on petrol products. This has posed a challenge for the government, which relies heavily on petrol for revenue. However, the VAT will require the government to share the revenue with the provinces, which can complicate fiscal planning.

Provision In The Finance Bill 2024: What’s Changing?

There have been specific provisions in the finance bill. These are as follows.

Levy On Other Fuels

Light diesel oil, high octane blending components, and E-10 gasoline have an imposed levy of Rs 25 per liter to Rs 75 per liter.

Gas Infrastructure Development Cess

The government wants to collect Rs 2.5 billion from GIDC in fiscal year 2024-2025. The GIDC’s original budget for the current fiscal year was Rs 40 billion.

Natural Gas Development Surcharge (GDS)

The current GDS for next year is Rs 25.618 billion, down from the original budget of Rs 40 billion and the revised estimate of Rs 27.169 billion.

Petroleum Levy On LPG

The government plans to collect Rs 3.537 billion from the petroleum levy on liquified natural gas. This is slightly more than the revised budget of Rs 3.516 billion for the current year. The original budget of PL on LPG was significantly higher, at Rs 12 billion

Discount on Local Crude Oil Prices

The budget for next year includes Rs 25 billion to be retained as a discount on local crude oil prices. It is the same as the revised budget for the current year, but the original budget was higher, up to Rs 20 billion.

Taxes On Oil And Gases

The budget has proposed a decrease in the oil levy and an increase in the tax on natural gas. The tax on crude oil is set at Rs 58.654 million for the next year, up from the revised budget of Rs 51.017 billion for the current year. Moreover, the tax on natural gas is set at Rs 103.751 billion, up from the revised budget of Rs 93.567 billion and the original budget of 75 billion for the year 2023-2024.

Windfall Levy On Oil And Gas

The budget has proposed a windfall levy on crude oil of Rs 28 billion, which is more than the revised budget of 20 billion for the current year.  Additionally, the levy on gas is set to Rs 400 billion, which is slightly higher than the revised budget of Rs 220 million for the current year

 Moreover, the oil and gas companies will generate revenue of Rs 1528.46 billion next year compared to the revised budget of 1197.8 billion and the original estimate of Rs 1141 billion for the current fiscal year.

Final Verdict

It is necessary to mention that the petrol levy on petroleum, oil, and gas has given rise to the government’s dependability upon these sectors for generating revenue. However, these may impact consumers, their fuel expenses, cost of living, and sources of transportation. The government leverages the energy sector to stabilize the country. 

In addition, the  petrol price increase will pose the challenge of balancing revenue generation with consumer economic affordability.