IMF taken into confidence over cut in petrol and gas prices

[Naveed Yaseen]

ZAFAR BHUTTA
ISLAMABAD (May 20 2009): The Finance Ministry has taken the International Monetary Fund (IMF) into confidence over the proposed reduction in oil prices that would reduce collection of petroleum development levy (PDL). According to sources, the government is also considering to replace PDL on petroleum products, with carbon tax, in the upcoming 2009-10 budget, sources told Business Recorder.

The government may levy carbon tax on petroleum products in the federal budget if the Supreme Court would issue any directive against imposition of PDL on petroleum products, sources said. According to sources, the government has committed to IMF to meet its revenue shortfall through PDL collection on petroleum products, as any reduction in oil prices would result in decline in PDL collection.

Sources said that the government is expected to notify the reduction in oil prices on Wednesday, following the Supreme Court directive. Petroleum Ministry had proposed different options for reduction in oil prices, which included 5-10-15 and 20 percent. Sources were of the view that the government is likely to reduce oil prices by 5-10 percent.

The Economic Co-ordination Committee (ECC) of the Cabinet was concerned about the impact of reduction in oil prices on PDL collection, which would compromise the government's ability to meet the revised budget deficit target set after consultations with the IMF team in Dubai last week. It was, therefore, considered imperative to take the IMF into confidence over the issue. The government submitted 'supplementary' Letter of Intent (LOI) to the IMF on March 16, 2009, in which it committed to possibility of levying a 'carbon tax' to enhance revenue collection.

It is important to mention that globally 'carbon tax' is levied under the name of 'Environmental Tax' in different countries and its objective is to control emissions of dangerous gases. Thus, 'Environmental Tax' is levied specifically to check pollution. The concerned ministries and departments are currently examining the legality of replacing PDL with new 'carbon tax' on petroleum products to make it part of the upcoming budget. The 'carbon tax' may be imposed on fuel consumption, considered one main culprit of pollution in Pakistan.

The PDL was imposed to develop the oil sector in Pakistan but it is now being used to meet revenue shortfall. Government has collected Rs 73 billion PDL on petroleum products during nine months (July-March) of the current financial year in an effort to meet the revenue target committed to IMF.

Total PDL on petroleum products has been calculated at Rs 106.6 billion during ten months (July-April). The government is still to recover the remaining amount of PDL from the oil refineries.

The government is currently collecting Rs 14.91 per litre PDL on petrol, Rs 19.56 per litre on HOBC, Rs 8.79 per litre on kerosene oil, 6.89 per litre on light diesel oil, Rs 3 per litre on JP-1, JP-4 and JP-8.This is in addition to General Sales Tax (GST) of Rs 4.99 per litre on JP-1, Rs 2.26 per litre on JP-8, Rs 7.95 per litre on petrol, Rs 9.94 per litre on HOBC, Rs 7.15 per litre on kerosene oil and Rs 6.62 per litre on light diesel oil (LDO).

Judicial commission had submitted an interim report on oil prices to Supreme Court on May 12. The commission observed that prior to allowing Oil Companies Advisory Committee (OCAC) to fix prices of petroleum products, effective from July 1, 2001, the function was performed by a Committee consisting of Secretary Petroleum, Secretary Finance and Managing Director (MD) Pakistan State Oil assisted by Director General (Oil) acting as its secretary. In December 1999, General Pervez Musharraf as chief executive of country announced the deregulation policy and introduced a Rationalised Import Parity Prices formula for Petroleum products.

Accordingly, a summary initiated on June 12, 2001 by Petroleum Ministry, advised the Chief Executive to assign this function to a private association of oil companies and oil refineries. Consequently, a Petroleum product (Petroleum Development) Levy Ordinance 1961 was amended. The commission observed that this amendment was patently illegal and unconstitutional as article 90 of the Constitution of Pakistan stipulates that the executive authority of the Federation shall vest in the President and shall be exercised by him either directly or through officer's sub-ordinate to him.

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