ISLAMABAD: Amid rising oil prices, the government is expected to abolish customs duty on crude oil and high-speed diesel (HSD) imports to contain inflationary pressures.

Informed government sources told Dawn that the finance and petroleum ministries, the Oil and Gas Regulatory Authority (Ogra), the Federal Board of Revenue (FBR), oil refineries and oil marketing companies were examining the proposal. Customs duty is the only tax left on the petroleum sector after the government gradually abolished sales tax and petroleum levy.

The matter would be taken up by the upcoming meeting of the cabinet’s Economic Coordination Committee (ECC).

At present, customs duty applies to the import of crude oil and all petroleum products, including diesel and petrol, at the rate of 10 per cent. Interestingly, customs duty on the import of petroleum products from China is zero under the free trade agreement with the country, and therefore oil companies tend to arrange their imports from there.

Under the proposal being discussed, customs duty on crude and HSD would be removed because of their inflationary impact, whereas petrol and other products would remain subject to import duties. Rationalising duties on imports from China is also likely to be a part of the proposal.

The sources said the government was currently paying price differential claims (PDC) on petroleum products, as the prime minister announced a cut of Rs10 per litre in petroleum products’ prices on Feb 28, along with a four-month freeze. Meanwhile, global oil prices have gone up by over 15pc since then.

Petrol and diesel prices should have increased by Rs23 and Rs34 per litre, respectively, on March 16 based on global trend but are being absorbed with a supplementary budget of Rs32bn payment to oil companies for March alone. The finance ministry has already released Rs20bn to Pakistan State Oil (PSO) for onward payments to other companies after a verification process involving Ogra, audits and the finance ministry.

Therefore, instead of paying out of budget, the authorities have proposed abolishing customs duty on crude oil and high-speed diesel to completely and partially get rid of the PDC. This would also enable finance and tax authorities to revive the petroleum levy to mop up revenues as international prices come down because the levy is a 100pc federal tax while customs duty, despite being a federal tax, has to be shared with the provinces.

When the prime minister announced a price freeze on Feb 28, the government estimated global crude oil prices to remain in the range of $85 to $100 per barrel over the final four months, i.e. March to June.

However, prices have since gone beyond $120 per barrel and the rupee has depreciated to Rs182 per dollar versus Rs178 estimated at the time.

The government had set a budget target of Rs610bn for petroleum levy during the current year but is unlikely to go beyond Rs250bn because its application on petroleum products was brought down to zero.

The government was doing well in the first half of the year in terms of revenue collections. During the first seven months (July to January) of the ongoing fiscal year, the FBR collected about Rs287bn in indirect taxes from petroleum products, an increase of 72pc over the same period last year.

Although customs duty rates remained unchanged after the government increased it from 5pc to 10pc in the budget, sales tax rates were adjusted downward on fortnightly price reviews. As a result, the government collected Rs287bn as customs duty and sales tax on petrol, crude oil, high-speed diesel and furnace oil against Rs168bn a year ago.

During the July-January period, the country spent Rs1.4 trillion on the import of the four petroleum products, which was or 120pc higher than the same period a year ago.

Interestingly, while sales tax on petroleum products was gradually reduced, the tax on crude oil, imposed in the 2021-22 budget, remained unchanged at 17pc — a major reason for higher revenue collection on oil.

The seven-month customs duty collection on the import of these four petroleum products stood at Rs84.4bn, which was 132pc higher than the previous year.

Likewise, the sales tax collection at the import stage on these items also increased to Rs163bn against last year’s Rs70bn. In addition, Rs40bn sales tax was also collected at the local stage, which was 35pc lower than the previous year because of a change in taxation from domestic to import stage in the budget.

The Rs287bn revenue collection amounted to almost 9pc of total FBR taxes during the seven months against 6.7pc a year ago.

In July-January, the FBR collected Rs70bn in taxes on the import of petrol on account of customs duty and sales tax, almost Rs17bn higher than the same period last year. The customs duty collection on petrol imports was Rs36bn in seven months, almost 300pc higher than last year.

Crude oil yielded over Rs92bn taxes at the import stage, up to five times higher than last year, as the government imposed a 17pc sales tax on crude oil imports in the budget. OF that amount, the sales tax collection accounted for Rs80bn. The FBR collected over Rs59bn on the import of high-speed diesel, almost double compared to the year-ago period.

Published in Dawn, March 28th, 2022