Govt increases PDL to ease IMF concerns. Will it be enough? 

ISLAMABAD: Senior sources within the ministry of finance shared documents with Profit that state that the ministry increased the Petroleum Development Levy (PDL) by Rs 5/liter on High Speed Diesel (HSD), Rs 6.09 Kerosene (SKO) and Rs 0.90 Light Diesel Oil on the 16th of December in an attempt to meet the IMF condition of collecting Rs 850 billion through this levy during this fiscal year.

With this increase, the government is now collecting Rs 30/liter on HSD, Rs 13.10 Kerosene (SKO) and Rs 16.29 on Light Diesel Oil.

The International Monetary Fund (IMF) during a meeting last month had expressed reservations with the Federal government regarding an estimated shortfall in the revenue targets of the government.  

One of the points raised in this meeting was that the IMF had estimated a shortfall of Rs 300 billion under the PDL in the current fiscal year. Contrary to the estimates by the IMF the Federal Board of Revenue estimates the shortfall to be around Rs 50 billion.

The government already has a Rs 50/litre development levy in place on the sale of petrol partially meeting the conditions of the IMF, however the government will have to increase the levy on other petroleum products in phases till April next year to the same level in order to completely meet the requirements of the fund.

This decision has been taken to address the predicted budget shortfall. Although sales tax has not yet been imposed on petroleum products, the development levy has been jacked up to somewhat make up for it. 

What is PDL, and why not sales tax? 

Various governments have used this charge to enhance collections in the face of their failures to broaden the tax net and increase collection in order to cover their ever-increasing expenditure. As you might have figured out, our country for the most part runs a fiscal deficit, that is our government spends more than it is able to earn. 

The petroleum development levy is essentially a tax levied on the sale of petroleum products, the theoretical purpose of which is to develop infrastructure for petroleum products and help refineries revamp their machinery to increase their efficiency and the quality of their fuel. 

All of us pay a hefty development levy on each litre of the petroleum products we utilise, this allows the government to generate more revenues. The question, however, arises; why isn’t the government charging a higher sales tax instead of the development levy?

While talking to Profit, the same sources said that the government has not placed a sales tax on petroleum goods since the federal government is required to pay a share of collected sales tax to the provinces. In the case of the levy, however, the federal government keeps the entire money.

An interesting thing to note however is that despite PDL having increased by the government, the price of all petroleum products witnessed a net decline. This can be attributed to the fact that globally oil prices have stabilised to levels before the Ukraine-Russia conflict.  

Without the increase in the petroleum levy the prices were set to decline by Rs 12.5/litre Diesel, Rs 16.09 Kerosene and Rs 10.9 on Light Diesel Oil. Whereas after the increase in the levy the prices only declined by Rs 7.5/liter on HSD and Rs 10 on Kerosene and Light Diesel Oil. 

Even though this step is in line with objectives set out by the IMF, an interesting point raised by some is to increase the petroleum levy on petrol rather than diesel. This is due to the fact diesel is the fuel of choice used by transporters, therefore an increase in its price would have a greater impact on the price of other goods in theory. 

The concern of the IMF

While talking to Profit on condition of anonymity, some sources said that the Pakistan and IMF teams are trying their best to resolve a number of pending matters including the expected shortfall in tax revenue to complete the 9th review of the Extended Fund Facility (EFF) programme.

The state minister for finance and revenue, Ayesha Ghous Pasha had also briefed the National Assembly’s finance committee on the 16th of December that IMF has reservations over a number of matters including tax collection. This briefing was held on the same day when the announcement regarding the revision of prices of petroleum products came out. 

Pasha also shared with the committee that the IMF is asking to not only withdraw untargeted energy subsidies but to end the circular debt of gas and electricity which has surged to a staggering Rs 4 trillion.

The IMF is pushing Pakistan for measures to generate additional revenue; according to some estimates they are expecting a Rs 400 billion shortfall in FBR revenue during this year. 

The IMF’s primary concern regarding the budget shortfall is that the country will not be able to meet its financial commitments and potentially default in the near future, unless it has a budget surplus. This can only be achieved by reducing spending and increasing revenues.

Why the deficit?

The government had budgeted a 26% growth in tax revenue, whereas the IMF forecasted an increase of 21.5% from the previous year, but in the ongoing year only a 16% growth was recorded by the FBR in the first five months. The wide gap between the actual and budgeted revenue figures is an issue that needs to be addressed urgently. 

According to sources within the ministry of finance, the IMF has estimated a Rs 300 billion shortfall on account of petroleum levy due to a 15% decline in consumption of petroleum products in the country. Additionally, contraction in imports is also contributing to a shortfall in the FBR revenue collection.

Another reason for the shortfall in revenue is the fact that the government has not been collecting sales tax on petroleum products since February this year. One of the government’s biggest sources of revenue remains untapped. 

The government had also deferred the decision to collect a fixed tax from retailers categorised as “small”. This was prompted by mounting pressure from the small retailers community on the collection of Rs 3000 fixed tax per shop. Similarly, the property owners also protested against the Capital Gain Tax forcing the government to reduce it as well.

Are we doing enough?  

In order to make up for the shortfall in revenue, Profit has been informed by senior sources within the finance ministry that the government will extend the Tax Laws (Second Amendment) Ordinance, 2022 for another four months which was introduced on August 23, 2022. This would essentially allow the government to continue certain tax regimes and, therefore, collect an additional Rs 38 billion taxes.

The incumbent government during last week had four important meetings to curtail mounting circular debt to soothe the IMF. The same sources stated that the government may use profits of state owned companies to address the circular debt. However this comes with its own legal and political challenges.  

As the government hopes to bring the budget deficit under control, a fundamentally simple solution is applicable. Miftah Ismael, the former minister of finance, had received criticism from all quarters when he moved to increase fuel prices and imposed new taxes. This move helped save Pakistan from going bankrupt, it might have to be repeated.

The question he posed was “should our government be selling petrol at a loss?”. Since we’re running a current account deficit, we need to reduce our spending and increase our income. Fuel prices have skyrocketed globally however domestic prices have been kept stable through counter productive and regressive subsidies. 

Turning around the current account deficit can be done by increasing taxes fuel, this has been done by the government through the Petroleum Development Levy. This not only reduces the spending on importing fuel, but also generates revenue for the government. 

But one important aspect that should be considered is that these taxes disproportionately affect the lower income segments of the population which are fundamentally bad for the economy. To bypass this predicament, price discrimination was considered. 

The IMF has also highlighted how increasing the levy has reduced the consumption which has somewhat contributed to the deficit as well. However, reducing spending through increased taxation trumps selling petrol at a loss. 

This means the same product would be sold at two different prices to different consumer groups. In Pakistan’s case it was considered beneficial if petrol prices for motorcyclists were kept low whereas for motor vehicle owners it would be kept high.

The increase in the petroleum development levy will contribute towards additional revenue. The government needs to take more proactive measures in order to meet its budgeted revenue targets. Time will tell whether or not the government is able to meet its expected revenue targets and ease the concerns of the IMF.