Defusing the POL bomb  

Huzaima Bukhari & Dr. Ikramul Haq

Rising need of petroleum and its heavy taxation leaves the common man stripped of his earnings, and renders the lives of the poor more miserable than before, but despite all these, brings in super duper profits to the petroleum companies and revenues in trillions for the government—Rana Bhagwandas Commission Report on Petroleum Prices submitted to Supreme Court of Pakistan in 2009.

It is shameful that since independence we have failed to provide mass transit facility for at least 2 large cities—Karachi and Lahore—and bus service for every city and town despite burdening the citizens with all kinds of taxes. On the contrary, consumer loans were vastly disbursed under Musharraf-Shaukat era inducing massive purchase of personal vehicles resulting in enormous profits both for the petroleum companies and car manufacturers. Public transport has been the least priority of all regimes because of which the real sufferer is the common man who cannot afford personal transport. More and more cars on the roads cause pollution, traffic mayhem and are the main source of increase in our oil import bill—POL price hikes—necessary evil?, Business Recorder, July 8, 2010

The Government of Pakistan Tahreek-i-Insaf (PTI), contrary to its tall claims of giving relief to common people, on April 1, 2019 announced an unprecedented raise in all petroleum oil and lubricant [POL] products. The same was done in 2012 on Fools’ Day by the government of Pakistan People Party and in the wake of angry demonstrations and strong resentment from all quarters on April 3, 2012 insubstantially reduced the prices—a miserly Rs. 2.32 per litre in the price of petrol, Rs. 1.16 per litre in high speed diesel and Rs. 1.74 per litre in kerosene oil. After the reduction in price, the new price of petrol was notified at Rs. 103.36 per litre, high speed diesel at Rs. 107 per litre and kerosene oil at Rs. 99.95 per litre—with effect from April 4, 2012. Now, the economic wizard of PTI is doing the same, even worse, leaving the common people in bewilderment as to why the Government, instead of taxing the rich, is opting for easy way of indirect taxation and raising the prices of POL products following the modus operandi of fugitive ex-Finance Minister, Ishaq Dar.

According to experts, “the recent appreciation of dollar by almost Rs. 5 from over Rs.138 to Rs.143 has mainly caused the massive increase in POL prices which will trigger a new wave of inflation in the country”.  Since coming to power, the PTI Government is burdening the nation with unprecedented price-hikes, irrational taxes, higher interest rates and repeated shocks of a devaluating rupee. Strangely, Imran Khan’s economic team is insisting that these are “inevitable measures” to undo the “undesirable legacy” of previous governments. Strangely, Federal Finance Minster, Asad Umar, after acknowledging that Pakistan has been captive in the hands of the rich is taxing them and improving business climate through structural reforms. While telling the masses be ready for “more hardships”, the Government is planning to give another amnesty to the powerful segments.

Strangely, Prime Minister, Imran Khan, also takes credit claiming that he has been giving “relief” to the masses by not accepting the summaries of Oil and Gas Regulatory Authority (OGRA) recommending much higher increases in POL products. The ordinary and oppressed citizens have strongly resented the moves leading to price hikes demanding that if the PTI Government is unable to provide any relief, it should avoid increasing their sufferings. They remind Asad Umar of his severe criticism of increase in POL prices while in Opposition. Now as minister, he justifies the unprecedented increases in the prices of petroleum, electricity, gas and items of common consumption by the economically deprived segments of society.

Inflation touched the highest mark of last ten years (9.4% in March 2019) and will go further up due to increase in POL products. There will be substantial increases for business houses, fare hikes for local and inter-city commuters. Citizens will incur higher cost of all items that are transported from the port city to various parts of the country through diesel-run vehicles. There will be huge surges in prices of all food items, construction material, and agricultural inputs—in fact in all the imported items. It is obvious that with over 38% devaluation of local currency for the last one year, the power purchase parity of every Pakistan has eroded significantly. Dr Farrukh Saleem, while commenting on price increase of POL products said that “in August 2018 when PTI government came to power, the price in international market was $75 per barrel of crude oil which plummeted to $66 per barrel as of today showing a dip of 7-8 percent, but the price of petrol, and diesel have been increased by Rs. 6 each”. He said that this month international prices of crude oil went upward, but “the dollar appreciation has played substantial role for hike in POL products in Pakistan”.

According to Dr. Salman Shah, “the landed cost of petrol stands at Rs.58.94 litre but the government is selling it to the masses at Rs.96.89 out of which Rs.37 is being earned by government and dealers and distribution”. He said that “certainly increase in POL products will bring more economic miseries for masses”. He added that “the government is on tight rope and needs to do a lot, but the required actions are not insight”. The government, he said, should go for reforms in Federal Board of Revenue (FBR), power sector and take right actions for ease of doing business, “but eight months have elapsed and the government seems unmoved in all fronts”. So the government, according to him, is left with only one option to let the POL prices bring more revenue.

Petroleum prices have generally been on the rise since early 2009 [see Table A] barring few reductions. According to a Press report: “Over the last couple of weeks, the international benchmark Brent has been inching up and the government has been mopping up tax rates in run-up to finalisation of an International Monetary Fund assisted stabilisation programme”.

The common man on the street is not interested in the perplexities of an extremely fluctuating nature of petroleum price rigmarole that leaves him stripped of their meagre earnings, increases inflation to a non-receding position and makes his lives miserable. The fact remains that these surges bring super duper profits to the petroleum companies, On an average more than two trillion per annum in taxes (per Rana Bhagwandas Commission Report on Petroleum Prices dated 9 July 2009 submitted to Supreme Court of Pakistan) to the government. These are the harsh facts behind the recurrent shock waves that unleash a tsunami of fiscal terror on the nation by the successive governments, and PTI is no exception.

Table A: Petroleum Prices: April 2009—April 2019

Product	April 2019	April 2011	April 2010	April 2009
HOBC	98.89	98.12	87.56	94.36
Premium	117.43	83.56	73.14	79.67
Light Speed Diesel	80.54	78.98	62.20	70.97
Kerosene Oil	89.31	84.01	64.81	74.99

Had excess profit tax levied on the extraordinary profits of the oil companies [Table B], there would have been substantial decrease in fiscal deficit and successive governments would not have to offer any subsidy. Anyone analysing/observing this situation would definitely agree that no business in Pakistan has such an exorbitant rate of return in terms of accounting profit. One really wonders why successive governments have failed to introduce excess profit tax which was once enforceable in Pakistan but was later on abolished like all other progressive taxes. The charging section of repealed Excess Profit Tax of 1940 reads as under:

“Subject to the provisions of this Act, there shall, in respect of any business to which this Act applies, be charged, levied and paid on the amount by which the profits during any chargeable accounting period exceed the standard profits a tax (in this Act referred to as “excess profits tax”) which shall, in respect of any chargeable accounting period ending on or before the 31st day of March, 1941, be equal to fifty per cent of that excess and shall, in respect of any chargeable accounting period beginning after that date, be equal to such percentage of that excess as may be fixed by the annual Finance Act”.

Under Ishaq Dar’s fiscal terrorism, there was levy of extra 5% sales tax with effect from January 1, 2015 on petroleum products at import and supply stage through an executive order [SRO 1152(I)/2014 dated December 30, 2014]. He resorted to oppressive taxation on POL products to show higher growth in revenue collection and IMF never objected to it. There were endorsing actions detrimental for industry and business, especially the export sector as well as burdening the poor with more regressive taxation. In fact, it was an open violation of Article 189 of the Constitution of Pakistan debarring taxation through statutory regulatory orders (SROs).  

The PTI, while in Opposition, used to criticise taxation through SROs but now in power, is following the same. It has exposed tall claims of Imran Khan and his economic team that they want to lower taxes and promote growth. They also did not pass the benefit of lower oil prices in earlier months in the international market to the citizens. The PTI Government while resorting to taxation through SROs is ignoring the binding ruling of the Supreme Court in Engineer Iqbal Zafar Jhagra and Senator Rukhsana Zuberi v. Federation of Pakistan and Others (2013) 108 TAX 1 (S.C.Pak.) holding that:

 “Parliament/Legislature alone and not the Government/Executive is empowered to levy tax. As far as delegation of such powers to the Government/Executive is concerned, the same is for the purpose of implementation of such laws, which is to be done by framing rules, or issuing notifications or guidelines, depending upon case to case, as we have come across some of the cases noted hereinabove. But in no case, authority to levy tax for the Federation is to be delegated to the Government/Executive. Therefore, arguments so raised by learned counsel have no force and the same are repelled hereby”.

Table B: Escalated profits of oil companies—Bhagwandas Commission Report

Taxation through SROs is unconstitutional in view of Article 77 read with Article 162 of the Constitution of Pakistan. Through these SROs, the government bypasses the Parliament and commits open violation of the dictum of Supreme Court in the case of Engineer Iqbal Zafar Jhagra and Senator Rukhsana Zuberi v Federation of Pakistan and Others (2013) 108 TAX 1 (S.C. Pak) that says: 

“It is well settled proposition that levy of tax for the purpose of Federation is not permissible except by or under the authority of Act of Majlis-e-Shoora (Parliament). Reference in this behalf may be made to the case of Cyanamid Pakistan Ltd V. Collector of Customs (PLD 2005 SC 495), wherein it has also been held that such legislative powers cannot be delegated to the Executive Authorities. Also see Government of Pakistan v. Muhammad Ashraf (PLD 1993SC 176) and All Pakistan Textile Mills Associations v. Province of Sindh (2004 YLR 192).”

Taxes constitute substantial part of the price of POL products—consumed by the public at large for personal use and by businesses and industry to produce/sell goods and services. According to FBR’s own admission, “the sales tax is the top revenue generating source of federal tax receipts. It constitutes 44% of the total net revenue collection”.

In the report submitted to Supreme Court by Rana Bhagwandas Commission on July 10, 2009, it was revealed that from 2002 to 2009, the government made Rs. 10.23 trillion in taxes on POL products. Part of this huge money could have been used to improve public transport, improve environment and build infrastructure for growth. It is shameful that all our governments, military and civilian alike, have failed to provide mass transit facility even for Karachi and Lahore and bus service for every city and town despite burdening the citizens with heavy taxation on POL products. On the contrary, consumer loans have been encouraged, especially under Musharraf-Shaukat era, inducing massive purchase of vehicles resulting in enormous profits both for the petroleum companies and car manufacturers monopolised by the foreigners.

Public transport has been the least priority of all the regimes and the real sufferer is common man who cannot afford personal transport. More and more cars on the roads cause pollution, traffic mayhem and are the main source of increase in our oil import bill. Our annual imports of crude oil and oil products is now touching US$20 billion, casting heavy burden on limited and dwindling foreign exchange reserves. For reducing monstrous POL products import bill, we need decent public transport system and use of alternate, renewable energy sources that can solve the prevalent acute problem of balance of payment and expensive energy. The challenge before us is to build good public transport system and a clean energy economy. We have destroyed our rail system—depriving the poor and business houses of cheap and efficient transportation mode. When other countries have been making huge investments in high speed rail and advanced car batteries, considered as the transportation systems of the future, we are relying on outmoded means where reliance on POL products have increased even for expensive energy destroying our local industry and making export sector highly uncompetitive.

The PTI government, instead of restoring equity in the tax system, reducing indirect taxes and increasing taxes on the rich, like its predecessor, is using higher prices of POL products as a means to bridge fiscal deficit, extending extraordinary benefits to a few powerful oil companies, destroying industry, discouraging investment and making life of 95% of the population miserable. By plugging loopholes that prevent wealthy companies and individuals from paying a fair share of taxes, the PTI government can generate enough revenues through levy of excess profit tax and carbon tax on oil companiesto build public transport system that would save billions that we mercilessly spend on import of POL products. ____________________________________________________________________

The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)