The government of Pakistan will achieve annual savings of Rs. 20 billion after a change of status of zero rating of petroleum products into sales tax exemption in the budget 2024-2025. In finance, in 2024, motor spirit petrol, high-speed diesel, kerosene, and light diesel oil, LDO, have been altered from taxable supplies to be excluded from the levy of sales tax. The alteration of status will generate favorable revenue outcomes of Rs. 18-20 billion.
The industry is now not capable of taking refunds because of the alteration of status from a sales tax zero rating to the sales tax exemption of petroleum products. Before the budget 2024-2025, the industry was taking refunds due to the sales tax zero rating status of petroleum products. The refineries, and oil marketing organizations are appealing to the government to alter the claim amendment made through the Finance Act 2024. Resultantly, up to 80-85% of the input tax will be forbidden, leading to a substantial increase in operating costs as well as project costs.
According to the refineries, the Federal Board of Revenue is examining and evaluating a proposal on the estimated revenue impact of the proposal. The proposal is to enforce a lower rate of 3-5% sales tax on petroleum products during the budget preparation exercise for 2024-2025. The proposal to enforce a standard rate of 18% sales tax on petroleum products was rejected by the Prime Minister as it is considered to be price-increasing, having a direct instantaneous effect on the general masses.
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The proposal for increasing the petroleum products cost rejected by the Prime Minister. Because of the following inflationary concerns, he showed strong disapproval.
- Firstly, increased cost of living and higher prices of petroleum contribute to increasing the cost of transportation and production costs for various services and goods, resulting in overall high prices of cost of living for people.
- Secondly, the rise in petroleum costs highly contributes to the inflationary pressures in the economy, as the cost of goods and services across various sectors hiked up.
- Thirdly, public discontentment, the immediate hike in the prices of petrol likely results in public dissatisfaction, especially among lower and middle-income households, who are mostly affected by the rise in the cost of goods and services.
- Fourthly, high inflation rate results in reduced consumer spending power, which in turn slows down economic growth in the country.
- Fifthly, the increased cost of petroleum contributes to cutting back on expenditures by the consumers, which will negatively affect the potential businesses, which in turn slows down the economy. To handle the increased cost of living, workers might demand higher wages, which would lead to wage prices spiraling further, increasing inflation rates.
- Sixthly, if a sales tax of 18% on petroleum is imposed, then it will lead to dilemmas in balancing revenue generation, and it is likely to be impossible for the government to control inflation, making it challenging for them to combat the inflation rate.