ISLAMABAD, March 22: The government is expected to reduce taxation on petrol (motor spirit) and increase on diesel fuel oil (DFO) under a new petroleum policy to be announced next month.

Official sources told Dawn that the government is planning to equalise prices of both the fuels over a period of around two years in a gradual process to balance out big taxation gap. At present, net taxation on motor spirit is 130 per cent against 72 per cent on diesel.

This taxation proportion is highest among 52 non-producer petroleum consuming countries. It has been under criticism for a long time mainly because petrol is surplus in the country and exported at highly subsidized rates abroad.

This will not only help the government implement cleaner fuel encouragement programme but also enhance its tax contribution from petroleum products in the federal budget.

Pakistan’s total diesel consumption is around nine million tons against motor spirit consumption of 1.2 to 1.5 million tons. This is a big cushion the government wanted to exploit following this year’s poor revenue collection performance.

The successive governments have been relying on petroleum taxation to bridge income and expenditure gap and at one stage it earned Rs72 billion.

This year, the tax on petroleum products were estimated at around Rs23 billion but decline in international oil prices and coupled with over 25 per cent decrease in petroleum consumption due to sluggish industrial activity affected the tax target.

The proposal to increase taxation on diesel and reduction in petrol has primarily come from the World Bank as part of $350 million structural adjustment credit, and in-house exercise is currently on to see how much increase in diesel price could be sustainable and what revenue could be earned under various options, a senior government official said.

Historically, higher taxation on petrol compared to diesel has almost forced conversion of petrol engines to diesel engines and then to compressed natural gas which according to one estimate was causing around $800 million to $1 billion per annum loss to the government due to additional spare part imports.

Under the world bank guidelines, “the relative taxation policies of CNG, gasoline and HSD would be reconsidered. Gaps in the prices of various products would be reduced by increasing taxation of CNG and HSD and reducing that of gasoline. The refineries and OMCs would be encouraged to compete on gasoline sales, with the government determining price caps and floors within which ex-refinery prices would be fixed. Also clear cut directions would be provided for production of unleaded gasoline and for future specifications pertaining to Benzene and aromatics.”

Similarly the fixation of prices by the industry body (oil companies advisory committee-OCAC) would be discontinued very shortly. All players would be encouraged to compete through the institution of a price cap mechanism both at the level of import parity, applicable also to refineries, and at the retail level.

HSD with not more than 0.5 per cent sulphur would be implemented before June 2002 at all costs.