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Oil, ghee on a slippery slope after budget

Updated July 01, 2019

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Tax and devaluation cumulatively add Rs13-17 per litre to the price of oil and Rs11-15 per kg to the price of ghee. — Dawn/File
Tax and devaluation cumulatively add Rs13-17 per litre to the price of oil and Rs11-15 per kg to the price of ghee. — Dawn/File

THE tax imposed on edible oil and ghee in the 2019-20 budget will not hit the higher income groups, but will make up a sizeable chunk of the increase in the food bill of the lower income groups.

The hefty price increase will push lower-income packaged ghee consumers towards the unbranded and potentially hazardous unpackaged banaspati.

The budget proposes to do away with Re1 per kg tax in lieu of value-addition tax. “Value-added tax is basically output minus input,” explains Shakil Ashfaq, chairman of the All Pakistan Seed Extractors Association and CEO of Shujabad Agro. By his estimates, the tax will push up the price by Rs7-10 per litre for oil and Rs6-9 for ghee.

Tax and devaluation cumulatively add Rs13-17 per litre to the price of oil and Rs11-15 per kg to the price of ghee

Add the impact of the repeated bouts of devaluation, the price increases by Rs13-17 per litre for oil and Rs11-15 for ghee. Cumulatively, the impact is of about Rs100-150 per month for a household consuming a premium brand, such as Dalda or Eva, and over Rs50 for households that prefer packaged ghee.

Revenue impact

In his post-budget speech in the National Assembly, Asad Umar pleaded that the tax on edible oil be removed because it would not yield a meaningful increase in tax revenue but burden the lower classes.

Pakistan Bureau of Statistics (PBS) data indicates that about 1.3 million tonnes of ghee and 391,000 tonnes of oil were produced in 2018-19. This translates roughly to Rs12 billion in revenue.

At 0.3 per cent of total budgeted indirect taxes for 2019-20, the additional revenue is as paltry as indicated by Mr Umar. Looked through the lenses of the people, it’s a gigantic amount given the entire nation’s efforts for the dam fund yielded the smaller amount of Rs10.6bn.

Consumer effect

“Business has been slowing down since buying power is getting squeezed,” says the manager of a high-end fine-dining establishment. About 150 litres of oil is used at the restaurant every month, increasing costs by around Rs2,500 — roughly what a single patron spends on a meal.

Though restaurant business may have been impacted by reduced purchasing power, higher oil prices are unlikely to reduce their bottom line.

Similarly, the EatFit spokesperson dismissed the impact of higher prices as the health food sector uses minimal oil to begin with. Given the low proportion of cost of oil per batch of brownies, a home-based desert business remained unperturbed by the tax or devaluation effect on oil.

However, while the relatively affluent sections of society might do little but tsk tsk at higher oil prices, families for whom the food bill comprises of the biggest chunk of household income would be hit a lot worse.

While the affluent sections of society might do little but tsk tsk at higher oil prices, families for whom the food bill gobbles up the biggest chunk of household income would be hit a lot worse

The Pakistan Standards Quality and Control Authority has provided the sector with a formula regarding the blending of soft oils with palm oil to make ghee, which is essential to maintain its quality. Industry estimates indicate that about 50-70pc of the edible oil and ghee market is dominated by the informal sector. The unpackaged ghee sector neither pays taxes nor is regulated by health standards, which is why it is heavily clamped down upon by the Punjab Food Authority (PFA).

As the price difference between unpackaged ghee and packaged ghee increases, those for whom food accounts for a large portion of household income will perforce shift from the formal to the informal sector.

In Punjab, where PFA’s efforts have curtailed easy availability and options for non-branded, unpackaged oil and ghee, people will be forced to eke out a higher proportion of household income for oil and ghee.

In the other provinces, a wide range of low-cost options from the informal sector are available. But those pose health risks compared to the regulated branded alternatives that come under the tax net.

Supplier’s side

The edible oil sector is characterised by high volumes with low margins. Mr Ashfaq asserts that the devaluation effect has been mostly absorbed by manufacturers. This point is contended by the manager of the fine-dining establishment who said that they have been experiencing price increases for the last three months.

“A majority of prices have not been pushed up by the manufacturers and the costs are piling up,” said Mr Ashfaq. With the latest bout of devaluation, the higher costs will have to be passed on and consumers have to brace for an increase by Rs20-25 per litre for oil and ghee on average,” he said.

In a recent Sustainable Development Policy Institute panel discussion, economist Kaiser Bengali said the 2019-20 budget has a one-point agenda – how to squeeze tax out of people.

Cooking oil and ghee are household essentials. Taxing goods with inelastic demand that hurt the lower income groups lend a voice of credence to Mr Bengali’s claims that the Federal Board of Revenue is an extortionist agency.

Published in Dawn, The Business and Finance Weekly, July 1st, 2019