Possible harms of tax rebate on petroleum
W hile increasing the prices of different pe troleum fuels, the government also reduced
various tax rates on these fuels. Despite this sacrifice by the government, the latest hike in retail price of the petroleum fuel has been substantial (e.g. 25% in petrol). But the revised price could have been even higher had the government not reduced the taxes.
However, this seemingly egalitarian move of the government is very harmful to the economy. For example, this reduction in the taxes is virtually the same as subsidy. Instead of direct cash subsidy (which is paid by drawing a cheque on the state treasury), the government has just allowed the Nepal Oil Corporation to keep with itself some of the money that would go to the government coffers. This is as archaic as the Dravid-style pranayam (meditation) in which the meditator takes his right hand round his head from behind to touch his nose.
As a repercussion of such indirect subsidy, the government now has to explore other measures to compensate the loss of revenue. Thus it is feared that the new government will hike the rates of various other taxes - income tax, excise and VAT. Though various other countries too have reduced taxes, their move is criticized for this very reason.
Change in tax should be welcome if it fulfils, among others, three important conditions: it should be non-discriminatory, encourage (not penalise) efficiency and help achieve some broad social or economic objectives. None of these conditions are fulfilled in the latest revision in the tax rate on petroleum fuels.
For example, it is discriminatory because it favours the richer people of the urban areas against the poorest of the poor who live in the remote areas and use petroleum fuel very rarely. It also penalises efficiency. That is exactly what will happen when the government increases rates of other taxes to compensate the revenue loss from reduction in tax on petroleum. Income tax is paid by those who make profit and only those make profit who are efficient. Since it discriminates against the poorest of the poor who live in the remote areas, it goes against the broad social and economic objective of reducing poverty.
Had the government allowed the market to decide on its own the real price, it would have created conditions for most efficient use of the petroleum. By maintaining the petroleum price artificially low, the government has prevented any reduction in demand for it.
The ground realities of Nepal require the petroleum price to be maintained high as it will make feasible more and more projects of hydroelectricity generation.
et's not forget that the prevailing crude oil prices in the international market are expected to go even higher. Efforts to keep Nepal insulated from such price rise will be futile. Rather it would be wise to keep the retail price in the domestic market much higher than in India or elsewhere as that would encourage efficient use of petroleum as well as speed up harnessing hydropower potential. Not only the economists, but also the environmentalists should side with this argument.
