Review Petroleum Taxes

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Review Petroleum Taxes

Rising losses mainly due to the upsurge in global oil prices following the Russian invasion of Ukraine has set off the alarm bells for Nepal. The state-owned Nepal Oil Corporation (NOC), which enjoys a monopoly on the supply of petroleum products in the Nepali market, finally said that it was not in a position to pay its sole supplier - the Indian Oil Corporation (IOC). So, the government provided some grants and some loans to NOC which helped to tide over the immediate problem. But that is not a long-term solution.  However, growing consumption is not the problem. High taxes imposed by the government on petroleum products is the main reason for the ongoing trouble.

The corporation has been increasing the prices of petrol, diesel, kerosene and aviation fuel in quick successive tranches following the Russian aggression in Ukraine. Despite raising prices regularly, NOC maintains that it is still incurring a loss of Rs 30 per litre on petrol and Rs 38 per litre on diesel. Except for aviation turbine fuel (ATF), NOC is logging loss on every petroleum product that it is distributing. After the price of petrol neared Rs 200 per litre, the government decided to reduce taxes in response to the voices raised that people should be provided relief even by cutting taxes. The government instructed the NOC to reduce the price by Rs 20 per litre. NOC reduced the prices accordingly, but the government has not reduced the taxes yet, making things difficult for the NOC.

The government runs from taxpayers’ money. But under normal circumstances, there doesn’t seem to be any alternative to bringing down taxes given the growing global petroleum crisis. Some of the taxes on petroleum were imposed at a time when the petroleum prices had gone down very much and that was a suitable moment to collect some more money for the government from this product. As that situation of cheap petroleum does not exist now, such taxes must be removed.

It is natural for people to expect some relief from the government at a time of crisis. Rising petroleum prices have impacted the daily life of common people. Therefore, it is necessary to provide some respite to the people by reducing taxes even by cutting government expenditure. Failure to do so could lead to a further crisis. At present, the government is levying an average of Rs 65 per litre on petrol and Rs 50 per litre on diesel as taxes.  The government is collecting taxes on petroleum products under different headings like excise duty, value added tax, infrastructure tax, road tax, environment tax, price stabilisation fund, etc. People are paying taxes but they do not know where the money paid by them as taxes is being spent.

As most of the economic indicators are negative, the government needs to make some difficult decisions. Nepal’s trade deficit is widening with every passing year because of the growing petroleum consumption. But the government is not doing what is needed to reduce fuel consumption. Though it hiked the taxes on electric vehicles with the argument that such vehicles are used by the wealthy, it did not do anything substantive to encourage electric buses and transport trucks. It didn’t bring any interventions to reduce fuel consumption in the budget for the coming fiscal year which begins in mid-July. Consumption can be reduced to a large extent if the distribution of free coupons given by the corporation and misuse of fuel by the government employees is controlled. But the government is not doing anything about it.

The Ministry of Finance doesn’t seem to be in a mood to reduce taxes. It would rather provide some subsidy to the Nepal Oil Corporation (NOC) to import and distribute petroleum products in the domestic market. It is important for the government to understand that tightening fuel consumption will have an impact on other sectors. Better to find ways to reduce taxes as a short term measure.   

Madan Lamsal
[email protected]

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