KARACHI, Dec 19: The World Bank has proposed increase in taxation on gas to bring it near the taxation level on petroleum. A World Bank review on Pakistan’s oil and gas sector released recently finds the taxation on petroleum products and on natural gas disproportionate.

“Each has similar market share yet the contributions are about Rs45 billion (from petroleum) and Rs15 billion (from gas),” the study points out.

It observes that gas has traditionally been taxed at a lower rate than petroleum products. Giving a detailed analytical review of revenue generation from import of petroleum products and gas supply, the World Bank points out that government revenues are vulnerable to change in international oil prices.

The World Bank has taken particular notice of heavy tax on motor gasoline resulting in what it calls “significant dieselization” of the economy and an unbalanced mix. “It is recommended that the government re-examines its taxation policies so as to narrow down the differential between motor gasoline and diesel prices,” it says.

“In recent years, the government has attempted to stabilize its revenues from the petroleum sector, and pass on changes in import cost to the consumers,” the World Bank review says.

The review takes notice of Pakistan’s increasing reliance on imported fuel oil — 85 per cent of total supply — to meet its liquid fuel requirements, and suggests a diversification in its sources of energy supply for which it suggests “accelerated development of domestic gas reserves should be given high priority”.

In recent years, Pakistan’s oil import bill exceeded the $3 billion figure. Fluctuations in international oil prices impacted more on Pakistan’s import bill than the variations in volumes.

The review says that annual petroleum imports represented 27 to 31 per cent of the country’s total import bill claiming as much as 30 to 36 per cent of the export earnings during the last seven years.

“Petroleum product prices are higher, sometimes considerably higher, than import parity levels, thanks to the taxation regime,” the World Bank review makes it clear while pointing out that petroleum and products’ imports generate revenue that accounts for a large share as much as 10 to 16 per cent of the total revenues.

Giving a year by year illustration, the study says that petroleum levies exceeded Rs50 billion in 1999 as the government raised surcharges when oil prices fell in 1998-99 and kept end- user prices fairly constant. In 2000-01, surcharges on petroleum products fell significantly as the government did not pass on full impact of increasing import cost to consumers.

During the fiscal year 2002, petroleum surcharge increased to Rs30 billion, largely due to a moderation in international prices.

The World Bank review says that revenues from gas development surcharges were less than Rs10 billion during the late nineties. But it surged to more than Rs25 billion in 2000 primarily due to a lag in adjustment of gas well-head prices to the decline in international oil prices.

In late 1999, the petroleum surcharge was bifurcated into a “fixed development surcharge” — a volumetric tax and a variable surcharge — which was designed to cushion against extreme fluctuations in international petroleum products. A 15-per cent GST was imposed in December 1999 on all petroleum products. The World Bank has endorsed this move and suggested its continuation.