Fuel prices hiked amid moves to keep them affordable

On 3 August, the Energy Division at a meeting asked the Bangladesh Petroleum Corporation (BPC) and Petrobangla to submit a proposal for restructuring VAT and income tax on different petroleum items in order to keep fuel prices at a tolerable level for consumers.

But just two days after the meeting, the authorities hiked prices of different fuel oils by up to 51% – the steepest increase in two decades, putting the lives and livelihoods of the people under tremendous strain.

Now, in the face of criticism from different corners of the community, even parliament members from the ruling party, the government is mulling a reduction in fuel prices.

Acknowledging that the recent fuel price hike has brought about tremendous public suffering, Prime Minister Sheikh Hasina on Sunday assured the people of slashing fuel prices once they drop in the international market.

"We can realise the sufferings of the people…We will adjust fuel oil prices whenever they come down in the world market. I have given that directive too," said Sheikh Hasina, also the president of the ruling Awami League, at a meeting with the party's organising secretaries from eight divisions at Gonobhaban.

At present, around 34% tax is levied on the imports of liquid fuel. Apart from this, an additional 15% VAT is imposed at the distribution level and another 2.5% VAT is levied at the business level.

Under this tax regime, the government earns around Tk10,000 crore and even more in revenue from the liquid fuel sector every year.

In 2019-20 and 2020-21, the BPC's payments to the national exchequer amounted to Tk14,123 crore and Tk15,046 crore, respectively, according to the corporation's budget report.

On top of this, an additional Tk5.2 is added to the price of each litre of fuel in the form of various charges in the existing pricing method.

Dr Ijaz Hossain, former professor at the Bangladesh University of Engineering and Technology (Buet), said the government could have avoided the latest fuel price hike by lowering the existing taxation, like in neighbouring India.

At a media briefing dubbed "Could Unprecedented Fuel Price Hike Be Avoided Now?" organised by the Centre for Policy Dialogue (CPD) on 10 August, he said, "For India, the tax structure is an effective tool to determine fuel prices. When fuel prices jump in the international market, they lower tax rates to keep fuel affordable to the people. But when prices fall in the global market, they raise tax rates to boost revenue.

"In this critical situation following the Russia-Ukraine war, the Bangladesh government could have followed the Indian practice instead of going for a historic fuel price hike."

Tax restructuring initiated before hike in fuel prices

Before oil prices were hiked on 5 August, the monthly coordination meeting held on 28 July with Senior Secretary of the Energy and Mineral Resources Division Mahbub Hossain in the chair discussed VAT-tax rationalisation.

Officials of the Energy Division told The Business Standard that at that meeting, the secretary directed authorities concerned to quickly complete the task of re-fixing duties, taxes, and VAT on fuel oils and LNG.

On 3 August, Additional Secretary (Operations) of the Energy Division SM Zakir Hossain held a meeting with representatives of the BPC and Petrobangla where the two organisations were instructed to prepare a proposal for re-fixing various taxes and VAT, including the existing import duty on fuel oils and gas, at rational rates and send it to the Energy Division.

But, the two institutions have not yet submitted any proposal to the ministry.

Energy Division officials said as soon as a proposal for VAT-tax rationalisation is received from the BPC and Petrobangla, it will be sent to the prime minister for approval.

If the prime minister approves the proposal, the Energy Division will then request the finance ministry to reduce the VAT-tax rates accordingly, they added.

Meanwhile, officials of the Finance Division said the government has a plan to reduce fuel oil prices to some extent within the next month by adjusting the VAT-tax rates as their prices are on a downward trend in the international market.

According to information obtained from the Finance Division, it will take nine months for the inflation that has been caused by the fuel oil price hike alone to become neutral.

Inflation may exceed 8% this month while the annual average inflation rate may exceed 7% due to the latest fuel price hike, projects the Finance Division.

Officials estimated that the annual average inflation would be limited to 6.5% if fuel prices were not hiked.

Double taxation makes LNG much costlier

Amid the dwindling indigenous gas production, the government started to import liquefied natural gas (LNG) in 2018 to meet the demand gap.

But this form of energy has become a financial burden for Petrobangla due to its price volatility in the international market.

The government spends around Tk5,570 crore for 80% of total gas, which comes from local fields, while it spends around Tk40,000 crore for importing LNG that caters to only 20% of the total demand.

Because of this price volatility, the government has to provide huge subsidies in the gas sector. For the current fiscal year, Tk6,000 crore would be needed as a subsidy even after a 32.8% hike in gas price.

But energy experts have said the government can cut around Tk18,000 crore from gas supply including liquefied natural gas(LNG) by lowering tax and VAT rates.

Professor Dr M Shamsul Alam, senior vice-president of the Consumers Association of Bangladesh, said, "If VAT is added to a service once, it should not be repeated to the service. But in the case of gas supply, the government levies VAT as high as 60%."

He said, "As per the existing tax structure, the National Board of Revenue imposes double taxes on LNG; 15% VAT and 2% AIT [advance income tax] are imposed at the import level. Later, another 15% VAT is imposed at the retail level when it is supplied to consumers after getting blended with local gas."

According to Petrobangla data, the cost of per unit indigenous gas is around Tk1.28 while the import price per unit of LNG is around Tk40. But After adding different types of taxes on the imported LNG, the cost per unit of the product climbs above Tk70.

By lowering taxes, the government can keep gas affordable to consumers, said M Shamsul Alam.

Apart from taxes, the government has made gas pricier by adding different types of charges – including finance charge, LC commission, re-gasification charge, 7% source tax on the LNG charge, and Petrobangla charge.

When asked, Nazmul Ahsan, chairman of Petrobangla told TBS that he was not aware of the initiatives to restructure tax rates.

"I cannot remember such initiatives. But, I will look into it," he said.