Desperate times call for relieving certain taxes on petroleum products

As we speak today, the fuel prices stand at NRs 155 per liter for petrol and NRs 138 per liter for diesel. Not to mention, the price has now become a back burner for the general Nepalis who do not see their income grow as much as prices do. Also denoted as supply induced inflation in economic terms, a rise in fuel prices for multiple reasons, domestic and international, not only increases the cost of travel per se but also increases the price of all goods and services necessary to maintain a livelihood and make ends meet. The rise in the price of petrol and diesel also increases the price of basic items such as food products and other durable & non-durable household commodities as the hauling cost of these items rises proportionally with the price of petrol and diesel.

There are multiple reasons behind the subsequent rise in the fuel prices lately in Nepal that witnessed above ten percent growth in the prices since the beginning of 2022. The primary reason for the growth can be attributed to the increase in the price of petroleum products across the global market following the current development of geopolitical tensions. Speaking of which, the Brent crude Index currently prices oil near above $100 per gallon which is approximately 40 percent higher than the price of oil at the start of the year. But the sudden hike in the price of petroleum products in the international oil market is not the only component that has been keeping the price of petrol and diesel beyond the level of affordability of the general population in Nepal. The hefty amount of tax and duties that the Nepal Oil Corporation (NOC) has to pay to the Nepal government during imports and sales of petrol and diesel has always played a significant role in keeping the price of these commodities artificially high.

At present, different taxes and duties amounting to NRs 60.11 per liter of petrol and NRs 42.78 per liter of diesel imported and sold by the NOC has to be paid to the Nepal government. These rates amount to above 30 percent of the end price of petrol and diesel that the consumers have to pay for during the purchase of the said commodities. The burden of these taxes and duties is also the reason behind NOC still having to suffer a loss of whooping NRs 28.57 and NRs 32.15 in the sale of petrol and diesel per liter respectively although it has engaged in a series of rate hikes over the last couple of months. Descriptively, custom duty, custom service charge, road maintenance tax, Infrastructure Development Tax, Environment tax, and Price stability fund charges combinedly form the notorious tax and duty charges that are eventually incidental upon the end consumers. Not to forget, the Value-Added Tax (VAT) is also charged on top of such taxes and duties.

Specifically, the ten rupees Infrastructure Development tax applied on petrol and diesel goes for the development of Budhi Gandaki Hydroelectricity Project (BGHEP). By the fiscal year 2020/21, about NRs 78.21 billion (about 25% of the total project outlay calculated at around NRs 315 billion) has been raised by the government in the name of infrastructure development tax while not much progress is seen in terms of capital development of BGHEP. This probes a major question of where the government has been parking the tax money collected from Infrastructure Development Tax while the general Nepalis are barely able to bear the rising cost of petrol at present time. More so, it is high time that the government at least relieved the Infrastructure development tax when nothing much is being done in terms of the construction of BGHEP.

There is also a long-term rationale behind this argument as it is casually expected that the world is soon switching to renewable sources as the source of energy while phasing out fossil fuels. Hence, a gradual decrease in the level of fossil fuel imports can be naturally witnessed in Nepal too in the coming years. Meanwhile, such a phenomenon will soon make taxes that finance infrastructure but are significantly dependent on fuel imports unreliable. So, it is also time that the government reconsidered financing infrastructure development through innovative financial vehicles capitalizing on private funds than by becoming obsoletely dependent on fuel imports.