Govt to withdraw 5% advance tax on fuel import

    Originally published in The Business Standard on 22 May 2023

    The government plans to withdraw the existing 5% advance tax on the import of 13 oil and petroleum products in the upcoming budget aiming to alleviate the burden on the public due to rising inflationary pressure, according to sources within the finance ministry.

    Officials from the finance ministry have confirmed to The Business Standard that the removal of the advance tax will result in cheaper fuel oils, including crude oil, diesel, jet fuel, kerosene, and base oil.

    Currently, the prices of major fuel oils such as furnace oil, jet fuel diesel, and octane include a total of 34% government duties and taxes, comprising a 10% duty, 15% VAT, 2% advance income tax, and 5% advance tax. With the removal of the advance tax, the overall tax ratio on fuel oil prices will decrease to 29%.

    Finance Minister AHM Mustafa Kamal is scheduled to present the FY24 budget in parliament on 1 June. Despite the current inflation rate exceeding 9%, the government has set the inflation target at 6%.

    At present, diesel and kerosene are selling for Tk109 a litre at the consumer level, while octane and petrol are selling for Tk130 and Tk125 respectively.

    Reducing fuel prices is seen by stakeholders as a crucial factor in achieving the government’s inflation target.

    Finance ministry officials have revealed that the government has made the decision to withdraw the advance tax on fuel oils for the well-being of people from all walks of life.

    Economists also support this government decision, asserting that fuel oil should not be subjected to advance tax or any other taxes.

    A senior official from the finance ministry, who preferred to remain anonymous, explained that although the international market prices of fuel oils are currently stable, they have been significantly high compared to the past. Last year’s substantial price hikes in the international market forced the authorities to raise fuel prices in the domestic market, despite providing subsidies to various sectors, including fuel oils.

    However, the forthcoming FY24 budget is considered politically and diplomatically significant, according to the official. The government aims to alleviate the public’s suffering, and since fuel oil prices have a direct impact on various aspects, the government has prioritized this sector.

    The official also emphasised that if the advance tax is removed, the prices will not at least increase, even if they do not decrease.

    The 13 petroleum products that will be exempted from the advance tax include petroleum oil, crude oil, HBOC (high octane blending component) type motor gasoline, aviation gasoline and other gasolines, jet fuel, white spirit, naphtha, jet fuel kerosene type JP-1, JP-4, and other fuels, other kerosene, light diesel oil, high-speed diesel oil, and furnace oil.

    M Shamsul Alam, energy adviser of the Consumers Association of Bangladesh (CAB) stated that if fuel prices are adjusted every month as per the government’s plan, the removal of the advance tax on oil imports will not benefit the consumers.

    This is because, he said, oil prices will go up in the domestic market if their prices increase in the global market, but will not drop if global prices go down.

    Instead of adjusting fuel prices in line with the withdrawal of the advance tax, the authorities might form a stabilisation fund with the money saved from this move, he suggested. This fund can be used to keep the prices stable when global prices are up.

    Jashim Uddin, president of the FBCCI, however, welcomed the government’s move to withdraw advance tax on oil imports.

    The move will ease inflationary pressure on consumers if the prices are adjusted timely.

    “Many a time, we see that it takes added time to implement a government decision. And before the prices are adjusted, they become pricier in the international market again,” he said citing the examples of sugar and soya bean oil.

    But, since the government itself is the importer of fuel oil and government companies are the distributors, the decision can be implemented easily and consumers will be benefitted.

    Ahsan H Mansur, executive director of the Policy Research Institute (PRI), said the advance tax imposed on fuel oil should have been withdrawn earlier.

    He added this is by no means reasonable, but the authorities impose it forcefully. Tax experts including the IMF do not like such taxes, but the NBR does.

    Mansur further suggested that there should be only VAT on fuel, as the country relies on imports for fuel and taxing it is not justified. He also proposed removing all taxes but VAT and making fuel oil prices market-based.