Can tax cuts sort fuel price crisis?

Augustine Kiggundu

What you need to know:

Tax in isolation cannot be a determinant or driver of the price of fuel

At the beginning of last year, fuel prices averaged at  Shs 3,500 for a litre of petrol and Shs3,100 for a litre of diesel.

However, the prices started to surge in July 2021 partly due to the heightened preventive Covid-19 measures specifically at the border points for transporters of cargo.

By December 2021, the price of fuel was at an average of Shs4,500 for a litre of petrol and Shs4,000 for a litre of diesel.Currently the price of fuel is averaging Shs6,500 for both a litre of petrol and diesel.

This trend is not unique to fuel prices, the Minister of Finance, Planning and Economic Development while presenting the Budget Speech for the Financial Year (FY) 2022/23, noted that the second half of the FY 2021/22 was characterised by a significant increase in prices for some of the essential commodities and services.

This in turn increased the overall inflation from 2.7 percent in January this year to 6.3 percent in May.

The increase was mainly attributed to the Covid-19 pandemic, overall global shortages, drastic increase in demand following the opening up of the economy and the Russia-Ukraine conflict. Nonetheless, many actors continue calling on the government to intervene in the rising prices of essential commodities.

Whereas the government has set out its strategy to manage the crisis of the rising commodity prices, it has remained resolute not to cut taxes on the affected commodities as a mitigating measure. But what if the government was to consider tax cuts on the essential commodities, fuel for example, would such an intervention sort the fuel price crisis?

It is true there is an array of direct and indirect taxes on fuel. For instance, for each litre of petrol there is an excise duty of Shs1,450; while each litre of diesel has an excise duty of Shs1,130; there is also a potential 30 percent income tax on the margin; an indirect VAT charged to the fuel players by the domestic suppliers among others.

Research places the amount of tax on each litre of fuel at approximately 36 percent of the pump price. This means that when a fuel station posts a price per litre on a board, say Petrol – Shs6,500; about 36 percent of that is tax.

While tax is a vital factor in determining the price of fuel, fuel prices are principally driven by the interplay of the forces of demand and supply. Tax in isolation cannot be a determinant or driver of the price of fuel. While analysing the dynamics of fuel prices, other factors ought to be looked at.

Let’s say in a bid to reduce the price of petrol, government was to intervene by dropping the excise duty on petrol, the resulting effect would be a sudden and short-lived reduction in the average price of petrol by about Shs1, 450 but this would come at an opportunity cost to the wider macro-economic outlook. Here’s why.

In FY 2021/22, URA had a revenue collection target of Shs22.4 trillion but while releasing the tentative results, the Authority indicated that they had achieved a collection of Shs21.6 trillion.

Of this, about 63 percent was domestic tax revenue collections, while 37 percent was customs collections. The lion’s share being from the wholesale and retail trade sector which is inclusive of fuel players.

According to statistics from Uganda Bureau of Statistics, the country imported approximately 2.1 billion litres of petroleum products in the FY 2021/22, of which about 48 percent was diesel and about 45 percent petrol.

An indicative international trade tax revenue from the two main petroleum imports places it at about Shs2.4 trillion. This represents about 11 percent of the total revenue collection for the FY 2021/22.

If such an intervention was made, the government would have to look elsewhere to fill the Shs2.4 trillion revenue gap.

Augustine Kiggundu is an Associate Partner - Ortus Advocates. [email protected]

                         

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