Sri Lanka cuts taxes on fuel to keep retail prices below formula

ECONOMYNEXT – Sri Lanka has cut the tax component on a fuel price formula as oil prices rose and the rupee fell to keep retail prices below those indicated by a pricing formula, officials said.

"For example petrol carries an import duty of 35 rupees (per litre) but presently we charge only 18, that means 17 rupee waiver," Deputy Treasury Secretary S R Attygalle said.

"Similarly diesel carries a 15 rupee customs duty. There we charge only 3.85. So the balance is a waiver."

"If the fluctuations are huge, we may, from time-to-time adjust through a duty waiver."

Finance Minister Mangala Samaraweera said standard diesel should have been hiked by 11 rupees under the formula but it was not done in October.

"Under the formula on October 10, Petrol should have been hiked by 9 rupees," Attygalle said. "We only raised it by 6 rupees.

If the government does not officially reduce the tax, petroleum retailers will have to take it. However distributors carry a stock.

The reduction of an import duty may or may not reduce the total tax take for the government as there are also other levies such as port levies and nation building tax, which are based on the value.

State Minister for Finance Eran Wickremeratne said in India 82 rupees or 43 percent of the retail price was taxes on petrel and 57.52 rupees of 33 percent was taxes on diesel.

In Pakistan 38 percent of the petrol retail price was taxes and 58 percent of the diesel retail price was taxes.





In Singapore, taxes were 11 percent of retail prices for petrol with taxes at 30.78 rupees and in diesel it was 12 percent or the equivalent of 27.08 rupees.

The formula is based on the Singapore Platts price for the refined product, a weighted average premium per barrel, applicable taxes, storage and distribution costs, leaving room for evaporation and dealer margins, Samaraweera said.

The weighted average premium per barrel however may leave room for procurement inefficiency or corruption.

Minister Samaraweera said oil prices were now falling and may be next month, prices could fall.

Sri Lanka was applying a formula based on the landed cost, where the oil price changes and rupee depreciation were the biggest component.

Sri Lanka rupee soft-peg has failed twice in 2018 after the central bank built up unsterilized excess liquidity in money markets.

In the first quarter, after allowing unsterilized excess liquidity to build up from the pegging period and suddenly halting mopping up of inflows, it also injected cash by domestic asset purchases, completely undermining the credibility of the peg and floated while excess liquidity remained in the system.

After first run ended with interest rates rising, unsterilized liquidity was against built up and the rupee is has now partially recovered from the second run.

The rupee has fallen from 153 to the US dollar at the beginning of the 2018 to 171 now. In 2017, the despite the peg being on the strong side (inflows steadily mopped up) the rupee was allowed to depreciate (convertibility undertaking pushed down). (Colombo/Oct19/2018)

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