Debate on petroleum tax

Amidst the falling price of crude, a question that is being debated by some within and outside the Government is whether there should be a tax on petrol.

The current automatic pricing mechanism (APM) for determining petrol prices comprises multiple components, including product costs, operation costs, vendor margins and a tax, among others.

Notably, the current managed float system is based on monthly reviews on the APM based on prevailing crude oil prices and the margins enjoyed by petrol dealers are closely monitored by the government.

Before the APM came into place, for each litre of petrol the tax portion was 58 sen.

However because of the high oil price, the government did not collect the tax and instead subsidised petrol to keep prices low.

Now the question being asked is whether the Government should reduce its relief on RON97 since petrol is a consumption item and involves draining the natural resources.

Currently, the retail price per litre of RON95 is RM1.85, RON97 RM2.25 and diesel RM1.60. This is because there is a tax relief on RON95 while there is no tax relief on RON97.

An economist says that in most countries any resource that drains the environment should be taxed.

“In this case, by reducing the rebate on RON97, it will affect on the rich as they consume more. The poor who own a small car or motorbike will not be affected,” says an economist.

Also the economist says that the petrol dealers and traders would see their margins squeezed as compared to the current APM system where there make better profits.

“It is worth noting that any implementation of petroleum tax at the pump will not necessarily translate into a sudden hike in petrol prices. Only the dealers and traders will lose out,” says the economist.

However there is another view that should the government allow tax on petrol, it would cause a ripple effect in raising the already higher cost of living. As such they do not think the government would consider such views.

“Such a move is unlikely and would be a surprise,” says Affin Hwang Investment Bank’s chief economist Alan Tan.

Alliance Research chief economist Manokaran Mottain says while imposing sales tax on all petrol products sold to consumers is another surefire way of boosting the Government’s coffers quickly, it wasn’t the best solution.

Manokaran feels that at the current crude oil prices, which are hovering a shade below US$30 per barrel, the price of petrol per litre in Peninsular Malaysia should be RM1.50.

In 2014, petrol subsidies were removed which allowed for substantial cost savings to the Government.

Notably, that was done in an environment where oil prices were already on a downtrend.

Before removing the subsidies, Malaysia had spent around 2% of its GDP on fuel subsidies.