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Oil price plunge should prompt new fuel taxes in Asia: Russell

LAUNCESTON, Australia,(Reuters) - One worthy side-effect of the plunge in crude oil prices is that several Asian governments have ended costly fuel subsidies, but it’s time to go further and impose higher taxes.

A worker at state-owned Pertamina, the country's main retailer of subsidised fuel, fills a vehicle at a petrol station in Jakarta November 17, 2014. REUTERS/Beawiharta

The 58 percent drop in Brent crude since June last year has opened a far bigger window of opportunity for Asian countries than just the chance to dump subsidies.

It’s laudable that the last remaining major subsidizing countries Indonesia, Malaysia and India have largely ended their support for fuel.

However, given the prevailing market view that crude oil is poised to remain weak for at least a couple of years, now is the time to start imposing taxes.

This would have two positive effects for Asian countries, firstly to ensure that fuel demand doesn’t rise too sharply because consumption is encouraged by low prices, and secondly to provide revenues to fund vital social infrastructure.

Indonesia stopped subsidizing gasoline altogether from the start of this year, and cut support for diesel to just 1,000 rupiah (8 U.S. cents) a liter.

This will cut the expected cost to the government to just 1 percent of total expenditures from a previously estimated 13.5 percent, according to analyst Wellian Wiranto of OCBC bank.

This effectively means the Indonesian government will have at least an extra $20 billion to spend on other areas.

Malaysia also decided to abolish fuel subsidies, scrapping both gasoline and diesel support from Dec. 1 last year, a move that will save the government nearly $6 billion a year.

And India ended diesel price controls last October, having earlier allowed gasoline prices to be set by the market.

To be sure, India does levy some taxes on factory gate prices for fuels, but these are comparatively low.

Two recent increases took the rate for unbranded petrol to 8.95 Indian rupees (14.5 U.S. cents) a liter and 7.96 rupees a liter for diesel.

ROOM FOR HIGHER TAXES

In contrast, a developed country such as Australia levies an excise of 38.6 Australian cents (30.8 U.S. cents) a liter on gasoline and diesel.

Australia also imposes a 10 percent goods and services tax (GST) on fuel sales, which is applied to the excise portion of the cost as well, leading to criticism from motorist lobby groups that a tax is being added to another tax.

Overall, with both the excise and the GST included, taxes amount to just under half the current retail price of gasoline and diesel in Australia, which is a far cry from the modest amount levied by India.

Australia’s center-right Liberal government last year re-introduced a policy of indexing the excise to inflation, which it had scrapped in a previous term of office in a bid to win popular support.

The measure still has to gain approval in the upper house Senate, where the government lacks a majority, but fuel costs have faded as a political issue as prices have declined, raising the possibility of Senate backing.

Even China, a former fuel subsidizer, is raising taxes, announcing a third hike in six weeks on Jan. 12.

The latest increase takes the consumption tax on gasoline to the equivalent of about 24.5 U.S. cents a liter, and for diesel to about 19.3 cents a liter.

While these are considerably higher than the taxes imposed in India, they are about half those in Australia, and are dwarfed by the roughly 87 cents a liter British motorists pay in gasoline tax.

It should be clear to Asian governments that structural shifts in oil prices, especially downward movements, don’t come very often and they should not be wasted.

Countries should decide a minimum level for fuel prices and impose taxes to ensure that these levels are maintained.

With the current low oil price, the political pain of doing this may not be so great, and if populations can be convinced that the revenue raised is being used to make meaningful improvements in their lives, it ends up being one of those rare win-win situations.

($1 = 12,460.00 rupiah)

($1 = 61.4250 Indian rupees)

($1 = 1.2466 Australian dollars)

Editing by Richard Pullin

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