Oil price plunge should prompt new fuel taxes in Asia

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.

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 subsidising 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; first to ensure that fuel demand doesn’t rise too sharply because consumption is encouraged by low prices, and second to provide revenues to fund vital social infrastructure.

Indonesia stopped subsidising gasoline altogether from the start of this year, and cut support for diesel to just 1,000 rupiah (8 US cents) a litre.

This will cut the expected cost to the government to just 1 percent of total expenditures from a previously estimated 13.5 per cent, according to analyst Wellian Wiranto of the 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 December 1 last year, a move that will save the government nearly $6 billion a year.

And India ended diesel price controls in October last year, 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 US cents) a litre and 7.96 rupees a litre for diesel.

Even China is raising taxes

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

Australia also imposes a 10 per cent 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 centre-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 subsidiser, is raising taxes, announcing a third hike in six weeks on January 12.

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

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 litre which 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.

(Clyde Russell is a Reuters columnist. The views expressed are his own.)