Seasonal Diesel Excise: A One-Sided Approach
Translated from Russian with the help of AI. Original: Russian version
Why a seasonal increase in the diesel excise tax yields little benefit and fuels inflation, and why it would be more sensible to adopt the Russian model in full, folding the vehicle tax into the excise and differentiating rates by environmental class.
Kazakhstan plans to raise the excise tax on diesel fuel to KZT 9,300 per ton, a 17-fold increase. In fairness, it should be noted that a seasonal excise increase was already introduced last year. However, it came in just as winter began, when the excise was scheduled to fall under the resolution then in force, so almost no one noticed the increase. When the time came to raise the excise under that resolution, the increase was postponed until summer.
According to media reports, the main rationale for the increase is the need to equalize prices between Russia and Kazakhstan in border areas.
However, the issue has been approached, as usual, in a rather one-sided way. The tax systems of Russia and Kazakhstan differ substantially, and in practice such an increase will not bring great dividends. First, in Russia the vehicle tax is included in the excise. Second, the VAT rate in Russia is 1.5 times higher. Third, the quality of fuel in Russia is significantly higher.
Moreover, diesel is a socially significant product. It is used mainly in agriculture and mining, as fuel for vehicles and for diesel generators that produce electricity and heat.
A rise in diesel prices will naturally affect the cost of the goods produced. It will then pass down the chain into the main goods, works and services produced in Kazakhstan, driving up inflation in the country.
Another highly questionable factor is the seasonal nature of the excise. Setting seasonal rates will always cause volatility in diesel consumption and uneven demand in the periods when an excise change is planned. This will push prices up ahead of the increase and tie up a large amount of working capital. Because demand will exceed supply, intermediaries will raise diesel prices in anticipation, before the new excise takes effect.
Given the technological specifics of diesel production, volatile demand may lead to seasonal fuel shortages and lower consumption of Kazakhstani diesel. In periods of high consumption, shortages will be covered by imports of Russian fuel, so over the year as a whole, consumption of Kazakhstani fuel will decline.
A more sensible option in the current situation would be to adopt the Russian experience fully: fold the vehicle tax into the excise and differentiate the excise by environmental class. The more environmentally friendly the fuel, the lower the excise.
Published in: Facebook, 31 May 2017