Ever since the oil subsidy was eliminated in FY2009, the government has been reaping an unexpected windfall in the form of higher revenues from oil as the rising prices also increased the amounts realised through the general sales tax and development surcharges on oil.

In FY2008, the federal government collected Rs14.5bn under the petroleum development levy. The next year, as all oil subsidies were withdrawn and prices at the pump soared, the same collection came in at Rs112bn.

GST collections experienced a similar windfall, prompting the government to congratulate itself in the economic survey that year for “the significant improvement in fiscal performance in FY2008-09.”

As oil prices remained persistently above $100 over the years since then, the windfall gains on the revenue side became a permanent assumption underlying our fiscal framework.

Additional benefits came to the government in the form of spiralling share prices and profits of state-owned oil and gas firms, and the dividends they were able to pay.

All of that is now changing. Now that oil prices have started plummeting in international markets, the government has passed on some of this decrease to the pump, but is caught in the consequences of the fiscal framework.

Reliable data on the revenue impact of declining oil prices is not available. There are widespread suspicions that officers of the Federal Board of Revenue are trying to show revenue weaknesses from other areas as losses on account of the reduction in oil prices.

What is reliably known, however, is that the government is feeling the pinch and has therefore notified an increase in the rate of GST applicable to oil sales, taking the rate from 17pc to 22pc.

This is a regrettable step, especially since no such effort was made to cushion the impact of spiralling prices for consumers when the upward climb in oil prices began back in 2008.

The step to notify an increase in the GST rate shows how dependent the government has become on the easy revenue windfall that came with high oil prices. The decline in oil prices ought to be passed fully through to the consumer, just like the increases were passed through fully in 2008.

If the fiscal framework is constrained as a consequence, the government should walk the hard road of tax reform rather than lean so heavily on withholding taxes to shore up its revenues.

Published in Dawn, December 31st, 2014