Summer does not seem an appropriate time to bring up the subject of the heavy tax on kerosene and the expense incurred to heat homes in winter. Fiscal changes need to be planned now if they are to be included in the next budget. This article is written for the 1,800 or so households that have invested in kerosene fuelled central heating, and all other legitimate users of kerosene.
Kerosene, historically associated with domestic cooking, lighting and heating, always had a minimal excise tax. It was one of the cheapest liquid fuels. The low excise tax was a concession provided kerosene was only used domestically, in agriculture and a few other specific situations. As we acquired a better standard of living, electricity and liquid propane gas (LPG) became the prevalent energy sources in the domestic environment.
In spite of using less kerosene in the home, over 18,000 metric tons of this fuel was being consumed every year before 1998. The reason for this is no mystery. Much of the kerosene was not being used as directed by law. Kerosene was being used instead of diesel, which carried a higher excise tax. In effect, the exchequer was being deprived of revenue because of a dwindling demand for “tax laden” diesel. Older diesel engines can be easily converted to run on kerosene. All owners of diesel powered motors, in whatever machine they are installed, in craft and machines used on land or sea, form the first characteristic in profiling the abuser. Sectors known to use large amounts of fuel would be a second characteristic. Enforcement was necessary but this was ineffective.
The first attempt at netting lost revenue was made in 1997 when the price of kerosene approached that of diesel. This stopped the abuse but unjustly penalised those making legitimate use of kerosene. Consequent to the price rise, imports of kerosene plummeted from 19,000 tons to 3635 tons. The 15,000-ton reduction can only be explained by abusers shifting to other fuels, legitimate users reducing consumption in response to the price increase or shifting to other energy sources such as LPG and electricity. Did these abusers shift completely to diesel and so started giving the exchequer its dues? Yes, on that occasion, this was likely the case as back in 1998 there was no alternative fuel except diesel. In the following year a new demand was created for light heating oil (LHO), which had a low excise tax.
Following the change in government in 1998, excise tax on kerosene was lowered once more. From that year the demand for kerosene rose abruptly from 3,635 tons in 1998 to over 9,000 tons in 1999 and continued to increase to over 16,000 tons by 2004 while LHO demand remained stable, at below 3,700 tons (2003). It is apparent that some kerosene users (or abusers) had shifted to LHO in the 1997 to 1999 period, possibly investing in systems specifically using LHO. Since during the period 1999 to 2003, the price of kerosene remained low and similar to that of LHO, there was no increase in demand for LHO until 2004.
In this year, in recognition of the same state of affairs that was present before the 1997 price hike, the government increased excise tax on kerosene to a level that brought the price to the consumer equal to or greater than that of diesel. This time the rise was several times that of 1997. This stopped abuse once more but again penalised those making legitimate use of kerosene. In this way, there was also no need for enforcement officers to get out from behind their desks to sniff out kerosene fumes, and political confrontation with abuse prevalent in particular sectors was avoided. The main aim was to collect around Lm2.5 million in “potential” excise tax by forcing abusers to use tax-laden diesel, or at worst collect the lost revenue anyway if kerosene consumption remained high.
Was this “potential” excise tax collected after 2004? The answer is no. While in 1998 there was no other alternative but diesel, in 2004 there was LHO, demand for which jumped from 3,783 tons in 2003 to 11,000 tons in 2005 (Enemalta Annual Report) or 15,789 tons (according to figures in the NSO publication Environment Statistics 2006). LHO’s increasing demand surged at the same time that kerosene demand plummeted from 16,000 tons to 5,447 tons in 2005. LHO is cheaper, less efficient and definitely more polluting than kerosene. Excise tax on LHO is a mere Lm6.45 per ton while kerosene, like diesel, is taxed at Lm142 per 1000 litres (Lm173 per ton). It will be difficult to deny that many simply switched from kerosene to LHO. Since diesel consumption fluctuated a mere 1000 tons since 2004, diesel was unlikely to have been used by those who were abusing the use of kerosene. The expected windfall of excise tax from other heavily taxed fuels did not materialise.
Raising excise tax on kerosene with total disregard to the extra burden imposed on legitimate users was simply an affirmation that the enforcement system, if it ever existed, was ineffective. The attempts by successive administrations to claw back tax that was perceived to be slipping the tax net did not work as expected in 2004 due to the switch to other fuels with low excise tax such as electricity, LPG and LHO. The environmental gain obtained by forcing legitimate users to cut down on kerosene consumption has been offset by a shift to other fuels and by the equivalent use of a more polluting fuel such as LHO.
If it were possible to note the current users of LHO (sold in bulk), the government would have a reasonably comprehensive list of those who might abuse the use of kerosene if excise tax on kerosene is reduced to LHO levels and if consumption of this suddenly drops. On the other hand, all those who use LHO legally may not change back to kerosene since they are well served. The finance department will not be able to demonstrate to the public that raising excise tax on kerosene has resulted in the recovery of tax due from illegitimate use of kerosene. I will stake my reputation and assert that apart from tax collected from those who still use kerosene legitimately, the tax change has not resulted in a perceptible revenue increase from forcing a switch to higher taxed fuel. Abusers and some legitimate kerosene users have switched to LHO. The indications are that kerosene imports for 2006 are around 2,000 tons netting government Lm315000 in excise tax mostly from families using kerosene legitimately to heat their homes. Sales of this small amount can be confirmed to have taken made prevalently in the winter months. It would be interesting if Enemalta were to publish the quantities of LHO sold every month since November 2004. “Heating oil” indeed!
In spite of its name, LHO can be used to fuel many diesel engines especially larger and older ones not found in newer diesel passenger cars. If enforcing officers ever existed they should be asked to get out of their office and find those who are literally managing to vaporize 15000 tons of LHO a year.
It is not difficult to create a registration scheme of households using kerosene (or LHO) for legitimate heating purposes. Small volume users can be given numbered, personalized vouchers they can give to the kerosene hawkers in exchange for kerosene with reduced excise tax. Large volume users taking several hundred litres of kerosene at a time would collect VAT receipts from the hawker and claim the excise tax back directly from the finance department at the end of winter or deducted from income tax due when completing the IT form in June. Abusers of this system will lose the right to a tax rebate for two to three years. Excise tax on kerosene lowered to Lm15 per 1000 litres would keep its price above LHO and finance a couple of government employees to manage the scheme.
What is going to be the authority’s next move? Is it going to raise excise tax on LHO to the same levels as kerosene or diesel? Are legitimate users of LHO now going to be penalised? Who or which entity was supposed to enforce the legitimate use of kerosene in the first place? If enforcement officers ever existed, their incompetence has resulted in an extra burden on an not insignificant number of households, a burden collectively equivalent to many times these useless officers’ salaries.