Economy
Hungary has never seen a tax hike like this one
Excise tax on fuel to change
The government’s latest tax proposals revealed on Tuesday a plan to make the excise tax on fuel conditional to the world market price of oil.In practice this means that if the price of Brent crude dropped below the level set by law, the excise tax would be raised. The government proposes two alternatives for this trigger level: USD 40 and USD 50. The end-quarter world market price should be the benchmark, according to plans.The excise tax would be raised by HUF 10 per litre on diesel and HUF 5 per litre on gasoline should the world market price of oil drop to under the predetermined threshold.
It is not the same if the trigger level is set to USD 40 or USD 50. In the former case we should not expect a tax hike in the short term, and possibly even in the longer term. Many market analysts believe oil price reached rock bottom and it will be over USD 40 in the remainder of the year. The latter threshold (USD 50), however, is a whole different story. In that case it is most likely that we cannot avoid the HUF 10 and HUF 5 excise tax hike if the changes are implemented soon. (The planned changes in the case of tobacco products will come into effect already on 1 September this year.)
The measure would take the excise tax on diesel up to HUF 120.35 per litre and to HUF 125 per litre on gasoline. (At present the respective - fixed - excise tax rates are HUF 120 (gasoline) and HUF 110.35 (diesel) per litre.)
The new excise tax rates would still not be outstanding in European comparison, as Hungary’s excise tax on fuel is one of the lowest in Europe. (However, the VAT rate holds a world record, which - as we will see later on - also carries great importance in this case.)
Why is it necessary?
The planned changes may be aimed at stabilising tax revenues. Fuel prices, just like the world market price of oil, are volatile and if the price of gasoline drops, VAT revenues drop with it (excise tax revenues do not because they are fixed). In other words, the raise to the excise tax in the event of the oil price dropping below the threshold would make up for decreasing VAT revenues.A few interesting items
First, let’s take a look at the structure of fuel prices. The producer price (oil) makes up merely one quarter of the retail price in the case of gasoline and diesel, whereas the excise tax represents a 40% share. In the current tax structure, a HUF 10 reduction to the price of gasoline corresponds to a cc. HUF 2 decrease in the total tax content (due to the loss of VAT revenues). This “loss", however, is offset by a 1.15% rise in fuel consumption, given that larger sold quantities of motor fuels boosts VAT and excise tax revenues.So, a 3% drop in the price of gasoline should be accompanied by a 1.15% rise in consumption in order to keep tax revenues unchanged. As you can see, even though the high tax content of fuel leads reduces demand flexibility, the tax revenue loss caused by fuel price cuts can be compensated fairly successfully by rising consumption. The government now plans to put into effect yet another safety measure, which suggest that it expects even smaller demand flexibility than the one we have mentioned above.
The way of execution holds additional oddities, namely that gasoline could be cheaper if the oil price is USD 51 per barrel than if it is USD 49.
It is also unclear how sophisticated a solution it is to link the excise tax to crude prices which are given in USD terms since what is relevant from the budget’s aspect is fuel prices in forint terms. As a result, sharp shifts in USDHUF may lead to higher excise tax even when it is not justifiable from the fiscal side.
Choosing Brent crude as a benchmark also raises questions. We have no information on the pricing formula used by oil and gas group Mol, but its previous practice was to take Mediterranean (southern Italian) quotations as a benchmark.
The ever-shifting tax burden would not make life easier for the industry players, either since they may need to make adjustments every single quarter.
