Under pressure from several quarters, the government on Saturday decided to slash the prices of petroleum products.

Commerce and Supplies Minister Dilendra Prasad Badu said at a press conference on Saturday afternoon that the government has reduced the price of petrol by Rs20 per litre and made diesel cheaper by Rs29 per litre.

Nepal Oil Corporation, the state-owned fuel utility, then came up with a revised price list as per which petrol now will cost Rs179 per litre and diesel and kerosene Rs163 per litre.

The new decision came into effect from Saturday midnight.

Minister Badu said that the government slashed equivalent taxes to enable the NOC to reduce prices of diesel and petrol. The government, however, has not clarified which taxes were slashed, and to what extent.

The move to cut the prices follows instructions from the House committee on Friday and a meeting of the coalition partners on Saturday to revise the rates of petroleum products, saying inflation was taking a toll on the general public.

The government was instructed to slash various taxes imposed on petroleum products.

After the latest hike in prices, petrol cost Rs199 per litre. Diesel and kerosene price had risen to Rs192 per litre. On Sunday night, Nepal Oil had jacked up prices—Rs21 in petrol and Rs27 in diesel and kerosene per litre. This was the highest increment ever made by the oil monopoly.

On June 9, the corporation hiked the price of petrol by Rs8 per litre to Rs178 per litre and diesel and kerosene prices by Rs12 per litre to Rs165 per litre.

After petrol price hit one rupee short of Rs200, there was a public outcry. With the rise in diesel prices, commodity prices also shot up, making life difficult for the general public.

Calls for cutting taxes on fuel grew, with students launching protests and lawmakers taking the government to the task over high taxes imposed on petroleum products.

According to Nepal Oil, the government levied Rs65.61 in taxes on every litre of petrol sold at Rs199. It collected Rs49.53 on every litre of diesel sold at Rs192. The government also collects Rs10 as infrastructure tax in each litre of petrol and diesel sold.

“With the government deciding to reduce taxes by a certain percentage point, the prices have been reduced,” said Binitmani Upadhyay, deputy director of Nepal Oil Corporation. At the government’s directive, the corporation board took the decision to revise the price.

“Prices have been adjusted as per the government decision to reduce taxes,” said Upadhyay. “The Ministry of Finance will decide on which headings taxes will be reduced. At this time, we only know that taxes have been reduced.”

The government has been levying tax on 7 different headings on petroleum products.

On the purchase of one litre of petrol at Rs131.91 from the Indian Oil Corporation, the government levies Rs25.23 customs tax, Rs4 as road improvement tax, Rs1.50 as pollution tax, Rs10 as infrastructure tax, Rs22.89 as VAT and Rs1.99 for the price stabilization fund.

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“If the government does not reduce tax or price on source, the corporation will face a monthly loss of Rs9.67 billion,” said Upadhyay.

The government earned Rs118.82 billion in various taxes levied on fuel in the first 11 months of this fiscal year. The high taxes, however, drew much criticism against the government.

A day after the the Industry, Commerce, Labour and Consumer Welfare Protection Committee of Parliament directed the government to slash taxes on petroleum products by half, a meeting of the ruling coalition on Saturday also instructed the government to reduce petroleum prices.

When the prices of petroleum products were hiked on June 19, the corporation was facing a monthly loss of Rs4.7 billion, according to the NOC.

“We hope that the tax rate will be reduced at source by the government so as to make up for the losses of the corporation while providing relief to the consumer,” said Upadhyay.

At Saturday's press conference, Minister Badu said that people have been forced to shell out more while buying petroleum products because of high taxes, stressing the need to reduce taxes.

Rising diesel prices have stoked inflation in the country.

According to the Nepal Rastra Bank, the year-on-year consumer price inflation jumped to a staggering 7.87 percent in May, hitting a 69-month high. It was 3.65 percent in May last year.

With the reduction in diesel price, Minister Badu requested traders to reduce the price on daily essentials so as to provide relief to consumers immediately.

After the latest hike in petroleum prices, the Department of Transport Management had allowed public transport operators to hike fares by 5.3 percent. For cargo carriers along the Tarai and hill routes, the fares have been hiked by 7.7 percent and 6.94 percent, respectively.

“Action will be taken if firms or traders are found guilty of charging more,” said Badu.

For governments across the world, reducing fuel prices is a tough task. For one, once reduced, it is difficult to increase the price, and second, fuel taxes are the most important revenue sources.

But Nepal’s predicament has been growing lately.

The government was reluctant to forego the bonanza created by rising oil prices, as it was raising more revenue from the consumers in the form of taxes, just while it was paying more in dollar bills, leading to a reduction in its foreign exchange reserves.

In the first 11 months of the fiscal year ended mid-June, Nepal's fuel import bill almost doubled from the previous year. Imports were valued at Rs340 billion, compared to Rs191.18 billion in the same period last year. The rising imports contributed to depletion of foreign exchange.

As of the first 11 months of the current fiscal year, the gross foreign exchange reserves decreased 21.1 percent to $9.28 billion in mid-May, 2022 from 11.75 billion in mid-July 2021, according to Nepal Rastra Bank.

Economists say there was no other way than tax cuts on fuels for a short duration to cool down the rising inflation.

“It is an immediate and short-term relief for the consumer as the Indian Oil is likely to send hiked prices. I think it is both profit and loss for the consumer,” said Dipendra Bahadur Kshetry, an economist who is also a former central bank governor.

“With tax cuts, it will be difficult for the government to meet the revenue target while in the long-term different development projects could be impacted if this situation of fuel prices continues,” said Kshetry.

According to Kshetry, petroleum prices will continue to remain unpredictable until the Russia-Ukraine war continues.

“India will not sell petroleum products by bearing losses. So we should consider reducing the consumption for some time,” he said.

He also cautioned about yet another factor.

“In principle, it is the right decision to reduce the prices so as to provide relief to the consumer but the impact is not seen in the market immediately,” he said. “The prices in the market go over speculations and traders are unlikely to reduce the prices of commodities immediately arguing that the cost of all goods and services has increased.”

According to Nepal Oil Corporation, when petrol price was hiked to Rs199, it was a 56.69 percent rise within a year. Similarly, when diesel price went up to Rs192 per litre, it was a 74.54 percent rise within a year.

Brent crude oil is being traded at $113.12 per barrel, as per international media.

Namraj Ghimire, director general of the Department of Transport Management, said that transportation fares will be reduced on Sunday accordingly.

“As the office is closed today [Saturday], we will make a decision on Sunday by calculating the reduced price of diesel,” he said.

As per the auto-pricing mechanism, the government allows transport entrepreneurs to hike fares when oil prices fluctuate by 5 percent.

Economist Ram Prasad Gyawali said that the reduction in taxes of petroleum product prices is a welcome step at a time when high inflation was hitting the general public hard.

“Petroleum products work as raw material for production and when the prices decline, the cost of production automatically declines, giving much-needed relief to the consumer,” said Gyawali. “Though the government may face losses in terms of revenue, it can compensate for that when things start getting better.”