Fuel tax cut not possible in Turkey unless tax collection improves

March 06, 2011, Sunday/ 14:47:00/ YASİN BABACAN

While oil prices surge around the world as a result of the Libyan turmoil, Turkish consumers are wondering whether a tax cut on fuel prices is possible while experts stress that it is certainly not, without a rise in the rate of tax collection in the country.

Fuel taxes in Turkey are a crucial source of revenue for the state. Turkey’s total tax revenue from direct fuel taxes -- value added tax (KDV) and private consumption tax (ÖTV) -- increased by 17 percent in 2010 from 2009, reaching TL 47 billion ($29.4 billion). It is, however, no surprise to see Turkish consumers’ unease with that much money flowing out of their pockets given that Turks pay the most for fuel among consumers globally and that the two taxes combined -- the KDV and ÖTV -- make up almost 70 percent of the pump price, which has currently exceeded TL 4 per liter for gasoline due to the growing clashes between the pro-democracy groups and pro-government forces in the North African nation.

On the other hand, there are many countries in the world that provide huge subsidies on fuel prices. For instance, in Venezuela the pump prices of gasoline and diesel are below global crude oil prices; filling up an average fuel tank there costs little more than $0.10 per gallon, or about TL 0.05, per liter. This means the Venezuelan government spends more than $1.5 billion annually to subsidize fuel in the country. The US, on the other hand, is a country where the fuel subsidy is moderate in comparison and comes indirectly in the form of tax breaks to big oil companies, which means that the retail price of $1 (TL 1.60) per liter is just above the price level of Brent crude. In Spain for instance, fuel prices are considerably higher than the world average, but it still has one of the lowest gasoline prices in the euro zone at TL 2.90 per liter.

Is it possible for Turkey to reduce its fuel tax level to that in Spain, if not to that in the US? According to Professor Sudi Apak, the international business department chair at the İstanbul-based Beykent University, this does not seem possible either the short term or the long term. “There is a great deal of tax fraud in Turkey, meaning that the government is not able to collect the real amount of tax accrued by companies or individuals. In order to compensate for the uncollected taxes in Turkey, the government opts for the simplest way of collecting tax revenues: fuel taxes. Therefore, I don’t think that the government will reduce any of the fuel taxes in the short term and maybe not in the long term, either,” he stated. “It will only be possible if the government is able to bring the fraud rate down to the global average and start to collect taxes with a more reasonable success.” The Finance Ministry was not available to comment on this issue despite numerous calls from Sunday’s Zaman throughout the week.

Were Turkey to cut its fuel taxes to at least European levels, the cuts would have to be implemented gradually, Apak argues. “[A large and sudden cut] would negatively affect price stability in the country since the state budget cannot afford to lose that much tax revenue at once,” he noted. However, cutting the taxes on fuel products is likely to cause problems in any major economy as it might lead oil-producing countries to take advantage of the reduced prices. European Union energy spokesman Ferran Tarradellas said in a statement three years ago in Brussels that “changing taxation on fuels in order to combat increasing prices would send a wrong message to producing countries. This would show them that they could increase prices and that the citizens would have to pay for this.”

Retired professor İsmail Aktürk, who previously worked at Azerbaijan State Economic University (ASEU) in Baku, also mentioned that it was impossible to reduce fuel taxes in Turkey before solving the issue of the vast informal economy in the country. “The amount of uncollected taxes in Turkey is huge. Without decreasing the size of the informal economy, this government, nor any others, cannot cut fuel taxes,” he noted. “But if you ask if the current rate is fair? Certainly not, but there is, at least for now, nothing that can be done.” He added that the Justice and Development Party (AK Party) government will not take any actions regarding tax cuts in any field simply because it likes to keep the budget deficit under control. “Even a small rate cut could cause the budget deficit to reach unexpectedly high levels, which could trigger a substantial increase to the historically low inflation we have in Turkey today,” Aktürk said.

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