Most of what the government calls a diesel subsidy is its own tax. Since the war began, that tax has doubled, and it falls hardest on the poor. Many have pointed this out this week. The bigger problem is that this tax grows with the world price and feeds straight into inflation.

On September 21 diesel went up by 20 taka, to 135 taka a litre. The government says it is still subsidising every litre. By BPC's own formula, a litre cost 187 taka to bring to the pump last month, so on paper the state loses 52 taka on each one. Most of that 52 taka is money the government pays itself.

Imagine the Trading Corporation of Bangladesh importing soybean oil at 200 taka a litre. NBR then taxes it at 25%, so TCB's cost becomes 250 taka. TCB sells it at 220 taka and announces that the government is subsidising soybean oil by 30 taka a litre. No one would call that a subsidy. Diesel is priced the same way.

BPC buys diesel at the international Platts price, plus a premium for shipping, insurance and the traders' margin. Landed in Chattogram, a litre has cost about 135 taka. Then come customs duty at 6%, advance income tax at 2%, and 15% VAT on top of the duty-paid value, with another 2% on top. Together that is about 38 taka a litre for NBR.

Very conveniently, the subsidy claim leaves out that 38 taka of the 52 taka is the government's own tax, and almost another 10 taka goes to BPC and the state-controlled distributors, Padma, Meghna and Jamuna.

And this subsidy myth is not new. For years, governments, their petroleum companies and the media that repeat them have masked a fuel tax as a subsidy. It is basically a related party transaction with the government on both sides, and the subsidy is financial engineering.

Much of any subsidy BPC gets from the finance ministry would go straight back to NBR. A real subsidy would be NBR letting go of its claim.

I have an even better idea. Put a 500 taka tax on every litre of diesel and collect only 50 taka of it. Then we can claim a 450 taka subsidy on every litre. As Matthew McConaughey would put it, it's fugazi, fairy dust.

Consumer campaigners have been saying the same, that the government takes a large amount in VAT and taxes while also making a profit. Even BPC asked, in writing on September 8, for the duties to be waived.

But this is not the worst part. Since the war began, the tax on a litre of diesel has doubled. Every one of these taxes is a share of the price, shipping, insurance and premium included, so every extra taka the world charges us at the border brings NBR another 28 paisa.

If the Platts price rises by 10 taka a litre, the formula price here rises by about 13 taka to 14 taka. In July and August, NBR collected about 90% more from fuel than a year earlier.

Pakistan and Nepal tax diesel mostly as a fixed amount per litre, and India's central excise is fixed too, so a price spike swells their take less than ours. All three cut their taxes when prices spiked, though Pakistan has since rebuilt its levy.

Sri Lanka taxes partly by value, like us, but it took 100 [Srilankan] rupees off every litre of diesel, three weeks after Colombo's Verité Research argued that the extra tax a price shock throws off could be handed back. Among the neighboring countries, Bangladesh's finance ministry runs the only tax agency that doubled its take on a litre of diesel during this war.

Bangladesh didn't have to do what it is doing. Turkey's main tax on diesel is a fixed amount per litre, and when world prices shot up in March, it cut that tax automatically, from 13.9 lira a litre to zero by April. It works as an automatic stabiliser, and it gave people some respite at a cost of about $2 billion in two months. When the world price rose, Turkey's tax automatically fell. Ours doubled, automatically, in the middle of a war.

But this is only one side of the story. Diesel is used mostly for basic economic activities. About 60% of it goes into transport and 15% into agriculture, and around 70% of our irrigation pumps run on diesel.

Farmers irrigating their boro this winter will pay about 3% more to grow each bigha, and closer to 7% where pumps burn more diesel. Trucking rice from Kushtia to Dhaka already costs 10% more. Want to import rice from India instead?

A truck from Benapole to Dhaka now costs 14 to 24% more. And these farmers, hit by the same inflation, will need a higher margin on next year's crop just to get by, as will transport workers and everyone else.

Then what should we expect from food prices?

And it is not just food. When diesel came down after 2022, bus fares barely moved. This time launch, city bus and long-route fares have gone up by 7 to 20%. Even Bangladesh Bank's monetary policy statement for July to December already says "upward adjustments in administered domestic fuel prices" helped push non-food inflation up.

What the government is doing is driving cost-push inflation at a mass scale. It will cut people's purchasing power, burn their savings and shrink their capacity to save and build capital. All because it cannot let go of roughly 11,000 crore taka a year in extra tax, a little over 1% of this year's budget. I would argue it is the most expensive 11,000 crore taka the government will ever collect.

The poor pay the biggest share of their income for it, because the tax is hidden in the price of rice, vegetables and bus fares. The average household already spends more than 40% of its budget on food, by the government's 2022 household survey, and the poorer the household, the higher that share.

The common argument that cheap fuel mostly helps the rich doesn't hold here either. Their cars run mostly on octane, which the government already sells above its own cost. Even if 50,000 diesel SUVs never switched off their engines for an entire year, at least 80% of the diesel would still go to buses, trucks, pumps, boats and generators.

This is a self-defeating way of thinking about the economy, and it shows a lack of foresight. Let this 11,000 crore taka go and keep inflation down, and I would bet the economic activity it protects earns the state more than that in tax down the road.

During a global supply shock, giving up this tax would likely do more to hold down prices over the next year than any subsidy the government could hand out.

Taxing basic inputs at such high rates is counterproductive. You do not tax fuel, rice, logistics and public transport, which have an outsized effect on inflation. You tax the products and services further down the value chain, where more value is created.

Peter Diamond and James Mirrlees, both later Nobel laureates, showed in 1971 why a tax system should leave the inputs to production untaxed. You don't tax the rice, you tax the biriyani made with it.

We tax diesel this hard because it is easy: one state importer, one main port, and the money is in before a litre is sold. But this easy route has a price, and we pay it in inflation. Of course the bureaucrats who run the day to day will argue for keeping the tax, because they have to answer for missed revenue, not for inflation.

Someone senior enough in government has to make the harder call. Taxing the biriyani needs a revenue service that can find the restaurant, and that is the skill the state needs to build.

Until then, freeze the tax on a litre of diesel at its pre-war taka amount, or at least make it a fixed amount per litre, as our neighbours do. NBR would keep everything it was collecting before the war and give back only the windfall. Better still, with world prices where they are, suspend the tax on diesel altogether until the shock passes.

That would be a real subsidy and a strong check on inflation, and the benefits would show within a few quarters.

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Taukir Aziz is a finance professional and a trustee of Panam Institute, a Dhaka-based think tank