The ministry has recommended raising the import tax for six months, said the document seen by Reuters.
India, the world's biggest edible oil importer, currently imposes a 40% import tax on crude palm oil (CPO) and 50% on refined palm oils. But shipments of refined palm oils from Malaysia have since January been taxed at 45%, under an agreement with Malaysia.
The change in duty structure reduced the effective duty difference between CPO and refined palm oil for Indian refiners to 5.5 percent from 11 percent for shipments from Malaysia, making overseas buying of refined palm more lucrative than CPO.
That led to a 727% surge in Malaysia's refined palm exports to India in the first half of 2019 to 1.57 million tonnes compared with the same period a year before, according to data compiled by the Malaysian Palm Oil Board (MPOB).
Rising shipments of refined palm oil have hit local refiners, said Mumbai-based trade body the Solvent Extractors' Association of India (SEA), which has filed an application with the Directorate General of Trade Remedies (DGTR) for an investigation.
The DGTR, trade ministry's investigative arm, in its preliminary findings accepted SEA's contention that imports of refined palm oil from Malaysia "have caused serious injury and are threatening to cause serious injury to domestic producers."
"We are hopeful that the Finance Ministry will soon issue a notification to implement the DGTR's recommendations," B.V. Mehta, executive director of the SEA, told Reuters.
The duty hike will reduce cheaper imports of refined palm oil and also provide level-playing field to Indonesia, which was losing share in Indian market, Mehta said.
India imports palm oil mainly from Indonesia and Malaysia.
Separately, government sources on Friday said India planned to impose an extra 5% tax on vegetable oil imports within weeks and use the revenue to help boost the country's stagnating oilseed production.