Crude, refined oil duty differential may be cut to 7.5%

A panel on edible oils, appointed by the government of India, has recommended that the nominal duty differential between crude and refined products may be reduced to 7.5 per cent and fixed uniformly at 72.5 per cent for all refined products, except soybean.

The panel under the chairmanship of Ashok K Lahiri, chief economic advisor with the ministry of finance, has also recommended reduction of custom duty on the import of crude palm oil to 65 per cent from the current 80 per cent, that of crude palmolein to 65 per cent from 80 per cent, while keeping that of oilseeds and soyoil unchanged.

"A modest duty differential between crude and refined oil imports - particularly in palm oil, the main filler between domestic consumption and domestic production - can supplement this competitive pressure on refining margins," the report said.

At present, stiff domestic competition among refiners, particularly those with idle capacity, has led to healthy pressure on refining margins.

Recommending not having an inverted duty structure, the panel argues strongly in favour of increasing the duty rate on vanaspati to 72.5 per cent from the current 30 per cent. "For stability of the tax regime, the duty rates should be kept unchanged for a period of five years," the panel report said.

The panel recognises three major problems with the edible oil import duty structure. These are: an inverted duty structure in the case of vanaspati, a wide dispersion of rates across various edible oils, and lack of stability in duty structure with frequent changes in duties.

The tariff-adjusted import parity prices for groundnut and rapeseed oils have been higher than the domestic prices for a number of years, while the relativity for soybean has depended on international price of soybean oil itself.

The considerably lower duty rate of 45 per cent on soybean oil relative to 80 per cent on crude palm oil has led to import of soybean and not crude palm oil, when soybean prices have been soft but not necessarily cheaper than crude palm oil. This has entailed a national welfare loss because of the lower revenue realisation and higher import bill.

For instance, it is privately profitable to import soybean rather than crude palm oil, as the prices per tonne of the two are $415 and $380, respectively; and simultaneously suffer a higher foreign exchange outgo of $35 and a revenue loss of Rs 5,357 (at an exchange rate of Rs 44.79 per dollar) per tonne.

The representative of the Department of Agriculture and Cooperation in the panel has sent a dissenting note indicating that the proposals for reduction in applied duty for edible oils to 72.5 per cent cannot be supported and that in fact the rate needs to be raised, the report stated.

The issue of raising the productivity of oilseeds will continue to be critical for the economy. The panel noted that despite the conscious attempt in recent years to encourage cultivation of oilseeds through increase of minimum support price (MSP), the returns per hectare at the current MSPs for wheat and rice are 2-3 times that for oilseeds.

Also, substantial increase in MSP of oilseeds runs the risk of resulting in increased import of comparatively cheaper oilseeds/edible oils from abroad, and putting tremendous pressure on the government procurement mechanism with subsidy implication. "What is needed is a concerted attempt to increase the productivity of such crops," the note said.