The Hindu Business Line : Tariff panel to study palmolein duty differential

DUTY anomaly, inverted tariff structure, negative protection, etc., are seemingly words that are now part of India Inc's everyday lexicon. Notable amongst the `victims' of this phenomenon are domestic vegetable oil refiners, who have pleaded their case loud enough for the Tariff Commission to undertake a formal study on the subject.

The Commission's exercise, launched early this month, would go into the costs borne by the industry in refining crude palm oil (CPO) and crude palmolein and arrive at a `justifiable gap' between the import duty on CPO/crude palmolein and RBD (refined, bleached, de-odourised) palm oil/RBD palmolein.

The processors' basic grouse stems from the Finance Ministry's notification, dated April 30, 2003, reducing the import duty on refined oils from 92.4 per cent (85 per cent basic customs duty plus 4 per cent special additional duty or SAD) to 70 per cent, even as that on the input (CPO) has been left unchanged at 65 per cent. This, they claim, has rendered domestic refining (i.e., lowering the free fatty acid or FFA content to 0.25 per cent or below, followed by bleaching and de-odourisation) and further fractionation (separating the liquid `olein' from the solid `stearin' fraction) an unviable proposition.

Currently, the landed (cost, insurance, freight) price of imported CPO is about $490 (approx. Rs 22,000) per tonne. The 65 per cent duty, which is levied on the tariff value of $504 per tonne, takes the duty-paid price to around Rs 37,201 per tonne. Adding port handling expenses (Rs 500) and processing costs (Rs 1,400), the total cost of the imported input works out to roughly Rs 39,101 per tonne.

On the realisation side, refining and fractionating one tonne of CPO typically yields 73 per cent RBD palmolein, 21 per cent stearin and 5 per cent palm fatty acid distillates (PFAD). The landed cost of RBD palmolein is now $525 per tonne. If, to this, the 70 per cent duty on a tariff value of $552 is imposed and port-handling expenses of Rs 500 per tonne is added, the final price (at port) comes to Rs 41,969 per tonne.

In the case of stearin and PFAD - used by soap manufacturers - the import duty on both stand at 20 per cent. This follows the recent Finance Ministry notification, dated January 16, reducing the duty on non-edible grade oils (with FFA of 20 per cent or above) used for soap manufacture, which covers stearin, from 30 to 20 per cent. The duty on PFAD has come down to 20 per cent, in line with the peak tariff cut announced in the Mini-Budget.

Taking present landed prices of $480 and $460 per tonne for stearin and PFAD respectively and adding the 20 per cent duty and port handling costs of Rs 500 per tonne, the corresponding final import prices work out to Rs 26,708 and Rs 25,616 per tonne.

If the domestic processors were to sell their products - 73 per cent RBD palmolein, stearin and PFAD - at the above import parity prices, the total realisation from processing one tonne of imported CPO would be Rs 37,527. Viewed against the cost of the input (Rs 39,101), it would tantamount to a net `negative' value addition of Rs 1,575 per tonne.

According to Mr D.N. Pathak, Executive Director, Indian Vegetable Oil Processors' Association (IVOPA), the negative value addition would be even more because the 65 per cent duty on CPO is subject to it conforming to a carotenoid range of 500-2,500, as per a separate notification, dated August 1, 2003. Since meeting the minimum specification of 500 mg/kg is virtually impossible, the refiner ends up paying the higher import duty of 70 per cent.

Mr Pathak noted that the earlier duty differential of 27.4 per cent had encouraged the setting up huge refining capacities in the country. "But today, refining and fractionation makes no economic sense. Instead, it is more viable to import CPO for vanaspati manufacture through refining and hydrogenation," he added.

SAD scrapping adds to the debate

THE abolition of the 4 per cent special additional customs duty (SAD) in the mini-Budget has further intensified the debate on the inverted duty structure in edible oils, especially with reference to soyabean oil.

Till now, the import duty on crude soya oil was 45 per cent, while it was 50.8 per cent for refined soya oil, taking into account the basic customs duty of 45 per cent and the 4 per cent SAD. But with the removal of SAD, the duty on both crude and refined soya oil comes to 45 per cent.

This is not all. Imported crude soya oil is subjected to a tariff value of $643 (Rs 29,000) per tonne and the 45 per cent duty is levied on this value. There is no tariff value, however, for refined oil, which means the 45 per cent duty is imposed on the invoice c.i.f (cost, insurance and freight) value.

Given that the objective behind fixing tariff values has been to curb importers from resorting to under-invoicing, the new duty structure of zero SAD and no tariff value on refined soya oil makes import of refined oil more viable vis-à-vis importing crude oil and refining it domestically.

More Stories on : Excise and Customs | Oilseeds & Edible Oil

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