Lahiri committee recommends stability in duty rates for edible oils

By Vijay Kumar

The Committee headed by Dr. Ashok Lahiri, Chief Economic Adviser, Ministry of Finance has submitted its report on the duty structure for edible oils. Important recommendations are:-

• Not changing the tariff value in line with international prices or changing it after a delay create distortion in resource allocation, undue revenue gains or losses and opportunities for rent seeking. Tariff value should be changed on a regular basis and the formula, including the relevance of the market from which the quotation is taken and the appropriate freight, reviewed at regular intervals.

• With the country becoming self-sufficient in food- grains, particularly rice and wheat, there is an added emphasis in recent times on the need for agricultural diversification, including to oilseeds. Higher protection of refined oil encourages domestic refining and meeting of the shortfall in domestic output vis-à-vis demand through utilization of domestic refining capacity. Simultaneously, however, it tends to increase the profit margin of the domestic refining industry. Thus, trade and tariff policies for edible oils and oilseeds have to reconcile interests of four different stakeholders: farmers, consumers, the edible oil industry, and the Government’s revenue interests.

• Palm is a plantation crop which requires special support. Only duty protection is not good enough. Palm plantation in Malaysia and Indonesia were promoted by government intervention in the erstwhile rubber plantation and proved to be cost efficient in the long term. Promotion of oil palm in India would require efforts over and above duty protection

• Three major problems with the current import duty structure 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. First, with inputs attracting a higher rate of customs duty than the refined edible oil or vanaspati, there may be negative protection for some segments of the industry. This is most evident in the case of vanaspati where the finished product, namely hydrogenated vegetable oil, attracts a basic customs duty rate of only 30 per cent, while the inputs of crude or refined oils attract higher rates between 45 per cent and 90 per cent. This has resulted in a negative protection to the domestic vanaspati industry.

• There should be a fair amount of stability in rates. In eleven years since the liberalization of edible oil imports in 1994, there have been eleven changes in the duty rates on palm oil alone! Frequent changes in the tariff rates since 1994 has created uncertainty for farmers in their allocation of land for oilseeds cultivation.

• There is a need to reduce the dispersion of rates across different edible oils. Given the WTO-bound rate of 45 per cent on soybean oil, convergence requires a downward adjustment of the duty on other edible oils to prevent soybean, even when it is more expensive than some other oils, from becoming the major import to bridge the demand-supply gap in edible oils in the economy. There is need for a slow transition as well as stability in rates. Thus, the Committee recommends a reduction in the applied rates on all oils other than soybean to 65 per cent. Given the low value-added in the refining process, a very large nominal duty differential between crude and refined products results in a very high rate of protection and goes against consumer interests. Thus, 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 logic of harmonisation and of not having an inverted duty structure, 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 issue of excise duty on edible oils is closely related to the issue of excise duty on processed food. Edible oils, particularly of the refined variety, belongs to the non-essential category, and should be reviewed when the issue of excise duty on processed food is decided upon. There is merit in a unified rate for excise duty on branded and non-branded edible oil, as brand loyalties are yet to evolve in the country and such loyalties help in ensuring appropriate standards.

• The excise duty exemptions granted to Kutch after the earthquake on January 26, 2001 have led to setting up of large refineries for edible with total installed capacity of 22.80 lakh tonnes in Kutch. While the problem of a non- level playing field for oil refiners in other parts of the country as a result of the excise exemption to Kutch is a self- limiting problem and will resolve itself by end-2010, in future, there is need for more caution in granting area-based exemptions to excise duties.