Financial Daily from THE HINDU group of publications
Tuesday, Dec 31, 2002
Agri-Biz & Commodities
Oilseeds & Edible Oil
Industry & Economy - Excise and Customs
Kelkar suggestion on edible oil duty a healthy one
MUMBAI, Dec. 30
THE Centre can potentially garner more than Rs 600 crore per annum as revenue if excise duty of Rs 1,000 a tonne is imposed on refined oils and vanaspati.
However, the recommendation of the Task Force on Indirect Taxes headed by Dr Vijay Kelkar (Kelkar Committee) that excise duty be imposed on edible oils including vanaspati has been stoutly opposed by industry bodies.
To what extent is their opposition justified? It is clear the industry representatives are averse to additional fiscal imposts, additional paper work and additional administrative hassles (the inspector raj!) as they perhaps have enough of these already. They are also worried about the impact on profit margin.
However, a dispassionate look at the country's vegetable oil sector would show that imposition of excise duty on refined oils and vanaspati would be a progressive step to help promote the cause of the industry, generate large revenue for the exchequer and encourage more equitable consumption.
Excise duty on refining of oils and manufacture of vanaspati was removed some six years ago (1996) in the initial flush of economic liberalisation when taxes and duties on a wide range of goods were slashed. Also, that was the time when demand-supply mismatch in edible oils had started to manifest and prices were both high and volatile because of shortage.
According to the Central Organisation for Oil Industry and Trade, the considerations that had guided the government then to exempt edible oils from excise duty remain valid even now and therefore do not require any review or change.
Opposing the Kelkar Committee recommendation, the apex body has pointed out that excise duty on indigenous edible oil will make imported oils more attractive which in turn will worsen the plight of the indigenous oilseed processing industry, hurt farmers' livelihood and further erode the country's low level of self-sufficiency.
It has also been argued that efforts to encourage purchase of edible oil in packaged form would receive a setback as excise duty would drive consumers to purchase oil in loose form, which is hazardous to health. In addition, the association said that excise duty on edible oil, an ingredient of daily diet, would be regressive.
None of these arguments would stand the scrutiny of logic or equity because the ground realities are different. For one, the recommendation to impose excise duty should be understood to be on refined oils and vanaspati, and certainly not on raw or unrefined oils.
Both from point of view of enforcement and impact, excise duty will make sense only when imposed on the organised industry, that is refineries and vanaspati units. Importantly, the market the consumer profile for refined oils and vanaspati is different from that for unrefined oils.
Of the approximately 60-65 lakh tonnes of vegetable oils produced indigenously, refined oils constitute roughly 20 lakh tonnes only. Major oils such as groundnut oil, mustard oil, sesame oil and coconut oil are still largely consumed in raw or filtered form for their natural flavour. A significant part of such raw oil consumption is in the rural areas.
Excise duty on refined oils will mean that the large mass of consumers who use raw or unrefined oils will not be affected at all. On the other hand, refined oils are largely consumed by the generally health-conscious well-to-do sections of the society concentrated in urban and semi-urban areas. This section of the population can afford to and will easily absorb the small burden of excise duty (say, Re 1 per kg) without any ado.
It would be fallacious to suggest that excise duty on refining will render imported oils cheaper. This is because imported refined oils will bear what is known as `countervailing duty', equivalent to excise duty on domestic refining. Also, the Government can any time use the tariff mechanism to change the rate of customs duty to influence the price, if warranted.
Indeed, if excise duty pushes up edible oil prices as is being made out, it should prove positive for oilseed growers, rather than hurt them as erroneously believed. For the same reason, the representation of the Solvent Extractors' Association too broadly on the lines of the central organisation does not carry conviction.
But why should any excise duty on refined oils and vanaspati be imposed at all? For the exchequer, there is massive revenue implication. A wide differential in the customs duty rates on crude oils and refined oils since February 2001 has ensured that the country imports a very substantial part of its import requirement in the form of crude oils like crude palm oil, crude olein, crude soyabean oil etc.
Currently, of the import volume of 44-45 lakh tonnes, about 10 lt are utilised by the vanaspati industry and the rest is refined for direct human consumption. In other words, refined oils production in the country is about 55 lt comprising 20 lt of indigenous oils and 35 lt of imported oils. Production of vanaspati is about 12 lt.
Levy of an excise duty of Rs 1,000 a tonne will generate Rs 670 crore per annum for the exchequer, comprising Rs 550 crore from refining and Rs 120 crore from vanaspati sector. This size of revenue is not insignificant. Indeed, a part of it can be earmarked and utilised for strengthening the vegetable oil sector through a process of modernisation and consolidation.
In order to promote use of minor oils in vanaspati production a rebate on excise duty may be granted. Such a system was in vogue until June 1996 when excise duty on vanaspati was removed. Since then, most unfortunately, efforts to exploit the country's vast minor oilseeds resources about which so much was talked in the mid-1990s have weakened.
Levy of excise duty will bring some discipline in the industry. A strong regimen of quality inspection and testing should also be put in place so that there is no compromise on quality. Instances of inadequate refining or no refining at all of imported oils as crude olein are well-known in trade circles. Sale of refined oils in packaged form for consumer may also be made mandatory.
The excise duty rebate system for using minor oils will improve the competitiveness of the vanaspati industry which is reeling under the twin onslaught of imports from Nepal and competition from liquid oils. Kelkar panele recommendation insofar as excise duty on refined oils and vanaspati is concerned is a progressive one. Of course, it is another matter whether the Government will act on it.
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