The Hindu Business Line : Excise duty on refined oils, vanaspati goes

TWO years after its imposition, the Finance Minister, Mr P. Chidambaram, in his 2005-06 Budget proposal, has abolished excise duty on manufacture of refined edible oils (Rs 1,000 a tonne) and vanaspati (Rs 1,250 a tonne).

Although the revenue potential of the fiscal impost was as high as Rs 800 crore, actual collection was less than half. This was primarily because of a combination of factors - exemption enjoyed by manufacturers in specified regions such as Kutchch in Gujarat, evasion by small units and laxity in collection.

Though the proposal is revenue negative (the exchequer will forego approximately Rs 300 crore), it is positive for the country's vegetable oil industry. Abolition of excise duty will help create a level-playing field for all refiners and vanaspati makers irrespective of their location.

The marketplace had been distorted to some extent because of the tax advantage enjoyed by a handful of large refineries in Kutch, a region where excise duty was waived as part of earthquake relief package. The units were established mainly to take advantage of the tax break.

As excise duty has now been abolished for the entire country, the advantage hitherto enjoyed by the units in exempted areas has been lost. Huge investments were made by some of the big players in the vegetable oil market, including some multinational companies to set up large processing facilities dependent almost entirely on imports.

Small and medium refineries outside the exempted areas that suffered both diseconomies of scale and duty burden have reason to be happy. Many were forced to evade taxes in order to survive and compete with the large units in exempted areas.

For the be-leaguered vanaspati industry, abolition of excise duty should come as a much needed shot-in-the-arm. Falling market share and competition from imports have combined to negatively affect the fortunes of the industry.

With excise duty burden of Rs 1,250 a tonne gone, producers of the hydrogenated oil can have some respite.

With abolition of excise duty, countervailing duty on import of refined oil would also be waived. This should provide some encouragement to import of refined palmolein and soyabean oil.

Price relief to consumers, following excise duty abolition, would be marginal at around Re 1 per kg.

There is fear, however, that even this would be neutralised by rising international market prices.

Excise duty on manufacture of refined oils and vanaspati was levied two years ago following the recommendation of Kelkar Committee on Direct and Indirect Taxes.

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