The Hindu Business Line : Budget widens duty gap between edible, industrial grade palm oils

WITH the Union Budget reducing the peak rate of customs duty on non-agricultural products from 20 per cent to 15 per cent, the gap between the import duty on edible-grade crude palm oil (CPO) and that on non-edible or industrial grade CPO used for making soaps has widened further.

This, it is feared, would further promote illegal diversion of non-edible CPO for making vanaspati.

Till recently, the basic customs duty on edible-grade CPO (with free fatty acid or FFA content of 2-5 per cent) was 65 per cent, while the same on imported industrial-grade CPO for manufacture of soap was set at the peak rate of 20 per cent, subject to actual user condition.

On February 15, the Finance Ministry announced an increase in the import duty on edible-grade CPO to 80 per cent.

And with the 2005-06 Budget now reducing the peak rate to 15 per cent, it would mean that the gap between edible and non-edible grade CPO would go up to 65 percentage points, against 45 percentage points till February 15.

This would create an environment for the mushrooming of the so-called soap units, who would use the facility of importing industrial-grade CPO at 15 per cent for manufacturing vanaspati. Vanaspati-making essentially involves refining the CPO (reducing the FFA content to 0.25 per cent, along with bleaching and de-odourisation), which is followed by hydrogenation (solidifying the liquid fat by addition of hydrogen).

"The industrial-grade CPO can be used for making vanaspati, since, in this case, all that is required is to bring down the FFA from 20 per cent plus to 0.25 per cent. Although this entails extra refining cost of Rs 150-200 per tonne, this would be more than offset by the huge duty savings from importing CPO at 15 per cent, instead of 80 per cent," the sources pointed out.

Currently, there is an actual-user condition governing industrial-grade CPO imports at concessional duty, which requires the importer to execute a bond with the Revenue Department for the duty difference (80 minus 15).

The bond would be cancelled, after certification of end-use by the authorities.

"But given the extent of duty difference now, there is always the possibility of collusion between unscrupulous vanaspati makers and revenue officials, who would certify that the product cleared at the factory-gate is soap, when the CPO has actually gone to produce vanaspati," the sources said.

According to them, the only way out to plug the loophole is to do away with the duty differential altogether, while retaining the 15 per cent rate only for imported crude palm stearin and palm fatty acid distillates (PFAD). The move would not adversely impact the soap industry because soap manufacture does not actually require CPO.

All oils (including CPO) are essentially triglycerides, in which three fatty acid molecules are attached to one molecule of glycerine.

In the traditional process, soap making entails `saponification' or mixing the oil directly after heating with an alkali (caustic soda), through which the fatty acids bind themselves to the alkali, resulting the formation of about 75 per cent soap and 25 per cent glycerine, which is then separated.

"Virtually no soap manufacturer now uses CPO for direct saponification. Instead, it is more economical to use the fatty acids (PFAD and stearin) and neutralise the same with an alkali.

There would no harm if CPO of industrial grade is also chargeable to 80 per cent duty, while the 15 per cent rate remains for PFAD and stearin", the sources added.

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