How will hiking import tax on palm crude oil help Indian farmers?
India is examining if there is a need to raise palm oil import taxes since its prices have been constantly falling in the last five months and forcing some farmers to sell seeds below the minimum support prices. A 10-12% hike in import taxes would bump up prices of oil seeds and help farmers receive better prices for their seeds.
Some context: India is the world's largest palm oil importer and buys nearly 9 million tonnes of palm oil from Indonesia and Malaysia. The imports satisfy about 70% of India's palm oil needs. This imported palm oil is used in the production of detergents, plastics, cosmetics etc. Now when we import either crude or refined oil, the government imposes a basic import tax rate or customs duty and some cess (which is a special purpose tax levied over and above the basic import tax rate).
As edible oil prices were rising steadily since 2021, the government took measures to cut tax rates. In October 2021, the government exempted crude palm oil from the 2.5% basic customs duty until 31 March 2022. The current import tax rate on imported crude palm oil, crude soyabean oil, and crude sunflower oil is zero up to September 30, 2022.
In the case of refined, bleached, and deodorized palm oil, the import tax is 12.5% whereas the import tax on refined soyabean oil and refined sunflower oil is 17.5%. In February 2022, India reduced the Agriculture Infrastructure and Development Cess (AIDC) on the import of palm oil from 7.5% to 5%. The same has continued to date and there is no change in this particular cess.
So why should the government increase tax rates now? And how will it help?
Global oil seed prices have been falling drastically in the last five months and the fall in international prices has also led to a fall in domestic palm oil prices. But the domestic prices have fallen so steep that some farmers have been selling their seeds at prices that are below minimum support levels. That's why the industry is seeking support from the Indian government in raising the import tax.
Along with falling rates, oil importers are facing another issue: The inability to hedge the price risks by trading in Futures on the stock market. Oil importers and exporters usually use Oil futures to reduce import and export risks. But in December 2021, SEBI suspended futures and options trading in seven agricultural derivatives for one year to ensure risk management and price discovery mechanism. That's why importers are suffering huge losses since they cannot hedge their price risks.
As the supply of local seeds has also increased, an increase in tax rates and reopening the Futures market for crude soya bean oil and crude palm oil would help increase the prices of oilseeds and thus help farmers sell oil stacks at better rates.
BV Mehta, the executive director of the Solvent Extractors' Association told Reuters that they believe that the government should raise the taxes by 10-12% to support farmers. As the news of the probable oil import tax increase spread, Malaysian palm oil futures climbed more than 3% on October 19, 2022, to their highest in nearly seven weeks.