Import duty on edible oils is lopsided

Sinha acknowledged the ingenuity and enterprise of the farmers are hamstrung by numerous Central and State laws and regulations relating to the marketing and movement of agricultural commodities. He promised to bring out,through the Minister of State for Agriculture, the government’s National Agricultural Policy paper which will address these constraints in a comprehensive manner.

On the other hand, the Minister of Commerce is reviewing existing controls on exports of all agricultural commodities except foodgrains. The finance minister feels there is no reason why farmers should not have access to global markets.

The budget has been branded as swadeshi by many. In its finer ramifications, the budget can legitimately be termed grass-roots, in addition to being swadeshi.

The finance minister has observed that India has made commendable progress in oilseeds production in recent years. In order to establish an efficient market environment and to reduce volatility in prices in this sector, it is proposed to introduce futures trading in edible oilseeds, their oils and cakes.

Obviously, the announcement to introduce futures trading in this sector has taken the Forward Markets Commission as well as the tradecircles by surprise.

VK Aggarwal, chairman of the Forward Markets Commission feels the introduction of a big product group such as edible oils and oilseeds would involve an intense exercise. The first task would be to identify the exchanges, giving them recognition and framing bye-laws. The exchanges are likely to be in the oil producing states of Maharashtra, Gujarat and Madhya Pradesh, besides Andhra Pradesh and Tamil Nadu.

The time frame required for putting in place an elaborate institutional mechanism complete with rules, regulations and bye-laws is anybody’s guess. Nevertheless, now that the first and most important step of a policy decision has been taken, the rest should follow in due course.

While the finance minister deserves to be complimented for his bold approach to uplift the farmer right through production and marketing of his produce, his proposals to levy an additional non-modvatable duty of eight per cent on imports has created uncertainty and confusion in the area of importedvegetable oils.

In his own admission, the measure is intended to redress a clear disability that commodity taxation inflicts on indigenous goods vis-a-vis the imported goods. While the former is subjected to sales tax and other local taxes and levies, imports are not so. This duty is not to be viewed as a protectionist measure but is intended only to provide a level-playing field.

It has been further provided that the levy would not be applicable to goods imported for subsequent trading, the logic being that they bear the burden of sales tax at the time of first sale.

In order to bridge the gap between the demand for edible oils and their availability out of domestic production, the country imports annually about one to 1.5 million tonnes of edible oils. Imported oils are already subjected to a customs duty of 25 per cent.

In view of a sustained rise in the price of edible oils since January 1998, there has been a clamour for reduction in import duty by at least 10 per cent. According to recentindications, duty reduction of the said order was imminent and the trade was looking forward to an official notification. The levy of an eight per cent across-the-board countervailing import duty has, therefore, not come as a bolt from the blue.

On the one hand, the interests representing oilseed processors have welcomed the levy of countervailing duty of eight per cent, as the measure will inevitably make imports of edible oils more expensive and on the other hand, both the ordinary consumer as well as the user industries like vanaspati manufacturers are going to be hit hard as a result of the additional burden of the proposed levy.

On closer examination it appears that although the proposal to levy the countervailing duty is well within the prerogative of the finance minister, the exemption given to goods imported for subsequent trading is patently flawed.

Prima facie the concept is discriminatory and, therefore, may not survive the scrutiny of law, if challenged.

Besides, it would be hard to tellthe imports meant for production from those intended for subsequent trading, as the basis for such determination is to be merely a declaration made by the importer. In fact, the entire imports can be theoretically routed through trading channels, but used for the purposes of manufacture simply by payment of sales tax, and any other applicable local levies, which are unlikely to add up even remotely to the figure of 8 per cent.

The concept of a level playing field just does not exist in the case of vegetable oils. In fact, quite the contrary domestic prices of vegetable oils are observed to have risen in sympathy with rising prices of imported oils in gross disregard of the demand and supply balance of edible oils within the country this year.

Again, the dollar-denominated imports are subject to the overload on account of the depreciating rupee. On this account alone edible oil prices have shown a rise of 15 to 20 per cent in recent months. The new eight-per cent countervailing duty is thus bound toprovide a fresh fuel to the bull-run much to the detriment of the common consumer of this essential item of mass consumption.

The finance ministry will have to examine immediately the implications of the proposed levy, more importantly those of the exemption granted to the goods imported for subsequent trading.

If the duty is retained together with the exemption, it is going to be a dead letter, because it will neither serve the purpose of providing a level playing field nor generate any worthwhile accrual of revenue to the exchequer.

On the other hand, if the exemption is withdrawn, there will be no raison d’etre for imposition of this countervailing duty.

It is an acknowledged fact that this country needs a minimum of one million tonnes of imported edible oils annually and, at least in the prevailing conditions in the international oil market, there is no unfair competition being offered by imported oils to the detriment of the domestic producer; much less there being any possibility ofdumping. If the levy is continued, to repeat the obvious, the net effect will be a sudden spurt in the prices of edible oils, especially in the impending lean season.

Finally, given the tight supply situation in the international vegetable oil markets there does not seem to be a remote possibility that the burden of the levy would be offset by a corresponding reduction in the quotations of imported oils.

Mercifully, the finance minister has kept a window open on this issue by stating in his speech, "in addition, there may be other sectors eligible for exemptions. These would be examined and if considered appropriate notified separately". Imported edible oils are perhaps the most eligible commodity for an exemption.

(The author is the secretary of Groundnut Extractions Export Development Association, the views expressed in the article are his own.)