Duty cut on palm oil hits vanaspati units in Lanka

The reduction in customs duty of crude palm oil (CPO) by India has severely hit the 12 vanaspati units set up by Indian companies in Sri Lanka to take advantage of the low duty on CPO there and export duty-free to India under the free trade agreement (FTA) quota. However, the move has helped the domestic vanaspati industry.

The import duty on CPO has come down from 88.8 per cent in August 2006 to 46.35 per cent. Moreover, the government’s decision to keep the tariff value (the base price at which import duty is calculated) of CPO frozen at $447 a tonne implies an effective duty of around 23 per cent.

This means that even if the CPO is imported at $910 a tonne, the 46.35 per cent duty is paid on a price of $447. The tariff has been kept frozen to contain inflation.

“These units were set up in Sri Lanka to take advantage of the low CPO import duty ($25 a tonne). Indian agents of these units imported the vanaspati duty-free under the 1998 FTA arrangement. As a result, the imported vanaspati was cheaper by almost 10 per cent than Indian vanaspati and was affecting the domestic producers,” said Sat Narain Agarwal, senior vice-president, Central Organisation for Oil Industry and Trade.

Now, the trend has reversed in favour of local vanaspati units. With the reduction in CPO import duty, the domestic producers would be able to sell vanaspati at a price similar (about Rs 800 per 15 kg jar) or even lower than the imported product.

This has helped the domestic units, which were operating below capacity, while the Lankan units are already on the verge of closure.

The 250,000 tonnes annual quota given to these units in Sri Lanka was increased to 312,500 tonnes for the current year. These units, set up with a total investment of Rs 250-300 crore, have a capacity of 25,000 tonnes each.

However, none of these units have been able to exhaust their full quota in the first two quarters of this financial year and the unused quota has got expired.

“We can revive our units only if the customs duty on CPO goes up in India. Otherwise, we will have to shut down,” said an official from the Lankan vanaspati unit.

SLIPPERY GROUND

# The import duty on crude palm oil (CPO) has come down from 88.8 per cent in August 2006 to 46.35 per cent

# The government’s decision to keep the tariff value of CPO frozen at $447 a tonne implies an effective duty of around 23 per cent

# With the reduction in CPO import duty, domestic producers would be able to sell vanaspati at a price similar to (about Rs 800 per 15 kg jar) or even lower than the imported product