Indonesia, the world’s top palm oil producer, may slash export taxes on crude palm oil to compete with Malaysia, which recently lowered its export tax on CPO to zero percent.
Trade Minister Gita Wirjawan said on Friday that the tax reduction was needed to generate a competitive edge, but that it should still help spur growth in the downstream industry,
“Ideally, it should be zero to allow us to compete with the rival, which applies zero percent. But will it support the development of our downstream industry?” Gita told reporters at his office in Jakarta. Gita added that he had consulted with Industry Minister MS Hidayat over the competitiveness issue, and agreed to take the necessary
Earlier this week, the Indonesian Palm Oil Association (Gapki) asked the government to lower the export tax on crude palm oil temporarily as a quick response to Malaysia’s move of reducing its export tax to zero percent this month.
The measure will help local producers manage the abundant supply until March, when local production is expected to moderate, according to Gapki.
Last October, Malaysia announced a cut in palm oil export taxes to between 4.5 percent and 8.5 percent from 23 percent starting January to decrease local supply.
The tariffs apply when the price of palm oil exceeds the threshold of 2,250 ringgit (US$745). The tariff is zero percent this month as the price fell below the threshold.
Malaysia’s move is a response to Indonesia’s new tax regime launched in 2011, which slashed the export tax on refined palm oil products from 25 percent to 10 percent, to foster growth in the processing and refining industry.
The new tax rule complements a progressive export tax on palm oil that begins when the commodity’s price is valued above US$750 per ton. Exporters should pay a 7.5 percent tax when the price goes beyond $750 per ton, and there is a 1.5 percent increase for every $50 rise in the price from the threshold.
Indonesian processors and refiners have benefited from the new tax structure, with the industry aiming to push up shares of refined products to 60 percent this year from 58 percent last year.
Meanwhile, Malaysian downstream businesses have been significantly impacted by Indonesia’s rule as the local supply cannot be absorbed domestically due to its limited refining capacity, while a higher export tax on crude palm oil erodes its competitiveness against Indonesia.
In the near future, Trade Ministry officials will hold a meeting with related stakeholders to formulate the change to underline the balance between the development of the downstream industry and to boost competitiveness of palm oil in the overseas market, Gita said.
Gapki executive director Fadhil Hasan said on the same day that in the long-term, the government needed to lower the export tax to avert a decline in market share, particularly in certain key buyers of crude palm oil, such as India and Pakistan, and to maintain competitiveness with Malaysia.
“As the export tax is an instrument used to boost the downstream industry, we propose that the government charges a zero percent export tax on refined products,” he said, adding that the cut in export tax on refined products should also be accompanied by the cut in export tax for CPO. He said that the tax rate for CPO should be 5 percent, at present it is 7.5 percent.
Gapki recently estimated that exports could surge by 10.19 percent to 20 million tons this year on the back of greater demand, including for refined products, from key markets like India, China Pakistan and Bangladesh.
Meanwhile, palm oil posted its biggest weekly loss since November as record reserves and declining exports in Malaysia, the second-largest producer, prompted analysts to push back forecasts for a price rebound during the low-output season.
The contract for a March delivery lost 0.9 percent to close at 2,366 ringgit ($783) a metric ton on the Malaysia Derivatives Exchange in Kuala Lumpur. Futures, which dropped 1 percent yesterday after the inventory data was released, fell by 4.1 percent this week, the most since the five days ending Nov. 9.