Indonesia mulls cutting tax on exports of crude palm oil

Trade Minister Gita Wirjawan said yesterday 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 per cent. 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 measure. 

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 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 per cent and 8.5 per cent from 23 per cent 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 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 per cent to 10 per cent, 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 tonne. Exporters should pay a 7.5 per cent tax when the price goes beyond US$750 per ton, and there is a 1.5-per-cent 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 per cent this year from 58 per cent 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.