05/04/2008 (Kuensel Online) - Business for country’s most lucrative industry, palm oil, hit the wall on March 31 when the government of India scrapped all import duties on crude edible oil as a measure to control inflation and rising food prices in India.
Bhutan’s palm oil industry, which mushroomed in the past few years, and has been reaping the benefits of import tax differentials on palm oil between Bhutan and India, has suddenly been left in a lurch.
Before the March 31 decision, India levied a 45 percent duty on imported palm oil, whereas it was zero percent in Bhutan if the industries imported palm oil with their own hard currency. In 2005, palm oil duties in India were 86 percent. It fell to 60 percent the following year.
To take advantage of this difference, these industries have been importing software from India and re-exporting it to south east Asian countries as a Bhutanese product, to earn hard currency to import palm oil.
Now these industries have stopped production. There are four palm oil factories - Kenpa Private Ltd., Mega Private Ltd., Bhutan Health Food Ltd. and Singye Vanaspati - in Pasakha and Phuentsholing, which process crude palm oil, imported from Malaysia and Indonesia, into refined edible oil (Dalda Vanaspati). About 80 percent of the refined edible oil is exported to India, the second largest importer of edible oil, at Nu 800-900 a tin and 20 percent is sold in the local market. One palm oil factory is still under construction.
Many business houses had applied to start up similar factories, described as get-rich-quick schemes, but the government put a cap on issuing licenses for all tax-sheltered industries in May 2005, following complaints from similar industries across the border.
In 2006, palm oil (or Vanaspati) export to India was around Nu1.38 billion, just below software and hydropower exports.
“There is no scope of profit with the potential buyers,” said the executive director of Bhutan Health Food Ltd., Sukesh Kumar Jain. Since the factory began production in June 2006, it has produced and exported approximately 18,000 tonnes of refined oil, with the factory’s capacity of producing 150 metric tonnes a day. “We can retain production at a reasonable rate, if the government exempts the five percent import duty on the furnace fuel,” he said.
The Bhutan Health Food industry plans to sell off 200 metric tonnes of crude palm oil, that it has ordered, directly to Indian factories. Crude palm oil is mainly bought from Malaysia at fluctuating prices of US $ 1,300 - 1,400 a metric tonne and sold in the Indian market at a profit of Nu 25-30 for a 30 kg tin of refined oil.
The factories also said that it would dismiss more than half its workers, mostly nationals. The four factories employ about 500 Bhutanese workers.
Kenpa private ltd., which produces 50 MT of refined oil per day, has 950 MT of refined oil in stock, which they hope to sell in the local market or at a loss in the Indian market.
For the United Industry in Pasakha, which is still under construction, shareholders are contemplating changing its line of production. “Seventy percent of the shareholders are Indian industrialists based in U.K and I’ve asked them for any alternative to the present condition,” said Kinga with United Industry.
While the government has always pointed out that industries, which thrive on tax differentials, were not sustainable, those in the palm oil industry did not expect the tax structure to change so suddenly. In the past, other tax sheltered industries like polymers have also seen their profitability shrink, when India reduced import duty from 24 percent to eight percent.
However, business houses in Phuentsholing say that zero duty in India is just a temporary fiscal measure. “Once inflation is under control, India could bring back the import duties,” said a Phuentsholing based businessman. The palm oil industries have been enjoying a three year tax holiday since 2006.
Bhutan’s newly elected government has stated in its manifesto that it will discourage tax-sheltered industries.