The cooking oil and ghee industry was heavily burdened with taxes, as it was the second largest contributor to the government exchequer after petroleum products.
The impact assessment study of the Competition Commission of Pakistan (CCP) on ghee and cooking oil sector issued on Thursday revealed that present heavy tariff and taxes on the cooking oil and ghee industry and anomalies within the cooking oil/ghee units and other irritants present within the vegetable ghee/cooking oil industry directly or indirectly impacted this sector.
In the past, it had been the practice that whenever the prices of imported edible oil rose substantially in the international market the custom duty was immediately reduced proportionately, so as to avoid further burden on the general public. But this has not been practised by the government to give relief to the common man due to its own financial reasons though the prices of palm products had touched an all-time historically low in 2008.
However, in spite of being the second largest contributor to the government exchequer after POL, the cooking oil and ghee industry at present is facing multiple irritants.
The CCP study further said that in Pakistan scenario, in spite of decreasing prices of RBD oil in international markets the prices in domestic markets were not decreased due to many reasons associated with the import and production costs of ghee and cooking oil. It included that an exchange rate depreciation of 33 percent between 2007 and 2009, the wages of workers have increased from Rs 4000 per month in 1998 to Rs 7000 in 2009, the FED, sales tax and the withholding tax are linked with the international prices of edible oil have also increased proportionately and prices of electricity, natural gas and diesel have increased 33 percent since 2007. Since 2005, tariff of gas, a major cost driver, has increased by 94 percent.
Market studies show that the prices of some regional and low sale brands are sometimes drastically low. Competitors try to fill this gap through different sales promotions to dealers and wholesalers. This price benefit generally does not pass on to the consumers. Consumers get the benefit of lower prices only when there is a noticeable reduction in the international price of palm oil and palm olien. It can also happen when sometimes government makes tax reduction in different tax slabs applicable to this industry.
Pakistan reliance on import of edible oil was 75 percent during 2009-2010 to meet the consumption demand of its people while only 25 percent of edible oils are locally produced.
The CCP study further disclosed that the consistent increase in the import bill of edible oil is directly related with the increase in consumption behaviour of Pakistani people. Pakistan's population is increasing at a rate of 2.05 percent per annum and urbanisation rate of 3 percent (2005-10) supports the increasing pattern of import bill. Sixteen Figures taken from a Malaysian Journal on yearly basis showed that oils and fats consumption in Pakistan had registered 16 percent increase during the calendar year 2009 and stood at 3.22 million metric tons as against 2.77 million metric tons in year 2008.
Pakistan has failed in increasing domestic production of edible oil due to dismal cotton production in the country. Pakistan had highest cotton production of 11.138 million bales in 2004 afterwards there remained an overall downward trend of cotton production in the country.
Pakistan's import of palm oil from Malaysia consists of 90 percent out of total import. Before 2002, Pakistan was importing palm oil from Malaysia only. Then with the emergence of Indonesian market of palm oil, the balance of trade divided into 50/50 between Malaysia and Indonesia. However, under MPCEPA signed between Pakistan and Malaysia in November, 2007, Pakistan had reduced the tariffs on seven palm products by 10 percent Margin of Preference (MoP) with effect from January 1, 2008. The MPCEPA is Pakistan's first comprehensive agreement on Goods, Services, Investment and Economic Co-operation with any country of the world, besides, being its first such Agreement between the two members of OIC and Malaysia's first such agreement with any of the countries of South Asia.
The tariff is to be further reduced by 5 percent MoP, starting from January 1, 2010, making Malaysia as the first choice for Pakistan to import Palm oil and its products compared to its closest competitors. What makes the Malaysian palm oil more attractive is that it has not only adapted well to the Pakistani taste but also costs much less than other edible oils such as soya bean, sun flower and canola from the US, report said.