Andhra removes incentives for edible oil refiners at ports

Complains of excess capacity

Andhra Pradesh, which is home to one-fourth of the country's port-based edible refining capacity, has decided to do away with tax incentives for new units as excess capacity stifled the existing units.

In AP new edible oil refining units were eligible for a reimbursement of VAT at 2.5 percent for big units 3.75 percent for medium size units and 5 percent for smaller units under the Industrial Policy 2015-2020.

Port-based refining units, which process the imported edible oil and sell it in the country, were estimated to have a total installed refining capacity of 15-16 million tonne per annum as against the average annual import of 12-12.5 million tonnes of edible oils, primarily palm oil. Of this, at least 2 million tonnes of refined oil is directly coming into the country, according to the industry sources.

Encouraged by the government tax incentives, units with a total refining capacity of 4 million tonnes have come up in Andhra Pradesh at the two private deep water ports of Krishnapatnam and Kakinada on the east cost in a short span of time. Large port-based edible oil refining capacity also exists in states like Gujarat and Maharashtra, though no tax incentives are given to the new units by the respective state governments any more.

As the undivided AP had accounted for a consumption of around 1-1.2 million tonnes of imported edible oil, the private port-based refiners have expanded their markets into the neighboring in states like Odisha, Tamilnadu and Karnataka, which too started growing local capacities.

"For an industry that operates on a thin 1-2 percent margin, AP government's tax incentives makes a huge difference. That is why several people had set up their refining units here only to face a problem of excess capacity later on," Pradip Chowdary, founder and managing director of Gemini Edibles and Fats India Private Limited (GEF India) told Business Standard, while welcoming the government's decision. His company runs a 800 tonnes per day capacity refining plant at Krishnapatnam port.

Citing the over capacity issues, the Krishnapatnam Edible Oil Refiners Association had itself appealed to the state government to stop incentives to the units some time ago. Based on these concerns the state government has now put the industry in the negative list.

"The association stated that there is excess edible oil refining capacity in the country and more particularly in the state of Andhra Pradesh and several existing units with a refining capacity of 1.2 million tonne capacity have already been declared as non performing assets by the banks. Under these circumstances, attracting investments into the refining sector with 5 percent VAT reimbursement will only aggravate the problem and the existing refining units will be be able to function," AP government said in its orders. Another 18-19 million tonne refining capacity exists in the hinterland of India which mainly depends on the domestic production. Lack of growth in domestic edible oil production and the practice of consumption of predominantly non-refined edible oils like mustard posing problems to the hinterland refiners, according to Chowdary.