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China has raised the consumption tax on oil products by up to 17.5% but the impact on the market appeared to be limited so far, trade and refinery sources said Monday, December 1.

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The Ministry of Finance and the State Administration of Taxation jointly announced Friday that the consumption tax would be raised effective Saturday.

"In order to promote environmental management and energy conservation, the State Council has approved the increases," according to the circular.

A government source said the hike in consumption tax had been under consideration for a while and was raised now as oil prices were lower which would limit the impact on consumers.

In percentage terms, the consumption tax on middle distillates and fuel oil have been hiked the most, by 17.5%, to Yuan 0.94/liter (15 cents/liter).

The government said, however, that it will continue the current practice of waiving the consumption tax on jet fuel. There is no consumption tax on crude oil.

Fuel consumption is not likely to be impacted as retail pump prices are at their lowest since mid-2010.

The National Development and Reform Commission has reduced retail gasoline and diesel prices by a total of more than Yuan 1,400/mt since July.

Traders pointed out that the magnitude of the latest consumption tax hike was much smaller than in 2009, when the tax on middle distillates and fuel oil was increased by 700% to Yuan 0.8/liter.

China's independent teapot refineries that routinely buy fuel oil to use as feedstock in their topping units will see only a limited increase in their average purchasing costs.

For example, the cost to procure Russian M100 fuel oil will go up by 3% with the new consumption tax, according to Platts calculations.

Unlike other countries, China requires the consumption tax to be paid in advance by refiners, which then recoup it at the pump from consumers.

In light of the recent slide in crude oil prices, regulated retail benchmark prices were due for another Yuan 220-Yuan 225/mt cut last Friday.

However, the NDRC announced late in the day that it would hold retail gasoline and diesel prices steady to account for the increase in the consumption tax.

Under the oil product pricing mechanism, regulated prices are adjusted every 10 working days in line with movements in international crude prices, unless the resulting price change is less than Yuan 50/mt.

While the state-owned companies such as China Petroleum and Chemical Corp. and PetroChina are able to pass the higher consumption tax on to consumers at the pump because of their dominant market share in the retail segment, teapot refiners without their own retail outlets may find it more difficult to sell the oil products at higher prices.

A teapot refinery source said it was still not clear if his company would be able to pass on the additional consumption tax costs when selling oil products to wholesalers as prices in the wholesale market are unregulated and negotiated between buyer and seller.

"Third party wholesalers and retailers may not want to pay more for the oil products, so we might have to bear the cost of the higher consumption tax."

--Staff reports,
--Edited by E Shailaja Nair,