China mulls tax options to reform oil pricing

By Eadie Chen and Shen Yan

BEIJING (Reuters) - Chinese policy makers may decide to increase a refined oil consumption tax rather than impose a new fuel tax, as some market participants are expecting, official sources familiar with the issue told Reuters on Thursday.

The consumption tax, currently levied on seven refined oil products rather than just the retail staples of gasoline and diesel, is paid by refiners and importers, who pass the cost on to their customers.

One of the sources said the tax would be raised by a margin that is "not low" to help encourage energy efficiency in the world's second-largest oil consuming country. He said hiking the consumption tax was simpler than introducing a new tax to be levied directly at the pump.

Sun Gang, a researcher for the Ministry of Finance, agreed.

"Increasing the existing tax is more acceptable to consumers and much easier for collection," said Sun, who was not directly involved in the decision-making process.

The National Development and Reform Commission (NDRC), China's top economic planning body, said it was actively studying plans with other government agencies to reform China's oil products pricing mechanism.

Also under consideration were proposals to lower pump prices, scrap road tolls and reform fuel taxes and fees, it said, without elaborating on details, timing or likely outcomes.

One of the sources said that there were more than one set of plans about the changes to the fuel pricing system.

One was to cut fuel prices while raising the oil consumption tax; others included a one-off overhaul of the oil pricing regime or incremental steps of reform, he said.

The officials said policymakers from various government agencies were still debating the details of the proposals but a final decision would be made before long.

The second source said that if the government hiked the consumption tax, the proceeds would go straight into central government's pocket, posing a problem about how to distribute the proceeds fairly.

Some analysts had said a fuel tax might replace road tolls and fees which are collected by local government. If consumption tax is raised instead, there would be no easy yardstick to decide how much each region should get, the source said.

"This will lead to a lot of non-transparency and tussles between the central and local governments about how to use the money," he said.

It will also lead to smuggling when domestic factory gate oil prices are higher than global prices, he added.

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