Refineries face brunt of tax rise

China's finance and taxation authorities announced on Monday a third increase on consumption tax for oil products in the past three months, altogether pushing the levy 50 percent higher.

It may dampen the production incentives among oil refineries which are normally advanced payers for the tax and despite the tax rebate are already plagued by recent price drops, said Hu Huichun, analyst with Zhuochuang Info Co.

"Several oil refineries in Shandong province have incurred loss and decided to overhaul and shut down temporarily," added Hu.

The tax on gasoline, naphtha, solvent oil and lubricating oil is increased to from 1.4 yuan to 1.52 yuan per liter from Tuesday, while the levy on diesel, jet fuel and fuel oil rise from 1.1 yuan to 1.2 yuan, according to the Ministry of Finance (MOF) and the State Administration of Taxation (SAT).

This is the third increase, following one on Nov 29 when and another on Dec 13.

The retail prices of gasoline and diesel will be cut by 180 yuan and 230 yuan per tonne after taking the higher tax into consideration, the National Development and Reform Commission announced in a separate statement, as the government reacts to lower global crude oil prices.

Countering pollution

"Protecting the environment is the main reason behind the tax increase," said Hu Huichun, adding that despite of a general hope for cheaper gasoline, the government shows its determination to fight against air pollution.

According to the MOF and the SAT, proceeds from the higher taxes will mainly be allocated to counter-pollution initiatives and the new energy sector.

"It may not fair to raise consumption tax on oil products, but a lack of regulation would worsen the environment," said Hu.

Vehicle emissions have turn out to be a major pollution source. If oil products fall sharply, customers may drive more than necessary, said Lawrence Lau, analyst of the energy industry at BOC International, in an earlier note.

The drop in oil prices will drag down sales of new-energy cars, said Liu Shangxi, director of the research institute for fiscal science at the MOF, to Xinhua.

China's energy consumption accounted for about 22.4 percent of the world's total in 2013, but its energy consumption per gross domestic product (GDP) was 3.5 times of that of the United States and seven times of that of Japan, according to Liu.

Fuel tax and pricing reform measures began five years ago, and have featured consumption tax hikes and the introduction of a pricing system more closely linked to the international market.

Consumption tax was first imposed in 1994 on consumer goods with a high energy cost and high pollution to make production and consumption more environmentally friendly and promote sustainable growth.

Over 10 countries, including Russia, Australia, New Zealand and France, have raised their oil product consumption tax since 2012 to ensure green development.