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On February 2, the Ministry of Finance and the State Administration of Taxation released a notice adjusting certain refined oil consumption tax policies. Industry experts observed that this new regulation on naphtha represents a significant shift from the policy implemented in April 2006.
In 2006, naphtha was included in the scope of excise taxation alongside solvent oil, lubricating oil, and fuel oil, with a tax rate of 0.2 yuan per liter for naphtha, lubricants, and solvents, and 0.1 yuan per liter for fuel oil. The policy also allowed for a 30% tax collection rate to ease the impact of rising production costs on large-scale ethylene producers.
The latest notice, effective from January 1, 2008, to December 31, 2010, mandates full consumption tax on naphtha produced directly by manufacturers. However, imported naphtha and domestically produced naphtha used as raw materials for ethylene and aromatics products are exempted from the tax.
Zhou Dayi, a researcher at the National Development and Reform Commission’s Energy Research Institute, noted that maintaining low energy prices through administrative measures may offer short-term relief from inflation but could distort market supply and fail to reflect resource scarcity, leading to inefficient use of resources.
Ethylene, a key petrochemical feedstock, is essential for plastics, synthetic fibers, rubber, pharmaceuticals, and more. Due to limited domestic production capacity and raw material availability, China still relies heavily on imports. Dong Xiucheng, deputy dean at the University of Petroleum, emphasized that the revised policy aims to better manage petroleum product consumption and conserve resources, aligning with national strategic needs.
The adjustment benefits domestic ethylene and aromatics production by curbing naphtha exports and supporting local manufacturing. It also encourages naphtha imports, which could increase supply and support growing demand from new ethylene projects.
Experts believe the policy promotes fair competition between domestic and imported naphtha-based products while addressing tax evasion practices. For companies using naphtha in downstream production, a three-year tax exemption helps boost competitiveness.
However, smaller companies not affiliated with the major state-owned enterprises face higher costs due to full tax imposition on imported or non-exempt naphtha. With international oil prices reaching $100 per barrel, these firms may suffer increased production expenses.
Industry analysts suggest that the tax adjustment could raise operational costs, potentially prompting companies to improve energy efficiency. While some costs may be passed on to consumers, the extent depends on product demand elasticity.
Professor Zhu Qing from Renmin University noted that the full tax on naphtha and other refined oils will affect industry usage but may not significantly impact production companies if they can pass on the burden.
Han Wenke, director of the National Development and Reform Commission’s Energy Research Institute, highlighted that the taxation policy reflects broader reforms and social equity goals, aiming to improve living standards while managing energy resources effectively.
Overall, the new regulations represent a step toward a more balanced and sustainable approach to petroleum taxation and resource management in China.