Nepal exported palm oil worth Rs 8.7 billion, accounting for 10 percent of all exports in the 11 months of this fiscal year ending Tuesday. Until last fiscal, Nepal did not export any palm oil, as the country doesn’t produce as much as a drop of palm oil.

Ingenious Nepali traders are taking advantage of the South Asian Free Trade Area (SAFTA), according to government officials. As the SAFTA agreement provisions zero tariffs on goods exported from underdeveloped countries like Nepal, Nepali traders have been importing crude palm oil from other countries paying minimum tariffs and then exporting the finished product to India with zero tariffs.

“The import duty on such products is high in India, so Indian traders are importing refined palm oil from Nepal because it ensures maximum profit,” said Jib Raj Koirala, a former joint-secretary at the Commerce Ministry. “Similar transactions can be seen in other agricultural products, such as peas and betel nuts.”

According to government data, the import of crude palm oil jumped to Rs 10.53 billion from Rs 4.31 billion during the 11 months of the last fiscal year. The crude oil is primarily imported from Indonesia, followed by Argentina, Malaysia and Singapore.

While officials say there is nothing illegal about importing crude farm produce, refining it and then exporting it, traders must ensure there is a certain level of value addition. In the case of palm oil, exporters claim they ensure up to 30 percent value addition, but government officials tell a different story.

An official at the Trade and Export Promotion Centre, a government entity under the Ministry of Commerce that works in trade facilitation, said that the first four digits out of the eight-digit Harmonised System (HS) code should be different to prove that there is high-value addition on the raw material.

Records from the Department of Customs show that crude palm oil has been assigned an HS code of 15111000 while the code for refined palm oil is 15119000.

“Since the first four digits for the raw material and finished product are the same, there is no value addition,” said the official on condition of anonymity as he was not authorised to speak to the media.

There is yet another provision that traders must comply with.

Traders need a certificate of origin issued by the Federation of Nepalese Chambers of Commerce and Industry, Nepal Chamber of Commerce or Confederation of Nepalese Industries in order to claim governmental incentives and zero tariff facilities.

“The umbrella organisations of the private sector can declare the value addition via a certificate of origin, for which no governmental approval is necessary,” said Suyash Khanal, deputy executive director of the Trade and Export Promotion Centre. “Based on such certificates, Nepali traders can employ SAFTA facilities.”

The surge in exports, from nothing to billions of rupees, is led by a growing demand for palm oil in the Indian market, said Mintu Kumar Gupta, general secretary of the Nepal Vegetable Ghee and Oil Manufacturers Association. There are around a dozen factories involved in refining crude products, including palm oil, and exporting the finished products to India, he said.

And Indian importers prefer palm oil from Nepal due to the high margin difference in duties, according to officials at the Ministry of Industry, Commerce and Supplies.

“India imposes a 40 percent duty on the import of raw agricultural materials, including palm oil, but finished goods exported from Nepal are allowed under zero customs duty under SAFTA provision,” said an official at the ministry on condition of anonymity as he was not authorised to speak about the issue.

The trade might be legal but there is little that Nepal gets out of the entire transaction, say officials.

“Such types of trade do more harm than good to the country. Foreign currency goes out of the country and the only beneficiaries are traders—both in Nepal and India,” said a Commerce Ministry official. “This is not a sustainable model that the government should encourage when the country is struggling to close the huge trade deficit.”

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