China may use existing tax, not new fuel tax: source

By Eadie Chen

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, a source familiar with the issue told Reuters.

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.

Hiking the consumption tax might be simpler than introducing a new tax to be levied directly at the pump.

But officials are still debating the details of the preliminary proposal and face the knotty problem of how to use the tax proceeds fairly, the source said.

Under the fuel tax idea, which has been floating around for a decade, tax revenues would replace road tolls as a means of funding highway construction and maintenance, with local governments receiving funding in proportion to local road use.

But expanding the oil consumption tax would leave officials with no easy yardstick to decide how much each region should get.

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

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

Beijing had held back on imposing the tax due to previous fears about soaring inflation, high and volatile oil prices and the need to finalize a definitive fuel pricing scheme, officials had said.

With global crude prices standing at little more than one-third of July's peak, Beijing is very determined to pull off the long-awaited reform in oil price and tax, the source said.

Relevant government officials are to have another round of discussions this week to decide technical details and aim to push it through as soon as possible, he said.

An oil pricing regime reform is also under active discussion, he said, without elaborating.

Government researchers have said that the authorities would likely cut retail pump prices before introducing a fuel tax.

Energy analysts say the collapse in crude oil prices has opened a rare window of opportunity to reform China's fuel pricing regime since its regulated prices are now relatively high, with gasoline at $3 a gallon, about 50 percent above current U.S. prices.

"We don't believe such high relative prices and obscene profits are sustainable amid declining car sales growth in China," Gordon Kwan, head of energy research at CLSA, said in a note to clients.