Jakarta. An analyst has urged Indonesia’s regional leaders to reconsider the proposed surface water tax for the palm oil sector, as it can backfire on the nationwide biodiesel program.

Some of Indonesia’s regional governments are mulling collecting a monthly water surface tax of Rp 1,700 (almost $0.10) per palm trunk. Riau,  West Sumatra, and Bengkulu are among those that are drafting the regulations.

Muhamad Zainal Arifin, the director for the natural resource think-tank Pustaka Alam, said this could cause a setback on the B50 rollout that will start in July. This is where Indonesia raises the mandatory palm oil blend in diesel from the current 40% to 50% in a bid to cut energy imports. But a higher mandatory palm oil blend means Indonesia needs to produce more than the current levels. This tax will only add a financial burden on producers.

“The surface water tax can be an indirect sabotage of the national energy policy. The tax will only lead to additional costs for the palm oil industry,” Zainal said in Jakarta on Wednesday.

“Oil palm trees only absorb rainwater or dew naturally through the soil, not surface water, using pumps. Taxing the natural processes of plants is a form of imposing regulations,” he said.

According to Zainal, the plan also “lacks legal basis” and potentially violates existing regulations, hence possibly deterring investors' interests. The current regulatory framework defines that surface water tax is only possible for water extraction activities. The term surface water also usually refers to rivers, lakes, reservoirs, swamps, or other bodies of water that do not infiltrate underground.

“As long as there is no actual extraction of water from a river or lake, there is no object of surface water tax. It is impossible to measure the cubic meters of surface water used by oil palm trees," Zainal said.

The West Sumatra provincial government is aiming to collect Rp 1 trillion ($58.3 million) in surface water tax. For starters, it has set a target to amass Rp 594 billion ($34.6 million) from plantations not owned by smallholders.

Indonesia is the world's largest palm oil producer.

Government estimates show that the upcoming B50 policy could save Rp 48 trillion (approximately $2.8 billion) in slashed fuel subsidies as Indonesia tries to navigate the Iran war-induced energy crunch. Fossil fuel consumption is set to drop by 4 million kiloliters once the B50 kicks in.

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