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China is said to be considering the idea of imposing a lower consumption tax on fuel oil next month following complaints received from trading houses, Dow Jones reports.

Earlier this month, China said that it planned to increase the consumption tax on a number of oil products to many times their current levels as part of the government's policy to promote energy efficiency. Fuel oil would also come under the new fuel tax structure, which is due to come into effect on January 1st 2009.

Under the new policy, consumption tax on fuel oil would be increased from CNY0.1 per liter to CNY0.8, equivalent to an increase of around CNY830 (USD 121) per metric ton, or roughly 35 percent of the current retail price for fuel oil.

Since the decision was announced, fuel oil traders and power plants have complained to the central government through their industry associations that the proposed tax hike is too high. Instead, they are understood to have proposed the idea of a number of gradual tax increases, with the first rise to be levied at between CNY0.3 to CNY0.4 per litre.

Trading houses have reportedly argued that prices of fuel oil in China, unlike gasoline and diesel, are largely market-based, so a substantial tax increase would be unfair.

Meanwhile, market sources have claimed that a higher consumption tax on fuel oil could benefit the state-owned oil companies as it could potentially lead to local "teapot" refineries being squeezed out of the market.

These refineries, mainly located in the southern province of Guangdong, China's manufacturing hub, and in the eastern Shandong province, use fuel oil as feedstock as they have limited access to crude oil. The use of cheaper feedstock enables them to compete with the state-owned refineries when producing products for the domestic market.

Market sources claim that teapot refineries and power plants using fuel oil are both on the central government's shortlist for elimination as they are less environmentally-friendly and energy efficient.

Fuel oil traders are expecting a decision by the central government regarding the tax hike over the next few days.