24/06/2011 (Reuters) -  Indonesia, the world's top palm oil producer, may cap its maximum edible oil export tax at 20 percent instead of 25 percent, an official at the industry ministry said on Thursday.

The existing crude palm oil export tax system, aimed at securing domestic supply and reducing volatility in cooking oil prices, allows the government to impose tax rates from 1.5 to 25 percent.

Indonesia this week said it would lift its palm oil export tax in July to 20 percent from 17.5 percent in June.

The official's comments follow remarks from the Indonesian industry ministry late last year that Southeast Asia's largest economy would "restructure" its export tax policy on crude palm oil, as the levy has not spurred more local processing into downstream products as intended.

"The government has not decided the new export tax policy on oil palm," the official told Reuters in a text message.

"However, the Fiscal Policy Agency in its analysis, seems likely to keep current export tax policies with a lower maximum rate of 20 percent. For the export base price determination, the government will maintain the current mechanism."

Trade ministry and industry officials meet every month to decide the tax rate for the following month, using the average spot crude palm oil prices in Rotterdam in the preceding 30 days as a reference price.

Exporters had paid lower tax of between 3.0 and 4.5 percent until August last year. Prices began to pick up from September as erratic weather hurt production in Malaysia and Indonesia.

Earlier this year, top industry analyst James Fry said Indonesia's palm oil export tax is distorting the flow to the market.

The benchmark September crude palm oil contract KPOc3 on the Bursa Malaysia Derivatives Exchange hit a seven-month low at 3,140 ringgit ($1,038) a tonne on Thursday.

Expectations of higher second half production in Southeast Asia weighed on prices, but investors also pointed to the latest export tax rise.

Traders say this would lead Indonesian producers to step up exports of palm oil before July.

"That would have some impact on global supply," said a Singapore-based analyst. "I've been telling my clients that you really want to be invested in Indonesian planters instead of Malaysian, because once that (tax) comes down, everybody wants to export.

"That would lower international (palm) prices but at the same time you'd have a step up in the average selling price for Indonesian planters because of the removal of that extra burden."

Listed Indonesian palm oil producers include Astra Agro Lestari , London Sumatra , Sampoerna Agro and Bakrie Sumatera

Indonesia is expected to produce 21 million to 23 million tonnes of palm oil this year, having outpaced Malaysia as the top palm oil producer in 2007.