* Seeks hike in import tax on refined edible oil to 20 pct vs 7.5 pct now
* Wants 10 pct import tax on crude edible oil vs zero now
* Palm oil futures may face pressure if govt adopts proposal (Adds details, comments)
By Niluksi Koswanage
NUSA DUA, Indonesia Nov 29 (Reuters) - India's oilseed industry has urged the government to hike import taxes on palm and other edible oils as a sharp fall in global prices hurts demand for domestic production, two trading sources told Reuters on Thursday.
Prices have fallen more than a quarter this year on growing palm oil stocks in Southeast Asia, another worry for top edible oil buyer India, which has tried to staunch an inflow of cheap imports after Indonesia cut export taxes on the refined variety.
India's oilseed crushing industry made a proposal to Farm Minister Sharad Pawar last week, seeking a 10 percent tax on imports of crude edible oil, Indian sources with direct knowledge of the plan said.
"If nothing is done, people will suffer and no government will want that," one of the trading sources told Reuters on the sidelines of an industry conference on the Indonesian island of Bali. "This is a two-pronged approach to save India's industry and farmers."
The sources did not want to be identified because of the sensitivity of the issue.
The industry wants to shore up prices for India's farmers, now sowing rapeseed, who have complained of smaller returns in the face of cheaper imports from palm producers Indonesia and Malaysia, and soyoil exporters Brazil and Argentina.
The sources said the proposal also called for import tariffs on refined edible oils to be hiked to 20 percent from 7.5 percent now, in a step to protect Indian refiners' investments in building plants to process imports of crude edible oil.
India may have a window period to set higher import taxes soon, as inflation in October unexpectedly dropped to its slowest pace in eight months, at 7.45 percent.
"Inflation is not too bad. The government needs to bite the bullet as the short-term effects will hurt a little but in the long term, it helps farmers and industry," the second source said.
This is not the first time India has faced pressure to change its import taxes. In August, the South Asian country raised its taxable level of refined palm oil cargoes to make the product more expensive and help local farmers and refiners.
That was a response to a cut last year in export taxes on processed grades by top palm oil producer Indonesia, to half of those of crude, to encourage its processing industry and lift earnings from higher value-products.
To match Indonesia's export push, Malaysia has focused on boosting its tax free quota of crude palm oil exports to 5 million tonnes from 3 million, most of which went to India.
Malaysia also plans to cut export taxes on crude palm oil from next year to capture more of the Indian market, where refiners and farmers are feeling the pinch from low prices.
Stocks in Malaysia hit a record 2.5 million tonnes in October, while Indonesian inventories are estimated at more than 4 million tonnes, setting the stage for a big export push.
Higher import taxes by India could cause a sharp drop in Malaysian palm oil futures, on fears of slowing demand.
But Southeast Asian palm oil traders said the decline might be limited, with an industry body estimating India will import a record 10 million tonnes of edible oils in the 2012/13 marketing year that began this month. (Additional reporting by Michael Taylor; Editing by Clarence Fernandez)