With demand going up, I am bullish on petrochemicals: Nikunj Dhanuka

Budget should take steps to revitalise investment in the industry, says IG Petrochemicals MD

Nikunj Dhanuka,MD & CEO, IG Petrochemicals

Last Updated : Jan 16 2017 | 1:01 PM IST

Any breakthrough requires bold measures and path-breaking decisions. Prime Minister Narendra Modi’s demonetization initiative has brought historic changes to the Indian economy. Not only are the banks recapitalised; there are considerations of spending $ 3 trillion on infrastructure. This would change the quality of lives of people and the economy would take the next step into globalisation.

The last few quarters have seen margins jump up as a result of factors such as high demand and low supply, improved efficiency in production, lowered costs etc. Add to this the growth story of India and we are in a rapid growth path.

We are extremely bullish about the industry as a whole in terms of growth over the next five years.

This will lead to the entire petrochemicals sector reaping the benefits as an industry. Petroleum with its consumption level and also the downstream petrochemical products that are used as a raw material in paints, plastics, cables, etc, which are all, used for infrastructure development. With demand going up, I am predicting a bullish future.

Increased capacities will logically lead to lowered cost of production. Companies producing chemicals using downstream petroleum refinery products, as raw materials, are competitive in the international marketplace. Locally within the Indian domain too, they would be in a position where demand can be met in a cost effective way. Also Korean manufacturers and Far East based companies, which found India to be a good market to dump their material, (since demand has slowed down in China) would find it hard to compete with Indian manufacturers who are lowering their cost of production and therefore their selling price.

Some of the key considerations for the mainstream petroleum industry, in this budget could be:

To promote gas-based industry, LNG transported by a vessel from abroad should be exempted from service tax. Currently there is a 15 percent service tax applicable on transportation of LNG by a vessel from abroad. Also LNG regasification should be exempted from service tax. Imported LNG has to be re-gasified and converted into natural gas for transportation and consumption domestically and this attracts service tax.
In this regard the transportation of LNG by a vessel from abroad could be exempted as ‘zero rated supply’, under GST. Similarly is the case for re-gasification of LNG, which should be exempted from GST.
There could be a tax holiday benefit given from the current 7 years to 15 years or for a period of minimum of 10 years consecutively within a 15-year period, from the year of commercial production.
To facilitate LNG import, location with LNG facility at port location could be defined as ‘industrial infrastructure u/s 80-IA of Income Tax Act.
In light of the implementation of BS-IV norms by April 2020, there should be incentivisation of the downstream companies. There should be 100-percent depreciation allowed to projects undertaken for upgradation of fuel quality.
There could be a consideration of changing the clause of the Finance Act, 2016, which has introduced a sun set clause in the provisions of section 80-IB (9) of providing no tax holiday if the production is started after March 31, 2017. This should be considered for a change and the provision of tax holiday provided u/s 80 IB (9) of a 7 year tax holiday for profits derived by a mineral oil producing company in India, should be maintained. Instead it could be kept as the intimation of discovery on or before March 31, 2017.

For the petrochemicals and downstream products industry, the Finance Minister could consider some of the key points in the forthcoming Union Budget:

Most countries have higher duty on finished goods than India. We expect that the import duty on chemicals like pthalic anhydride which is at 7.5 percent, should be raised to 10 percent, to have better capacity utilisation by the Indian manufacturers and reduce imports thus saving precious foreign currency of the country.
There is duty free import under FTA (Free Trade Agreement) from major exporting countries like South Korea, Indonesia and Thailand, with effect from January 1, 2017, for raw materials derived from the petroleum refining, used to manufacturing of various chemicals like pthalic anhydride. Whereas on raw material like orthoxylene which is used for producing pthalic anhydride basic duty is at 2.5 percent. We expect this duty to be removed making duty on orthoxylene as nil, thus making Indian manufacturers at par with the foreign exporting companies.
Also currently the income tax rate on companies is 30 percent and Book Profit Tax (MAT) is 18.5 percent, which is on the higher side. We expect that MAT rate should be reduced to 15 percent, with set off for higher period of 20 years against current period of 15 years. It is recommended that there should be a proportionate decrease in MAT if there is a decrease in income tax rate. This will promote higher investment in the sector, which is highly capital intensive.
We also expect that there should be restoration of 80 percent depreciation on waste recovery units like malic anhydride

These sets of considerations in the budget will go a long way in revitalising infrastructure investment in the industry and bring in critical edge within the domestic play in the country.
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Nikunj Dhanuka is the managing director & CEO of IG Petrochemicals Ltd

The views expressed in this article are personal and does not reflect that of the publication