Chemical imports should be taxed on end use: Ministry

The ministry of chemicals and fertilisers has forwarded a proposal to the finance ministry to modify the duty structure for all chemical imports. “The proposal, which seeks differential taxation of same chemicals based on their end use, is expected to negate the effects of heavy imports in the sector”, said a ministry official.

The ministry’s proposal urges that chemicals be taxed differently, based on their phases of manufacturing, whether the chemical import is used as a raw material, as an intermediate one or as finished goods. The proposal says chemicals should be taxed at the highest rate when they are used as finished goods, since here, they directly compete with the domestic product, and lower if they are used as intermediate products. The taxation should be comparatively less when chemical imports are used as raw materials, explained the official. This would also help take care of the raw materials for the specialty chemical industry, sources said.

Officials added that the differential duty structure would also contribute to affordable pricing of some chemicals, in case they are used for public utilities (pharmaceuticals, fertilisers etc). The case could be similar to compressed natural gas (CNG ), a relatively environment-friendly substitute for petrol and diesel, used by certain automobiles. CNG is priced lower at around $4.3 Mmbt when sourced for fertilisers or power, while normally, it is available at $7-11 Mmbt when imported, sources said.

Meanwhile, the ministry has also recommended a lower import duty for all basic chemicals to address the issue of raw materials for the chemical industry. Major chemicals used by the industry include formaldehyde, acetone, acetic acid, phenol and methanol.

“The Indian chemical industry is plagued by the problem of capacity constraint, so much so that it is operating at one sixth to one eighth of the size of the global industry. Therefore, while global players have the benefit of an economy of scale, imports are inevitable to be used as substitutes for raw material, since domestic output of the same chemical is far less than the requirement. Therefore, a lower duty will help address the issue of procurement of raw material, at least in the short term,” officials said.