Pre-Budget Memorandum for Union Budget for the year 2009-2010
Posted On : 23rd June 2009

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Indian economy is passing through a difficult phase due to global economic meltdown. Manufacturing and service sectors continue to experience severe demand contraction from overseas markets and export has been adversely impacted in all major sectors.

With advanced economies of USA, EU and Japan projected to contract during the year, IMF and other agencies have revised the GDP growth downwards for India as well. This would expose Indian producers to surge of imports from Asian and Middle East countries that were traditionally focused on exporting to China.

With destruction of demand in domestic markets, China, EU countries and USA are also saddled with excess capacity in many product segments of the chemical industry. Indian industry is also witnessing surge of imports from many of these untraditional sources.

Chemical industry players from Middle East countries with their huge feedstock cost advantage are looking at India as an attractive destination for their products since export demand from China, Europe and other traditional destinations have dried-up. This would pose additional challenge to Indian producers in retaining their share in domestic market. With surge of imports from Middle East observed in many product categories, chemical sector has become extremely vulnerable.

Indian economy has been rapidly opened up to global suppliers while internal reforms are progressing at a relatively much slower pace. This has made local market more accessible to overseas suppliers than to Indian producers. Plethora of taxes, levies and duties charged while transacting business internally, within and across state, often exceeds the duty barrier that exporter to Indian market face. This high cost of internal transactions needs to be compensated appropriately so that Indian manufacturing sector gets a level playing field.

Fortunately for the economy overall price levels for manufactured goods, including chemicals, have come down. The inflationary forces are under control giving Government an opportunity to pursue both internal and external tax reforms that would support employment and long term growth of the industry.

Fall in prices for most chemicals in the international markets had been substantial. This provides an opportunity to explore the possibility of re-calibrating duty structure (import & excise) without adversely impacting final costs to consumers. This would help reduce the handicaps, which local producers face vis-a-vis overseas suppliers.

It is in the above context that proposals on indirect & direct taxes have been made to review various fiscal policies for chemical sector in the ensuing budget.


Import duties on most of the products of interest to ICC members have rapidly brought down. For polymers it is 5% and for most of the chemicals, it is at 7.5%. These rates are one of the lowest in the world and much below the bound rates. Whereas, in case of inputs, India has one of the highest rates, thereby placing the industry at a severe handicap as compared to overseas producers. In the above context ICC would submit:

1.1 Denatured Ethyl Alcohol (2207 20 00):
It is an important renewable feedstock for the chemical industry and several chemicals are manufactured using Denatured Ethyl Alcohol as a raw material. The current Import Duty on Denatured Ethyl Alcohol is 7.5% and this duty needs to be reduced to Zero since we have substantial deficit in domestic production.

1.2 Cracker Feed stocks: Naphtha (2710 11 90), Ethane (2901 10 00), Propane(2901 22 00):
Import Duty on Naphtha, Ethane and Propane for the chemicals and petrochemical sector needs to be reduced to zero % as is done for fertilizer and power sector. Current import duty of 5% on Naphtha and Propane (the basic feedstock for petrochemical industry) results in zero duty differential between these items and their downstream products like polymers. Petrochemical production involves huge investments and most of the countries have reasonable duty differential (between 6.5-15%) to make such investments financially viable. In line with above it is proposed that duty on these feedstock be brought down to zero.

1.3 Fuels & Energy Products like Fuel Oil (2710 19 50), Coal (2701 11 00 & 2701 12 00)
Energy constitutes a significant cost for Chemical operations. Currently the energy cost in India is much higher than the global average. Hence it is recommended that import duty on all fuels like Fuel oil, LSHS, Coal should be reduced to zero.

1.4 LNG (2711 11 00) & LPG (27111900)
LNG after gasification is used both as feed-stock as well as fuel. With Natural Gas available from KG Basin at $4.2 per mmbtu, it is recommended that import duty on LNG be brought down to zero so as to bring parity between RLNG and NG price. On the same line (as in 1.7) import duty on LPG needs to be reduced to Zero.

1.5 Catalyst:
Import duty on reaction Initiator/ Accelerator catalysts namely Catalyst with Nickel or Nickel compounds (3815 11 00), Platinum or Palladium (3815 12 00) (3815 19 00) and other (3815 12 90) may be reduced to Zero.

1.6 Rock Phosphate (2510):
Rock phosphate is used for manufacturing Phosphoric Acid which in tern is used for production of Fertilizer and other chemicals. This attracts a basic duty of 5%, which may be reduced to Zero.

1.7 Petrochemical building blocks:
Ethylene (2901 21 00), Propylene (2901 22 00) and Co-monomers like Butene(2901 23 00), Hexane (2901 10 00) Octene (2901 29 10) are derived from Naphtha and currently attracts 5% duty. Since, these are primary building blocks; duty on these may be reduced to 2.5%.

1.8 Solar Wafers - Duty free import of Capital Goods:
In order to provide a level playing field for manufacturers interested in setting up a solar wafer production facility in India, Government may exempt all capital goods required for setting up such facility from payment of import duty. This would greatly facilitate faster growth of this critical industry which in turn would provide a level playing field for solar power generation in the country.

1.9 Capital Goods and Fuels for Captive Power Plants:
Energy is a vital input for Chemical industry. Availability of power both in terms of quantity and quality is deficient in most of the states compelling the industry to setup captive power plants. It is therefore recommended that input of captive power plants and its spare are allowed duty free. Similarly fuels required for captive power plants may also be allowed at zero rate of duty.

1.10 Bulk & intermediate chemicals and finished products (Chapters 28, 29, 32, 38)
Import duty on bulk & intermediate chemicals and finished products may be increased to arrest free imports from countries where their own internal demand is severely affected due to global economic meltdown. This is necessary in the present context for Indian producers to survive through this difficult phase.

It is necessary to increase import duty on all those items covered under Chapters 28, 29, 32 and 38, which are presently at 7.5%. The duty may be increased to peak level of 10%.

However, import duty on Acetic Acid (2915 21 00), Methanol (2905 11 00), Cumene( 2902 70 00 ), Mix-Xylene(2902 44 00), Ortho-Xylene(2902 41 00), Toluene(2902 30 00), Benzene(2902 20 00), Iso butylene(2901 23 00), Hexane(2901 10 00), Ethyl Benzene(2902 60 00), Ethylene di-chloride(2903 15 00) may be retained at existing level of duty.

1.11 Commodity Polymers:
LDPE (3901 10 00), LLDPE (3901 10 10), HDPE (3901 20 00), PP (3902 10 00 & 3902 30 00), EPS (3903 11 00), PS (3903 19 10), SAN (3903 20 00), ABS (3903 30 00), PVC (3904 00 00, 3904 21 00, 3904 21 10 & 3904 22 10) The current duty on polymer is 5% which is one of the lowest in the world. This is even lower than that of developed countries of Europe (6.5%) and in USA (6.5%). India has large capacity for polymers to meet domestic demand and is a major exporter of PP. Substantial new capacities for Polypropylene and Polyethylene are being added by IOC, GAIL and HPL. Despite this, substantial import of polymers takes place due to very low import duty. This adversely impacts domestic industry. It is recommended that duty on polymer be increased to peak level of 10% so that investments made in this sector remain financially viable.

1.12 Paraxylene(2902 43 00):
The input of Paraxylene is Naphtha which has import duty of 5%. Import duty on Paraxylene is Zero. This is clear case of duty inversion, which need to be rectified. The duty on this product may be increased to 5%.

1.13 Fibre Intermediates - PTA (2917 36 00) and MEG (2905 31 00)
India is one of the major producers of fibre-intermediates and is an exporter of PTA & MEG. To support this segment it is necessary to increase import duty from existing 5% to 7.5% since Indian producers are facing large scale import threat on these products.

1.14 General Recommendation:
A. SAD (Special additional custom duty-SAD) is a reflection of CST. This should be reduced to 1% which is the CST rate expected to be the rate of CST as announced by the Government earlier. B. No exemption from SAD to imported goods if locally manufactured goods are subject to CST/VAT.


2.1 Inverted duty structure of excise duty:

  1. Molasses for Denatured Ethyl Alcohol:
    Excise duty on Denatured Ethyl Alcohol has been reduced from 10% to 8% ad valorem without any corresponding reduction in the specific duty on Molasses (Tariff Item 1703 10 00) which has been maintained at the effective rate of Rs. 750/ MT and this has resulted in an Inverted Duty Structure. Denatured Ethyl Alcohol is used by the chemical industry as substitute for petroleum feedstock. It is therefore proposed that Excise Duty on Molasses for use in the manufacture of Denatured Ethyl Alcohol (non-potable) be reduced to 8% ad valorem or Rs. 375/PMT whichever is lower.
  2. Naphtha:
    Excise Duty on Polymers has been brought down to 8% however Excise Duty on Naphtha is at 16%. Naphtha is an input for the chemical industry. As a result there is a distortion. It is proposed that Excise Duty on Naphtha be brought down to 8%.
  3. Furnace Oil:
    Excise duty on Furnace Oil is at present 16% and needs to be reduced to general Excise Duty level of 8%. Furnace oil price needs to be based on export parity price instead of import parity price.

2.2 Service tax on GTA:
Many entities compulsorily pay Service tax on GTA and they are also allowed to avail credit. However, with the regular Excise Duty credit accumulating on one hand, using of this GTA Service Tax credit is almost impossible under current circumstances for some of the manufacturing units. We request the government to consider exempting this service from service tax purview as an interim measure.

2.3 CENVAT credit
Inclusion of LDO and HSD in input category: LDO and HSD are used by the chemical industry for generation of power or as fuel in the manufacture of final products. Exclusion of these inputs from CENVAT scheme results in higher energy cost.

2.4 Education cess on CVD/CENVAT:
While education cess on basic custom duty is VATable the same benefit is not available for Cess applied on total duty for DTA sale of EOU, this may be made VATable.

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