Pre-Budget Memorandum For Union Budget For The Year 2010-2011
Posted On : 22nd February 2010

15 January 2010

0. ECONOMY

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--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.

I. IMPORT DUTIES

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 Inverted Duty Structure on Lauryl Alcohol falling under Ch. 3823 70 20:

The finished goods (Surfactants) are classified under Chapter 3402 of the Customs Tariff as Organic Surface Active Agents (hereinafter referred to as OSAA) and primarily used as inputs in FMCG like toothpaste, detergents, soaps and shampoos. The main raw material is Lauryl Alcohol which is classified as Industrial Fatty Alcohols under Chapter 3823 70 20 of the Customs Tariff.

Since the budget of 2006-2007, the said raw material Lauryl Alcohol has been subjected to an INVERTED DUTY STRUCTURE as compared to our finished goods OSAA. At present the raw material Lauryl Alcohol attracts 15% Customs Duty, whereas the finished goods OSAA attracts a lower duty of 10%.

We request the government to correct the anomaly by levying 7.5% Import Duty on Lauryl Alcohol or at the Peak Rate Duty on Organic Chemicals falling under Chapter 29.

1.3. 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.

1.4 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.

1.5 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.

1.6 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.

There are quite a few imported raw materials used in the manufacture of catalysts (eg. Platinum & Palladium : 28439012, Special Grade Alumina Powder & Activated Alumina : 28183000, Molybdenum Trioxide: 28257010, Activated Carbon : 38021000) which attract either the same or higher rates of import duty than the duty on the finished product. To make manufacture of catalyst viable and making at available to the chemical industry at competitive prices we request that import duty on the inputs (metal & their oxide to be reduced to zero).

1. 7 Import duty on Boric Acid and its raw material:

Most Indian producers of Boric Acid produce it with Borax Pentahydrate (7.5 import duty) and Natured Boron Ores (2%) import duty.

Production of Boric Acid with Baron Ores involves pollution and control methods where as production with Borax Pentahydrate there is no pollution angle. However, production of Boric Acid with Boron Ore is economical in view of lower import duty.

We request reduction of Import duty on Boron Pentahydrate (Tariff Code 28401300 to2% ad valorem level.

1.8 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.

1.9 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%.

1.10 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.

1.11 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.

1.12 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.

1.13 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.

1.14 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%.

1.15 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.

1.16 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.

II. EXCISE/ CENVAT

2.1 Inverted duty structure of excise duty:

A. 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.

B. 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%.

C. 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

III. SALES TAX/ VAT

The total incidence of Indirect Taxes on many chemical products produced in India including Excise, Sales Tax etc. is often as high as 21.8% which is significantly higher than the incidence even in the other Asian countries. This should be brought down to the level of other Asian countries through reduction in both excise duty and sales tax.

The erstwhile Honorable Finance Minister had proposed in the Union budget 2006-07 that India should move towards a national level GST, with the Centre and States sharing the revenue. He had also proposed to set April 1, 2010 as the final date for introducing GST. This deadline needs to be adhered to if not advanced.

Given the hour of crisis, we request for abolition of CST with immediate effect.

IV. DIRECT TAXES

4.1 Corporate Tax Rates and Service Taxes:

Global Financial Meltdown is very similar in its manifestation to a Force Majeure situation on individual manufacturing units. In this hour of crisis, we request the government to:

" Reduce Corporate Tax rate to 25%
" Reduce Service Tax by 5%

4.2 Surcharge:

Surcharge may be abolished.

4.3 Fringe Benefit tax to be withdrawn.

To help companies make more contribution towards employee welfare, ICC proposes removal of Tax on Fringe Benefits.

4.4 Incentives Like benefits for Creating Investment Allowance Reserve:

The global recession has affected plans for investments and the sentiments are very weak on capital investments. In order to bring back the economy into a growth mode, it is necessary that some incentives like benefits for creating Investment Allowance be re-introduced as a part of a stimulus package.

4.5 Tax exemption to EOU to be continued after 31/03/2010:

Tax exemption under section 10B of the Income Tax Act may be extended beyond 31/03/2010. SEZs have been granted Income Tax Exemption and benefits for a period of 15 years. EOU units are basically performing the same parameter required to achieve positive foreign exchange earning. Therefore, complete tax exemption under section 10B should also be extended to EOUs without any time time.

4.6 Rate of depreciation for Plant & Machinery:

The wear and tear of plant & machinery in the chemical industry are relative higher as compared to other industry. The depreciation allowed for the purpose of income tax was earlier @ 25% which was brought down 15%. It is proposed that same may be restored to 25%

4.7 Investment in energy efficient & green technology:

In order to encourage adoption of more energy efficient and green technology like replacing mercury cell with membrane technology in chlor-alkali industry, water recycling plants etc. 100% deprecation may be allowed.

4.8 Initiatives to address Climate Change:

To encourage initiatives in reduction of carbon emission by the chemical sector India industry can play a vital role. Trading in carbon credit is an emerging global initiatives and it is proposed that income accruing to an Indian company by selling Carbon Emission Reduction Credit (CER) may be exempt from income tax.

4.9 Dividend Distribution Tax:

To encourage investment Dividend Distribution Tax may be removed.

4.10 Others:

Deduction u/s 80HHC for export of Goods is to be re-introduced.
Surcharge to be abolished.

V. Technology up gradation and R & D:

For Indian chemical industry to become globally competitive there has to be more emphasis on innovation and R&D. Establishment of R&D facilities is very capital intensive. Though India has acquired significant position in Specialty Chemicals sector especially in Pharmaceuticals, Fine Chemicals and Agrochemicals, industry's expenditure on R&D is hardly 1% of their turnover. This is very low compared to other major countries where it ranges from 4% to 8% depending on specific sectors. To be globally competitive, Indian chemical industry has to invest in R&D and continuously develop new products and new technologies. This will require considerable investment. Indian chemical industry therefore needs financial incentives to pursue the course of innovation in the form of:

  • Soft loans at reduced interest rates with longer moratorium period and longer repayment period.
  • Zero Import Duty on capital goods imports for R&D activities
  • To encourage R&D, Government should consider extending 150% of expenditure in R&D for income tax exemption beyond 2012 by additional 10 Yrs.

5.1 Income Tax benefit for Commercialization of R&D:
Companies spending on R&D get benefit under Section 35. However, no benefits are available upon launching of the product. In order to promote innovation government may allow exemption accruing out of new product launch from payment of income tax for a period of 3 Yrs.


5.2 Technology up-gradation fund (TUF)

Chemical industry needs to continuously upgrade technology to stay competitive in the global environment. Government may create Technology up-gradation fund (TUF) which can be used to support technology up-gradation initiatives in SME sector.

VI. Free Trade Agreements:

ICC strongly recommends that in the current global meltdown, government should not commit to participate in any of the FTA deliberations in view of the following factors:

  • India's general experience on FTAs so far had not been encouraging. An analysis of our FTA with Thailand has clearly demonstrated that the same has benefited Thailand disproportionately more than trade flow from India.
  • Indian Import Duty on most of the chemicals in India is already very low. In some of the product categories, it is one of the lowest and lower even in comparison to developed countries that enjoy substantial technology, financing and infrastructural cost advantages as compared to India. Further reduction will result in imports flooding Indian market to the detriment of the local industry.
  • Over the years, Import Duty has been reduced significantly, while similar adjustments have not been made in the cost of inputs of the Indian chemical industry.
  • Due to the impact of Economic Meltdown in their own countries, members of the Trading Blocs are eyeing the large Indian market to sell their goods at low prices.
  • In the recent past, industry is experiencing surge in importsnot only from countries like China, Taiwan, Korea but also from Brazil, Mexico and others from Latin America.

Our Submission:

  • Defer signing and implementation of all FTAs negotiated or finalized or in pipeline, especially with ASEAN, Thailand, Korea and Gulf Countries for at least 1 year.
  • If possible, put on hold enforcement of all FTAs already signed since 2006 at least for 6 months.

VIII. SUMMARY OF SUBMISSION:

Sir, in conclusion we would like to submit the following-

A. Import duty on following products may be increased to the peak level of 10%

- All chemicals under chapter 28, 29, 32 & 38 which are currently @ 7.5% (exept for chemicals specified in para 1.1)
- All polymers under chapter 39 which are currently @ 5%

B. Import duty on fiber intermediate like PTA & MEG may be increased from 5% to 7.5%

C. Import duty on basic inputs may be brought down to 0%

- Denatured Ethyl alcohol
- Cracker feedstock (Naphtha, Ethane, Propane)
- Fuel & Energy products (Fuel oil, Naphtha, Fuel oil, LSHS, Coal, LNG, LPG)
- Capital goods for captive power plant and PV cell-Solar wafers
- Catalyst
- Rock Phosphate
- Import of capital goods for PV cell(Solar wafers and R&D activity

D. Excise duty for following products may be reduced

- Molasses for Denatured Ethyl alcohol to 8% or Rs.375/Ton whichever is lower
- Naphtha for cracker feed stock to 8%
- Naphtha, Fuel oil for captive power generator to 8%

E. Direct Tax

- Corporate tax may be reduced to 25% and service tax to 5%.
- Depreciation for Plant & Machinery may be increased from 15% to 25%
- Dividend Distribution Tax may be removed
- Fringe benefit tax (FBT) may be withdrawn
- Tax exemption to EOU to be continued after 31/03/2010.

F. Creation of Technology up-gradation fund.

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