Chemical sector seeks a slew of sops

Hike import duty on finished products; Rationalize excise Duty on Molasses to 8% ad valorem or Rs. 375/PMT and on Naphtha to 8%, cut corporate tax to 25%, service tax to 5%.

Current status

Chemical industry is an important constituent of the Indian economy. Its size is estimated at around US$ 35 billion approx., which is equivalent to about 3% of India's GDP. The total investment in Indian chemical sector is approx. US$ 60 billion and total employment generated is about 1 million. The Indian chemical sector accounts for 13-14% of total exports and 8-9% of total imports of the country.

In terms of volume, it is 12th largest in the world and 3rd largest in Asia. Currently, per capita consumption of products of chemical industry in India is about 1/10th of the world average. Over the last decade, the Indian chemical industry has evolved from being a basic chemical producer to becoming an innovative industry. With investments in R&D, the industry is registering significant growth in the knowledge sector comprising of specialty chemicals, fine chemicals and pharmaceuticals.

Industry expectation

Customs duty

Customs duty (Import duty) on most of the chemical products has been rapidly brought down. For polymers it is 5% and for most of the chemicals, it is at 7.5%, almost lowest in the world. 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 above context industry expects:

• Import Duty on Denatured Ethyl Alcohol needs to be reduced to Zero% from 7.5%.
• 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 from 5%.
• Import duty on all fuels like Fuel oil, LSHS, and Coal should be reduced to zero to decrease energy cost.
• Import duty on LNG and LPG be brought down to zero
• Import duty on reaction Initiator/ Accelerator catalysts namely Catalyst with Nickel or Nickel compounds, Platinum or Palladium and other may be reduced to Zero.
• Import duty on Rock phosphate may be reduced to Zero from current 5%. Rock phosphate is used for manufacturing Phosphoric Acid which in tern is used for production of Fertilizer and other chemicals
• Import duty on primary building blocks viz. Ethylene, propylene and Co-monomers like Butene, Hexane and Octene to be reduced to 2.5% from 5%.
• Exempt import duty on import of capital goods for setting up a solar wafer production facility in India.
• 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.
• Import duty on bulk & intermediate chemicals and finished products may be increased to 10% from 7.5% to arrest free imports from countries where their own internal demand is severely affected due to global economic meltdown. However, import duty on Acetic Acid, Methanol, Cumene, Mix-Xylene, Ortho-Xylene, Toluene, Benzene, Iso butylene, Hexane, Ethyl Benzene, Ethylene di-chloride may be retained at existing level of duty.
• Duty on polymer be increased to peak level of 10% so that investments made in this sector remain financially viable.
• Duty on paraxylene to be increased to 5% from 0%.
• Increase import duty (PTA and MEG) from existing 5% to 7.5% since Indian producers are facing large scale import threat on these products.

Excise duty

• 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 from current rate of Rs. 750/ MT
• Excise Duty on Naphtha be brought down to 8% from current 16%
• 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.
• Inclusion of LDO and HSD in input category to avail CENVAT credit.

Direct taxes

• 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.

Others

Government may create Technology up-gradation fund (TUF), which can be used to support technology up-gradation initiatives in SME sector.

Government should not commit to participate in any of the FTA in the current global meltdown

Analysts expectation

It is likely that the import duty on input materials would be maintained at the current levels. However many finished products with lower import duty compared to duty on input materials may be increased.

Stock to watch

BOC India; Beck India; Foseco India; BASF India; Industrial Organics

Outlook

Indian economy is passing through a difficult phase due to global economic meltdown. Due to this global meltdown demand destruction is widespread across US, EU, China and Middle East leading to excess capacity across many product segments of the Chemical industry. 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. 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. It is in this context Industry expects major support from the government to remain in business.