The Budget for 2005-06 is likely to unveil a package of tax sops for the petrochemical and drug industries. Many of the proposals in the package will be in line with the recommendations of the Kelkar Task Force on tax changes for the next fiscal year.
A major proposal, now being examined by the finance ministry, seeks to halve the Customs duty on naphtha to 5 per cent. At present, the Customs duty on naphtha used by the polymer and polystyrene industries is 5 per cent, while it is 10 per cent when used by other industries.
The finance ministry is also considering the chemicals and petrochemicals department's proposal to slash the Customs duty on fuel oil used for power generation from 20 per cent to 8 per cent in the Budget.
The reduction in the Customs duty on naphtha will help reduce the cost of producing fertilisers and electricity. The power ministry had sought zero import duty on naphtha and liquefied natural gas.
A rise in the price of naphtha had prompted the fertilisers department to seek a 40 per cent increase in fertiliser subsidy for the current fiscal year.
The chemicals and petrochemicals department has also proposed halving the Customs duty on ethane, propane and butane to 5 per cent as these are feedstock used in gas cracker complexes.
According to government officials, the differential between the intermediate raw materials and the finished products was just 5 per cent.
Over the years, the government had reduced the peak Customs duty but had not complemented this by reducing the duty on fuel, raw material and feedstock used for producing downstream value-added chemicals, they said.
The finance ministry is also considering a proposal to do away with the excise duty on life-saving drugs and equipment from the present 16 per cent in line with the recommendations of the Kelkar committee.
The proposal is being justified on the grounds that it will go a long way towards meeting the goals set out in the National Common Minimum Programme of the United Progressive Alliance government.
Government officials pointed out that the steep cut in the Customs and excise duties could lead to an immediate drop in revenue collection, but the consequent growth in the related industries would compensate for the shortfall in the next two-three years.
The chemicals department has sought a reduction in the Customs duty on intermediaries and bulk drugs from 20 per cent to 10 per cent and 15 per cent for formulations.
While suggesting no changes in the Customs duty on polymers at 15 per cent, the petrochemicals department has proposed that the excise duty be halved to 8 per cent to boost demand and generate investment of Rs 70,000-80,000 crore (Rs 700-800 billion) in the sector.
Except nylon tyre cord fabric, the department has sought a reduction in excise on all products like polyester textured yarn, polyester filament yarn, polyester staple fibre and partially oriented yarn to 8 per cent.
Along with the textiles ministry, it has also said synthetic fibre and yarn be brought under the optional route like the Cenvat exemption for cotton.
The chemicals department has also suggested continuing with the weighted deduction benefits under Section 35(2AB) of the Income Tax Act until March 2010 to promote research and development in pharmaceuticals.