No respite to the chlor alkali sector

Product: Caustic soda, chlorine, soda ash, bleaching powder.

Outlook: Neutral

• The following changes in the duties have been proposed in the Union budget 2011-12:
• Direct Taxes Code (DTC) to be finalized for enactment during 2011-12. DTC proposed to be effective from April 1, 2012.
• Central Excise Duty to be maintained at standard rate of 10%. Base rate on excise duty raised to 5% from 4%
• Current surcharge of 7.5% on domestic companies proposed to be reduced to 5%
• Minimum Alternative Tax (MAT) increased from 18% to 18.5% of book profits. However, adjusted for surcharge reduction the effective rate remains the same
• Lower rate of 15% tax on dividends received by an Indian company from its foreign subsidiary Service tax rate held at 10 percent

Industry expectations

Power constitutes to a major cost for Chlor alkali industry. In order to bring down the cost of power import duty on power plants and spared should be made nil from current 7.5%.

The government should allocate coal blocks to caustic soda and soda ash industry on a priority basis as is done in other industries like cement so that the coal is available to the industry on a timely manner at a reasonable cost.

Furnace oil, LSHS and HSD used for power generation, at present attract 10% customs duty.

Industry expects duty on all fuel oils and gas used for power generation should be fixed at 0%, as coal, furnace oil and LSHS are the raw materials for power-intensive industries like caustic soda.

Caustic soda attracts 7.5% import duty, as compared to fuel oil, which attracts 10% duty. This inverted duty structure should be corrected.

Many of the State Governments have imposed electricity duty, consumption tax, cess and sales tax etc. on captive power generation.

This makes power more expensive and the cost becomes almost at par with the cost of Grid Power.

Industry expects government should put a cap on such taxes and whatever taxes are levied by the State Governments on CPPs and on the fuels used for power generation like Furnace Oil, LSHS, CNG & LNG, these should be made VATable so that the cost is free from cascading effect.

None of the above expectations of the industry have been fulfilled in the Union Budget 2011-12.

Budget impact

No sector specific announcement was made in the budget. So it has a neutral impact on the sector.  Marginal reduction in effective rate of tax of Chlor alkali companies with reduction in surcharge from 7.5% to 5%.

Stocks to watch

Gujarat Alkalis and Chemicals, Kanoria Chemicals & Industries, GHCL.

Outlook

Electric power is the key input required for manufacture of caustic soda and accounts for almost 60% of the total cost of production.

The higher cost of power in India is the main factor, which makes Indian manufacturer uncompetitive in the international market. However Budget 2011-12 did not give any respite to the chlor alkali sector. It had neutral impact on the sector.