INDIAN CHEMICAL COUNCIL

(FORMERLY: INDIAN CHEMICAL MANUFACTURERS ASSOCIATION)

PRE-BUDGET MEMORANDUM

FOR THE UNION BUDGET FOR THE

YEAR 2011-12

1
The Indian Chemical Council (ICC) represents one of the major sectors of
Indian economy i.e. Chemical Industry. The Council was founded by Acharya
P.C. Ray & Dr. B.D. Amin. The Council has over 350 members representing all
segments of Chemical Industry such as Inorganic and Organic Chemicals,
Petroleum Refining Petrochemicals, Fertilizers, Agrochemicals Pesticides,
Dyes, Pharmaceuticals, Paints, Specialty Chemicals etc.

While the size of the global chemical industry is in the region of USD 3
Trillion, the Indian chemical industry has an output of around USD 80 Billion
and ranks 12th in the world.

While the overall industrialization and economic growth in India provides

major opportunities for growth of chemical industry in India, there are some
severe constraints and stumbling blocks like,

Surge of imports from Asian and Middle East countries.

Producers from Middle East (with feedstock cost advantage) and China
aggressively pursuing Indian markets due to very low tariff levels.

Growing menace of dumping

High cost of Power, Energy, Finance and Capital Equipment

Internal transaction costs being one of the highest in India -

Internal taxes VAT rates substantially higher than other Asian

countries.

High logistics cost due to poor infrastructure

State levies, entry taxes add to the local transaction cost

2
 SECTION-I: GENERAL CONCERNS OF THE INDIAN CHEMICAL
INDUSTRY ON INDIRECT TAXES

Peak Import Duty on Chemicals:

The Peak Import Duty on chemical products in India at 7.5% ad valorem

level is at one of the lowest levels in the world. Last two decades have
seen a major decline in Import Duty on chemicals in India from 300% in
1990 to current level of 7.5%. Besides this, the current Import Duty level is
well below Indias bound rates under the WTO.

Such low Import Duty level is against a scenario of rising costs of finance,
fuels, power etc., which continue to be higher than in other parts of the
world.

The year 2010 has seen slow down in new investments in chemical
industry in India.

While we go into 2011-2012, the current trends in Rupee appreciation indicate further appreciation
likely in the year 2011 as per the figures given below by the Financial Forecast Centre, Houston,
Texas.

Month Rupee/ USD

Oct 2010 44.36
Nov 2010 44.9
Dec 2010 44.5
Jan 2011 44.3
Feb 2011 43.9
Mar 2011 43.5
Apr 2011 43.1
May 2011 42.8
Jun 2011 42.6

3
This will cause the landed cost of imported chemicals to drop by 5.12% in
Rupee terms. This is in face of Rupee appreciation that has already
happened so far since January 2009 of 8% as can be seen from Chart
below:

While this Rupee appreciation will bring the cost of imported chemicals
down, the conversion costs of chemical industry (from raw materials to
downstream chemicals) like cost of finance, fuels, power, manpower etc.
have shown significant increases and these costs continue to rise further as
can be seen from the figures, tables and charts below.

The benchmark interest rate (reverse repo) in India was last reported at
5.25 percent. Interest rates are decided by the Reserve Bank of India's
Central Board of Directors. These interest rates have shown an increase of
61.5% between January 2010 and November 2010.

4
Year Jan Feb Mar Apr May Jun Jul Aug Sep Nov
2010 3.25 3.25 3.38 3.63 3.75 3.75 4.08 4.50 5.00 5.25

5
 The inflation rate in India (of 9.7% as reported in October 2010)
which has been a matter of concern all through the year has caused
manpower costs to rise significantly in recent times and the trend is
likely to continue unabated.

Besides this, with the rising expectations of skilled manpower of

Salary and Benefits in an era of globalization, the impact has got
compounded and manpower costs of major corporates in
manufacturing sector have been increasing at double digit rates (in
some cases of over 15% per annum).

In view of the hardship, we request the Government of India to

increase the Peak Import Duty on Chemicals from 7.5% ad valorem to
12.5% ad valorem in the forthcoming Union Budget.

6
 Need for Zero Import Duty on Feedstocks:

For Indian chemical industry to be competitive, there is an imperative need

for feedstocks and fuels to be available at international prices. We therefore
request for Zero Import Duty on the following:

Naphtha (Tariff Code 2710-1190)

Hydrocarbons such as Ethane, Propane (Tariff Code 2901-1000,
2200) etc.

which are feed stocks for manufacture of a wide range of Organic Chemicals
and which currently attract Import Duty of 5% ad valorem.

Need for Zero Import Duty on Ethanol (Tariff Code 2207 20 00):

Ethanol is an important renewable feedstock for Indian chemical industry.

There is a significant deficit in production of the same in India. Presently,
this basic input attracts Import Duty of 7.5% ad valorem. We request the
government levy Zero Import Duty on this basic input. Hon. Finance Minister

7
 had also indicated that if the ethanol program for fuel blending was to
commence, then the duty would be brought down to zero.

Import Duty on Coal (2701 1100) and LNG (2711 1100):

Manufacture of chemicals involves carrying out Unit Operations and Processes

under very high pressures or very high vacuum, at very high or very low
temperatures. These requirements impose high consumption of energy on the
chemical industry.

Besides this, chemical products need to be pumped or carried from one

process or operation stage to the other mechanically, which also consumes a
lot of energy.

Chemical industry is therefore highly energy intensive. For Indian chemical

industry to be globally competitive, it is necessary for fuels such as coal,
natural gas and the liquid fuels from petroleum fractionation to be available
to the Indian chemical industry at international prices.

Coal is still a major source of energy for the Indian chemical industry. In line
with our request for fuels to be made available to Indian industry at
international prices, we request the Import Duty on Coal to be reduced from
5% ad valorem to zero.

LNG is becoming increasingly important as an energy source. LNG currently

attracts Import Duty of 5% ad valorem, which may kindly be reduced to
Zero.

COAL DEMAND AND SUPPLY

PRODUCTION-MN TONS PER ANNUM 531
IMPORTS- MN TONS PER ANNUM 35
CONSUMPTION- MN TONS PER ANNUM 566

8
 CURRENT PRICE OF AUSTRALIAN THERMAL COAL - USD/MT 117

NATURAL GAS- DEMAND SUPPLY IN INDIA

MMSCMD MN TPA
PRODUCTION 132 33
IMPORTS 35 9
CONSUMPTION 167 42

Import Duty on other Fuels: While fuels and basic inputs need to be made
available to the industry ideally at international prices, Import Duty on
Fuels [including Furnace Oil/ LSHS etc. (Tariff Code 2710 1950)] falling
under Chapter 27 is 10% ad valorem, which is higher than the Import Duty
on most of the chemical products (at 7.5%) ad valorem. While, ideally,
fuels need to be made available to Indian industry at international prices
and should ideally be eligible for import at Zero duty, we request at least
for roll back of duty to 5% ad valorem.

LSHS AND FURNACE OIL- MN TPA

FO+LSHS ETC.
PRODUCTION-2009-10 EST 17.54
IMPORTS-2009-10 EST 0.76
EXPORTS-2009-10 EST 5.17

Import Duty on Catalysts:

Catalysts are an important input for manufacture of chemicals and decide the
efficiency and cost of manufacture of chemicals produced in India. Usage of
superior and selective catalysts leads to lowering of energy, power and
capital costs. We have been requesting for Zero Import Duty on Catalysts.
Certain precious metal Catalysts like Nickel or Nickel Compounds (Tariff Code
3815 1100) and Palladium (Tariff Code 3815 1200) Copper Chromite (Tariff
Code 38159000) and others (tariff Code 3815 1290) attract Import Duty of
7.5%, which may kindly be reduced to Zero.

9
 Import Duty on Para-Xylene:

This is a case of Inverted Duty Structure. The Import Duty on Naphtha which
is a basic input is higher at 5% ad valorem, while the Import Duty on Para-
Xylene is Zero.

We request the government to correct this anomaly and fix the Import Duty on Para-
Xylene at 5% ad valorem.

PARA XYLENE OVERALL SCENARIO

QTY FIGURES IN '000 TONS
DEMAND >2200
PRODUCTION-ESTIMATE-2009-10 2237
JAN-OCT-IMPORTS-ANNUALISED 395

IMPORT PRICE- AVG 2010-USD/MT 1011

REVENUE GAIN- RS. CRORES 92

Import Duty on Basic Building Blocks:

o Olefins: Ethylene (2901 21 00), Propylene (2901 22 00) and other

Olefinic monomers like Butene (2901 23 00), Octene (2901 29 00) are
derived from Naphtha and currently attracts 5% duty. Since, these are
primary building blocks, Import Duty on these may be reduced to 2.5%
ad valorem.

o Aromatics:

Benzene (2902 20 00), Toluene (2902 30 00), Ortho-Xylene (2902 41 00),

Mix-Xylene (2902 44 00), Cumene ( 2902 70 00 ) and Ethyl Benzene
(2902 60 00) are starting points for Organic Chemical Synthesis and
presently attract 5% ad valorem Import Duty. We request that the
Import Duty on these Basic Inputs be maintained at not more than 5%
ad valorem.
10
 PRODUCT IMPORTS PRODUCTION AVG PRICE (CIF) IMPORT DUTY (%) REVENUE
000 TONS 000 TONS OF IMPORTS PRESENT PROPOSED GAIN/LOSS
JAN-OCT-2010 APR-DEC-09 Rs./Kg US$/MT
ANNUALISED ANNUALISED Rs. Lakhs
BENZENE 64 821 46.14 991 5 5 -
TOLUENE 187 136 41.85 902 5 5 -
O-XYLENE 66 361 51.09 1098 5 5 -

Inverted Import Duty Structure: There are various cases of Inverted Duty
Structure (other than of Para-Xylene vs. Naphtha) which need to be
corrected. We have come across two types of cases of Inverted Duty
Structures:

One related to the proposals in Union Budget

The other arising out of the Free Trade and Regional Trade Agreements
that India has entered into

We are requesting correction of all these individual cases dealt with in detail
in the next Section.

Special Additional Duty (SAD) on Imports: SAD is a reflection of CST.

However, the present rate of SAD is 4% ad valorem. We request that SAD rate
be fixed in line with the prevalent CST rate of 2%. We also request that no
exemption be granted from SAD on imported goods if locally manufactured
goods are subject to CST/ VAT (except import against advance license).

Cess on Coal: In the last Union Budget, there is an additional levy in the form
of Cess of Rs. 50/ Ton of Coal, which has led to increase in Power Generation
cost by Paise 3.5 to 4 per KWH. Since this increase cannot be passed on to the
domestic/ individual consumers, the load on industrial consumers is even
higher. While the idea of the government to promote Clean Energy is
commendable, the additional cost to the industry would be onerous. We

11
 request reconsideration of decision to impose Cess. In case Cess need to
be continued it should atleast be made vatable.

Duty on capital goods to be brought down to encourage investment

Chemical industry is capital intensive. Besides this, competitiveness of Indian

industry depends on operating at economic scales of operation and higher
scales mean higher investment. The necessity for the industry to operate in
environmentally friendly and safe manner necessitates even higher
investments in plant and equipment and in instrumentation.

We therefore request that Capital Goods be made Duty Free or the Import
Duty on Capital Goods be brought down to a level not more than 5% ad
valorem.

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
inputs/equipment of captive power plants and their spares are allowed
duty free. Similarly, fuels required for captive power plants may also be
allowed at zero rate of duty.

12
Inverted Excise Duty/ CENVAT structure:

A. Molasses for Denatured Ethyl Alcohol and finally for Ethyl Acetate:

The government has reduced the rate of Excise Duty (CENVAT) on

most of the products including chemicals from 14% to 10% without
any corresponding reduction in specific duty on Molasses. Excise duty
on Denatured Ethyl Alcohol is effectively lower than Excise Duty on
Molasses (Tariff Item 1703 10 00) at Rs. 772/ MT (equivalent to the
rate of 16%) and this is an Inverted Duty Structure. Denatured
Ethyl Alcohol is used by the chemical industry as substitute for
petroleum feedstock and is also used for manufacture of Ethyl
Acetate. It is therefore requested that Excise Duty on Molasses for
use in the manufacture of Denatured Ethyl Alcohol (non-potable) be
reduced to equivalent of 8% ad valorem or Rs. 386/PMT whichever
is lower.

B. Naphtha:

CENVAT/ Excise Duty on chemicals is 10%, while CENVAT/ Excise

Duty on Naphtha is higher at 16%. Naphtha is an input for the
chemical industry. As a result, there is a distortion. It is requested
that Excise Duty on Naphtha be brought down to 10%.

C. Furnace Oil:

Similarly, CENVAT/ Excise duty on Furnace Oil is 16% and needs to be

reduced to general Excise Duty level of 10%.

13
 SCETION-II: OUR CONCERNS ON SPECIFIC PRODUCTS/
INPUTS/ INTERMEDIATES

INVERTED DUTY STRUCTURE ON LINEAR ALKYL BENZENE (LAB) VIS--VIS

ITS RAW MATERIALS:
The Import Duty on LAB is 7.5% ad valorem, while the Import Duty on inputs
such as Normal Paraffin/ Kerosene is higher at 10%.

We request that this Inverted Duty Structure be corrected.

INVERTED CUSTOMS DUTY STRUCTURE ON NONYL PHENOL & DODECYL

PHENOL (@ 7.5% AD VALOREM) VIS--VIS THEIR RAW MATERIALS
PROPYLENE TRIMER (NONENE) & PROPYLENE TETRAMER (@ 10% AD
VALOREM):

Nonyl Phenol (Tariff Code: 2907 1300) is manufactured from Propylene Trimer
(also called Nonene; Tariff: Code 2710 1990) and Phenol (Tariff Code:
2907.11).

Dodecyl Phenol (Tariff Code: 2907 1950) is manufactured from Propylene

Tetramer (Tariff Code: 2710 1990) and Phenol (Tariff Code 2907.11).

Chemically, Propylene Trimer (Nonene) & Propylene Tetramer are Olefins

like Ethylene, Propylene, Octene etc. They are Organic Chemical Building
Blocks in slightly semi-pure form & come straight out of Petroleum
Refineries. They are used as chemical raw materials (without further
purification) directly for chemically reacting with Phenol to give Nonyl Phenol
& Dodecyl Phenol.

14
The World Customs Organization classifies few Organic Chemical Building
Blocks coming from Petroleum Refineries in slightly semi-pure form as a part
of Chapter 27 (which primarily covers mineral fuels/ mineral oils) and this
classification appears correct and is not being disputed.

Both Propylene Trimer i.e. Nonene & Propylene Tetramer are completely
imported into India as there is no domestic manufacturer.

Since the Import Duty on Mineral Fuels falling under Chapter 27 is 10%,
Propylene Trimer (Nonene) & Propylene Tetramer also attract 10% Import
Duty.
The Basic Customs Duty on Phenol is 7.5% ad valorem.
Basic Customs Duty on their derivatives Nonyl Phenol & Dodecyl Phenol is
also 7.5% ad valorem.

This clear case of Inverted Duty Structure needs correction.

Propylene Trimer (Nonene) & Propylene Tetramer being Olefins & Basic
Building Blocks should attract Import Duty of not more than 5% ad valorem.
We request the government to reduce Import Duty on Propylene Trimer i.e.
Nonene and Propylene Tetramer (both falling under Tariff Code: 2710
1990) to a level not exceeding 5% ad valorem.

PRODUCT DUTY PAID AVG PRICE (CIF) IMPORT DUTY (%) REVENUE
IMPORTS Rs./Kg US$/MT PRESENT PROPOSED GAIN/LOSS
(KL) OF IMPORTS Rs. Cr
CURRENT IMPORT LEVELS
PROP. TRIMER 4080 72.9 1.62 10 5 -1.49
PROP. TETRAMER 3850 67.5 1.50 10 5 -1.30

15
 The negative impact on Customs revenue due to reduction in Import Duty will
be compensated by spurt in demand for Nonyl Phenol and Dodecyl Phenol
leading to increased imports of Propylene Trimer and Propylene Tetramer.
This is besides increased revenue from CENVAT, Sales Tax and local levies due
to spurt in domestic sales and production of Nonyl Phenol and Dodecyl
Phenol.

INVERTED DUTY STRUCTURE ON POLYMERS & CHEMICALS VIS--VIS ITS

STARTING RAW MATERIAL NAPHTHA:
Under the India-Singapore CECA, Polyolefin Imports are eligible for
concessional 3.35% Import Duty, while Import Duty on Naphtha is higher at
5%. There is an immediate need for reduction in Import Duty on Naphtha to
zero level.

INVERTED DUTY STRUCTURE ON OLEOCHEMICALS:

The Import Duty on the inputs Palm Fatty Acid Distillate and Palm Kernel
Fatty Acid Distillate (both falling under Chapter 3823 1900) is 14% even under
ASEAN-India FTA and Import Duty on another input Crude Glycerine (1520
0000) is 12.5% ad valorem. However, the Import Duty on their derivatives
Stearic Acid (Ch. 3823 1190), Refined Glycerine (Ch 2905 4500) and Soap and
Soap Noodles (Ch. 3401 2000) is lower at 7.5% ad valorem and on Fatty
Alcohol (Ch. 3402 3709) also it is lower at 12% (than the duty on its inputs).
We request that the Import Duty on all the Inputs mentioned herein be
reduced to 7.5% ad valorem level.

16
 IMPORT DUTY ON SODIUM NITRATE:

The Import Duty on Sodium Nitrate is Zero based on the rationale that it is
used as a Fertilizer. In India, Sodium Nitrate is not used as fertilizers.
Actually, product used in the country is as an input in manufacture of Glass
& Ceramics, Pharmaceuticals, in Water Treatment, Food Industry, Dyes &
Pigments etc.

We request that Import Duty on this product be fixed at 7.5% ad valorem level in line with Import
Duty on most other chemicals. Item Sodium Nitrate should be covered under Chapter 28, and caption
used should be Sodium Nitrate uses for other than as Fertilizers Import Duty of 7.5 % should
be applicable".
PRODUCT IMPORTS AVG PRICE (CIF) IMPORT DUTY (%) REVENUE
(MT) Rs./Kg US$/MT PRESENT PROPOSED GAIN/LOSS
OF IMPORTS Rs. Lakhs
SODIUM NITRATE 3160 21.17 451.83 0 7.5 50.17

CENVAT RATE ON PRECIPITATED SILICA:

This product is manufactured in India with total capacity of 40,000 TPA. This
product is consumed in manufacture of tyres and toothpastes.

The small scale manufacturers of toothpastes are not able to avail CENVAT
credit, while the CENVAT rate is 10% ad valorem.

It is requested that the CENVAT rate is brought down to lowest level possible.

SECTION-III- OTHER ISSSUES

17
 Depreciation Rate for Chemical Industry: The industry employs processes
involving the use of highly corrosive materials. The structures (on which
equipment is installed) are also made of steel, which is also prone to
corrosion. Some of the chemicals like Brine/ Chlorides corrode even
Stainless Steel. Reactions and separation processes involve tough
conditions in terms of temperature and pressures from extremely high
pressures and temperatures to sub zero temperatures and sub-atmospheric
pressures/ extreme vacuum levels. All this takes toll on the equipment
used in chemical industry. The wear and tear of plant & machinery in the
chemical industry is relatively much higher as compared to other
industries. The depreciation allowed for the purpose of income tax was
earlier @ 25% which was brought down 15%. It is requested that same
may be restored to 25%.

Additional concessions required to boost R&D in chemical sector:

For Indian chemical industry to become globally competitive there has to

be greater 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, industrys expenditure on R&D is hardly 1%
of its turnover. This is very low compared to other major countries where
it ranges from 3% to 7% 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:

18
 Soft loans at reduced interest rates with longer moratorium repayment
periods
Zero Import Duty on capital goods imports for R&D activities

To encourage R&D, Government should extend income tax exemption of

200% of expenditure in R&D beyond 2012 by additional 10 Yrs.

Companies spending on R&D get benefit under Section 35. However, no

benefits are available upon launching of the product. In order to give
boost to R&D spent, it is necessary that profits on new products launched
are given some Tax benefits, at least initially for 3 years.

Reimbursement of REACH Registration Costs:

The costs of data generation and registration fees in this context are
extremely high and for companies exporting 7-8 products to Europe, the
costs could run into crores of Rupees. We request the government of India
to constitute a fund of substantial amount for reimbursement of REACH
registration expenses and evolve a mechanism for granting reimbursement
of REACH expenses to incentivize chemical exports to European Union
countries.

Membrane in Caustic industry should be considered as capital

equipment and not spare:

The membrane is an integral part and the main member of the Membrane
Cell in which electrolysis of Common Salt is carried out to give Caustic
Soda and Hydrogen. It is certainly not a spare and is the heart of the

19
 Membrane Cell. It therefore deserves the same treatment while
importation that is accorded to Capital Equipment and should be eligible
for all the concessions that are applicable to Capital Goods.

Misuse of Duty Free Import Authorisations (DFIAs):

There is an Anti-Dumping Duty on Sodium Hydrosulfite. However, imports

against transferrable DFIAs is permissible without payment of any Import
Duty or Anti-Dumping Duty. Since these licenses/ authorizations are
transferrable, there is misuse of the DFIAs granted under the Foreign
Trade Policy.

It is therefore recommended that imports against DFIAs should attract

Anti-Dumping Duty or alternatively an Actual User condition be imposed.

De-canalization of Petroleum Solvents:

Imports of certain solvents, which fall under Chapter 27 of Customs Tariff

Classification attracting codes nos. 2710 11 11, 12, 13, 19 are canalized
through Indian Oil Corporation.

The purpose of canalization is to prevent import of petroleum solvents

which could be used as admixtures with any substance suitable for use as a
fuel in spark ignition engines, which might result in adulteration of
transportation fuels.

These solvents are used in manufacture/ extraction of Pharmaceuticals

and Essential Oils. Indian solvents are not free from undesirable impurities
and cannot be used making imports necessary.

We request that imports of these solvents be de-canalized.

Investment Allowance
20
The global recession has affected many Companies plans for investments
and the sentiments are very week on capital investments. In order to
bring back the economy in growth mode, it is necessary that some
incentives, like Investment Allowance, given earlier be re-introduced as a
part of stimulus package.

21