Understanding Goods and Services Tax for the Indian Chemical Industry

The chemical production sector in India is intricate and diverse, playing a vital role across various modern industries. Consequently, the Goods and Services Tax (GST) applied to chemicals significantly influences the broader economy. This article explores the GST rates and their economic implications for industrial chemicals.

GST Rates on Chemicals

In India, GST rates for chemicals vary from 5% to 28%, determined by factors such as chemical composition, intended application, and purity levels. For instance, phosphoric acid used in fertilizers attracts a 5% GST, whereas its non-fertilizer application is taxed at 18%. While the GST framework aims to streamline indirect taxation with consistent rates since its 2017 introduction, the chemical sector's distinct nature necessitates varied tax rates for different products.

Classification of Chemicals Under HSN Codes

To facilitate trade documentation and taxation, industrial chemicals are categorized using Harmonised System of Nomenclature (HSN) codes. In India, the primary two-digit HSN chapters for chemical classification include:

• Chapter 28: Covers inorganic chemical compounds.
• Chapter 29: Deals with organic chemical substances.
• Chapter 30: Pertains to pharmaceutical goods, encompassing raw drug materials and prepared formulations.
• Chapter 31: Is dedicated to fertilizers.
• Chapter 32: Includes extracts for tanning or dyeing, alongside various dyes, pigments, paints, varnishes, and inks.
• Chapter 33: Encompasses essential oils, resinoids, and preparations for perfumery, cosmetics, or toiletries.
• Chapter 36: Includes explosive materials and pyrotechnic articles.
• Chapter 38: Refers to diverse miscellaneous chemical products.

GST on Specific Chemical Categories

The GST rates for products within the chemical industry exhibit significant variation, primarily determined by their ultimate applications. These specific categories include:

• Critical and Export-Focused Chemical Inputs: These products are subject to a zero-rated GST liability. Their usage is restricted to industries geared towards exports, the production of essential medicines and vaccines, or other sectors deemed to be of national importance.
• Agrochemicals and Agricultural Manufacturing Inputs: Chemicals in this category attract a 5% GST rate. They are primarily utilized within the agricultural supply chain and for rural economic growth initiatives. A reduced GST rate helps mitigate the tax burden on farmers and other agricultural stakeholders, thereby maintaining affordable farm produce for consumers.
• Pharmaceutical Intermediates and Fine Chemicals: A 12% GST is applied to these types of chemicals. This category encompasses Active Pharmaceutical Ingredients (APIs), chemical compounds used as intermediates in drug production, and other specialized fine chemicals essential for complex formulations.
• Fundamental Industrial and Advanced Performance Chemicals: An extensive array of chemicals falls under this category, incurring an 18% GST. Common examples include commodity chemicals, foundational inorganic compounds, solvents, and sophisticated specialty formulations.
• Specialty or Non-Essential Chemicals: A 28% GST is levied on these chemicals, largely due to their primary use in manufacturing cosmetics, luxury goods, and high-value synthetic compounds.

GST on Import & Export of Chemicals

Imported chemicals are subject to Integrated GST (IGST), in addition to Basic Customs Duty (BCD) and any other applicable cesses. While the standard IGST rate is 18%, the final rate depends on the intended domestic application of the imported chemicals. Importers who pay IGST during the import process can claim Input Tax Credit (ITC), which helps mitigate tax cascading.

Chemical exports are considered zero-rated supplies under GST, meaning they are not subject to GST. Businesses involved in exporting these goods can seek refunds for GST paid on production inputs. The GST Act provides two main avenues for exporters to obtain tax relief:

1. Exporting goods under a Bond or Letter of Undertaking (LUT), which allows them to avoid paying IGST and then claim a refund for any unutilized input tax credit.
2. Paying IGST on exports and subsequently applying for a refund, typically requiring shipping bills as documentation for such claims.

Exemptions & Reduced GST Rates for Chemicals

Certain chemical categories qualify for either GST exemptions or reduced tax rates:

• Chemicals intended for export in various segments, including organic, inorganic, tanning, dyes, and synthetic rubber, are exempt from GST.
• Agrochemicals, such as inorganic fertilizers and pesticides, are subject to a preferential GST rate of 5%. Moreover, organic fertilizers (HSN 3101), including bone meals and bio-fertilizers, are entirely exempt from GST.
• Pharmaceutical chemicals utilized in manufacturing essential life-saving drugs benefit from reduced GST rates, typically 12%.

Impact of GST on the Chemical Industry

The introduction of GST has largely brought positive outcomes for the chemical industry, although some challenges persist.

Positive impacts are;

• A notable decrease in tax cascading, a common issue in the pre-GST taxation system.
• A streamlined Input Tax Credit (ITC) claim mechanism, allowing businesses faster access to tax credits for GST paid on inputs.
• The consistent GST rates have promoted the optimization of manufacturing plants and supply networks.
• The zero-rating of exported goods under GST has enhanced the competitiveness of Indian chemical products globally.
• The digital infrastructure supporting GST implementation has substantially simplified tax compliance for businesses.

Some of the challenges are as follows

• Difficulties associated with the precise classification of chemicals.
• Challenges involved in applying for concessional rates for chemicals used in research activities.