'Chemicals' — Culprit And Collateral Damage

The Budget 2024 brought fluctuations of customs tariff rate changes on expected lines. However, one tariff line stood apart owing to a steep increase in its tariff rate. Needless to say, ‘Laboratory Chemicals’ falling under tariff heading 9802 of the First Schedule of Customs Tariff Act, 1975, has sent a shock to various industries dealing in chemicals, pharma, research, among others. The intent behind the increase from 10% basic customs duty, or BCD, to a whopping 150%, apart from promoting the ‘Make in India’ initiative, was to ensure that miscreants do not take shelter of this tariff entry and import chemicals at a lower rate of duty without using them as laboratory chemicals. A panic filled week later, the Central Board of Indirect Taxes and Customs amended Notification No. 50/2017-Customs dated June 30, 2017, and provided relief by inserting Sr. No. 606A, which brought the effective rate back to 10% for all goods (excluding undenatured ethyl alcohol of any alcoholic strength) falling under tariff entry 9802 0000 for use in laboratories or for research and development purposes. To avoid any misuse, the exemption comes with a condition that requires importers to furnish an undertaking to the effect that the goods shall be used in laboratories or for R&D purposes, failing which differential duty shall be sought by the department. The move has completely obliterated a segment of genuine importers-traders importing chemicals on behalf of laboratories or R&D purposes. Taking a practical view and to avoid litigation/clearance issues, most of these importers-traders had under pressure succumbed to the department’s proposed classification under heading 98.02 (instead of the respective headings), which already attracted a higher 10% BCD and now 150%. The R&D industry, being a requirement-driven industry, has shared a symbiotic relationship with importer-traders and has always relied on them to import, stock, and deliver specific quantity and quality. The amendment has thus choked well established supply chains for the R&D industry and has left them with tough choices of either importing themselves or paying higher duty. This also has the potential to open old wounds pertaining to the classification of imported chemicals under respective headings, viz., Chapter 28, 29, 38, etc. (as the case may be) or under a residuary heading 98.02. The affected importer-traders importing on behalf of R&D industries would want to adopt globally accepted HS codes, i.e., under respective headings, by employing General Rules for Interpretation (GRIs). Lack of clarity with respect to classification of such goods has led to varied practices; for example, in cases of pharmaceutical reference standards (PRS) imported from various pharmacopoeias—US, Japan, British, European, etc.—the department has contended classification under heading 98.02, whereas in case of ethyl alcohol absolute, it has opposed classification under heading 98.02. This variation also results in denial of exemption, whether under free trade agreements or general exemption notifications issued under Section 25 of the Customs Act, 1962. The issue with respect to the classification of chemicals meeting the parameters of heading 98.02 but falling under the 'restricted’ or ‘prohibited’ import category also remains unanswered. The primary victims of the hike, such as Indian pharmaceuticals and subsidiaries of MNCs with well-established supply chain networks, are left out of the relief under the amendment notification, and consequently, the R&D industry is left to make tough calls. The industry has collectively started responding to this drastic step, while on the one hand an option of challenging the amendment is explored and, on the other, representation before the government is hoping for an amicable solution. .Brijesh Kothary is partner and Chitrartha Gupta is senior associate at Khaitan & Co. .Disclaimer: The views expressed here are those of the author and do not necessarily represent the views of NDTV Profit or its editorial team.

'Chemicals' — Culprit And Collateral Damage

The industry has the options to either challenge the tariff hike or send representatives to the government hoping for an amicable solution.

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'Chemicals' — Culprit And Collateral Damage

The industry has the options to either challenge the tariff hike or send representatives to the government hoping for an amicable solution.

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