HS Code Rationalisation Assumes New Urgency Under GST Regime

Chemical manufacturers are facing serious issues with customs authorities dealing with imports of raw materials as a consequence of varying interpretations on how chemicals are classified as per the Harmonized System (HS) – a globally accepted means of identifying and tracking trade in all sorts of products.

A series of actions, including by the Department of Revenue Intelligence (DRI), in which some leading companies have been accused and harassed for alleged misdeclaration of HS codes to avail of lower import duties, has got several small, medium and large companies agitated. They are now calling for a qualified committee of experts to look into the matter and set right the several anomalies that now exist.

DMLA – a surfactant or not?

A recent case that has hit several companies pertains to the import of dimethyl lauryl amine (DMLA), a chemical intermediate, which is used, amongst other things, for the manufacture of benzalkonium chloride, a key ingredient in several home care products. The revenue authorities (Customs) claim that DMLA should be classified under Chapter 34 as it is, according to them, a surfactant. Importers, several of whom are manufacturers, claim that the chemical should instead be classified under Chapter 29, as an organic chemical. The revenue implications come from the fact that imports under Chapter 34 would invite an import levy of 10% and 6% for imports from China and ASEAN, respectively, while that under Chapter 29 would imply that the chemical could be imported by paying a basic customs duty of 7.5% and 1%, respectively.

According to industry sources, imports of the chemical are about 350-tonnes per month, with about 70% coming from China and the balance from mainly the Philippines (part of ASEAN). With an average price of $3,000 per tonne, the financial implications of the higher duty are significant for the importers, while from an overall government revenue perspective this is still small change.

Contradictory findings

The DRI’s Ahmedabad Zonal Unit, which sent some samples for testing to ascertain whether DMLA is a surfactant or not has received a report from the Central Revenue Controls Laboratory (CRCL) in Vadodara stating that the chemical was “not a separate chemically defined compound” and that it meets “the physicchemical characteristics of an organic surface active agent.”

However, industry represents contest these findings and point to findings of CRCL, Mumbai and Nhava Sheva, that DMLA is an amine compound that does not answer the test for a surface active agent. They have also pointed to the opinion of technical experts, including from the Department of Oils, Oleochemicals and Surfactants Technology, Institute of Chemical Technology ICT), Mumbai and from the Indian Institute of Chemical Technology (IICT), a government-run laboratory that is part of the Council for Scientific and Industrial Research (CSIR), that DMA cannot be classified as a surfactant.

In the meanwhile, imports are being cleared only with bank guarantees for the difference in the import duties, tying up working capital and causing delays in clearances.

The matter has also been discussed at an interactive session between members of CHEMEXCIL, the export promotion council for the chemical industry, and representatives of the Ministry of Commerce in Mumbai recently, and a representation is being prepared for submission to the government.

Competent authority

DMLA is, however, not the only case in which classification under the HS code is being contested. Other products facing similar issues include fatty alcohol ethoxylate and medium chain triglycerides (MCT) such as caprylic capric triglyceride (CCTG). Industry representatives firmly believe that a competent authority, comprising domain experts and representatives from leading industry associations, must urgently undertake a scientific and rational review of the HS codes where such starkly differing viewpoints exist, in order to avoid harassment by investigative agencies. Otherwise, they state, “tax terrorism” will continue. Uncertainty in imports, they add, create supply chain issues that impacts not just domestic business but exports, as well.

They point to the last Economic Survey of the government, which refers to unwanted litigation by government agencies and their high failure rates, which has as been identified as a major reason for the country’s poor rating in the global ‘Ease of Doing Business’ rankings.