GST on Chemicals: Tax Rates, Exemptions & Impacts

Unlike many industries, businesses related to the production of chemicals are vastly diverse, multifaceted, and complex. Besides, the production of chemicals is critical for almost any modern industry. So, GST on chemicals has direct implications on the economy as a whole. 

This article discusses everything you need to learn about the rates and implications of GST on industrial chemicals.

GST Rates on Chemicals

GST on chemicals in India ranges from 5% to 28%, depending on composition, intended end-use, and level of purity. As an example, the GST rate on fertiliser grade phosphoric acid is 5% while the same chemical for non-fertiliser usage is taxed at 18%. 

The government introduced the GST regime to simplify indirect taxation through uniform tax rates, and it has made significant progress toward that goal since its implementation in 2017. However, the unique characteristics of the chemical sector prevent us from applying a uniform tax rate across all products.

Classification of Chemicals Under HSN Codes

For trade documentation and taxation purposes, authorities classify industrial chemicals under several HSN (Harmonised System of Nomenclature) codes. The broader (2-digit) HSN chapters classifying chemicals in India are,

• Chapter 28: Encompasses inorganic chemicals.
• Chapter 29: Covers organic chemicals.
• Chapter 30: Deals with pharmaceutical products, including bulk drugs and formulations.
• Chapter 31: Specifically for fertilisers.
• Chapter 32: Includes tanning or dyeing extracts, dyes, pigments, paints, varnishes, and inks.
• Chapter 33: Relates to essential oils, resinoids, perfumery, cosmetic, or toilet preparations.
• Chapter 36: Covers explosives and pyrotechnic products.
• Chapter 38: Miscellaneous chemical products. 

GST on Specific Chemical Categories

The GST rates on chemical industry products vary widely based on the respective products’ end applications. These categories are as follows-

• Essential and export-oriented chemical inputs - These are zero-rated goods for GST liability. Such chemicals are exclusively used either in export-oriented industries, manufacturing life-saving medicines and vaccines or sectors with implications in national interests. 
• Agrochemicals and inputs for manufacturing agrochemicals - The applicable GST rate for this category of chemicals is 5%. The agricultural value chain and rural economic development sectors primarily use these chemicals. Lower GST rate helps relieve tax burden on farmers and other farm sector stakeholders, and keeps farm produce affordable for the masses.  
• Pharma intermediaries and fine chemicals - The authorities impose a 12% GST on this category of chemicals. Active Pharmaceutical Ingredients (APIs), chemical intermediates for drug manufacturing, and other fine chemicals used in sophisticated formulations comprise this category.
• Core industrial and high-performance chemicals - This category encompasses a broad range of chemicals, attracting 18% GST. The typical examples include commodity chemicals, basic inorganics, solvents, and advanced speciality formulations. 
• Specialised or Discretionary Chemicals - The government imposes a 28% GST on these chemicals because manufacturers primarily use them to produce cosmetics, luxury products, and synthetic compounds with high value. 

GST on Import & Export of Chemicals

Imports of chemicals are charged with integrated GST (IGST) along with respective Basic Customs Duty (BCD) and other cesses. The standard IGST rate is 18%. However, the domestic end use of the imported chemicals determines the applicable rate. Importers paying IGST at the point of import are eligible to claim Input Tax Credit (ITC) on the same. This helps prevent cascading effects. 

Exports of chemicals are zero-rated supplies under GST. It means chemicals for exports do not attract any GST. Businesses exporting such goods can claim refunds of GST paid on inputs of production. The GST Act allows exporters two primary options for tax relief:

1. Supplying goods under a Bond or Letter of Undertaking (LUT) without paying IGST and claiming a refund for any unused input tax credit.
2. Paying IGST on exports and subsequently claiming a refund. Shipping bills are standard documents needed for claiming such refunds of IGST. 

Exemptions & Reduced GST Rates for Chemicals

The following categories of chemicals are eligible for GST exemptions or application of GST at reduced rates. 

• Export-oriented chemicals across verticals such as organic, inorganic, tanning, dyes, and synthetic rubber are exempted from GST.
• Agrochemicals, like inorganic fertilisers and pesticides, are taxed at a concessional rate of 5% GST. Organic fertilisers (HSN 3101), such as bone meals, bio-fertilisers, are exempted from GST.
• Pharmaceutical-use chemicals for producing life-saving medicines are taxed at reduced GST rates of 12%.

Impact of GST on the Chemical Industry

The implementation of GST has mostly remained positive for chemical industries. However, some challenges still exist.

Positive impacts are;

• Significant reduction in cascading effects, which were prevalent during the pre-GST era. 
• An efficient ITC claim process enables businesses to realise tax credits more quickly on GST paid for inputs. 
• The uniform GST rate has encouraged rationalisation of manufacturing facilities and supply chains.
• Zero-rating of export items under the GST regime made Indian chemical products competitive in international markets.
• The digital tax implementation infrastructure under the GST regime has made tax compliance significantly easier for businesses. 

Some of the challenges are as follows

• Complexities in the classification of chemicals. 
• Complexities related to claiming concessional rates for research uses.