GST on Chemicals: Tax Rates, Exemptions & Impacts

The 56th GST Council meeting introduced a major simplification in chemical taxation by cutting down the multiple GST slabs to just two main rates: a 5% merit rate and an 18% standard rate. This change resolves previous complexities like inverted duty structures and strengthens India’s chemical exports by making the tax system more straightforward and competitive.

Key Takeaways

• Starting September 22, 2025, GST on chemicals is streamlined into two main rates: 5% and 18%, replacing the earlier multiple slabs.
• Essential chemicals, agro-products, and pharma-related inputs are taxed at 5%, helping keep costs low and supporting innovation in these key sectors.
• Industrial and specialty chemicals fall under the 18% rate, which maintains revenue flow and makes input tax credits easier to manage.
• Chemicals destined for export are zero-rated, giving exporters cash flow advantages and enhancing India’s global trade position.

What is GST on Chemicals?

GST on chemicals is a unified tax on the manufacture and supply of chemical products under India’s Goods and Services Tax (GST) regime. It replaces varied state‑level indirect taxes with a consolidated framework. Under GST 2.0, chemical rates are primarily set at 5% for essential products and 18% for industrial chemicals, designed to streamline compliance and remove cascading tax effects.

Understanding GST Rates on Chemicals

GST 2.0 aligns chemical tax rates by category and end use, creating a functionally simpler and sector‑aligned structure.

5% Merit Rate:
Applicable to essential agrochemicals (fertilisers, pesticides), pharma intermediates, fine chemicals, and industrial inputs with social or agricultural importance.

18% Standard Rate:
Applies to commodity, inorganic, organic, and specialty chemicals — solvents, pigments, coating materials, and high‑performance industrial compounds.

Zero‑Rated Exports:
Chemicals exported under LUT or IGST refund are zero‑rated, with input tax credits refunded to exporters to enhance global competitiveness.

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

1. Essential and Export‑Oriented Inputs
   These critical chemicals power industries exporting globally and support life-saving products like vaccines and essential medicines. Being zero-rated means they face no GST, helping manufacturers compete internationally without tax burdens slowing them down.
2. Agrochemicals and Fertilisers
   Farmers benefit from a straightforward, uniform 5% GST on fertilisers, pesticides, and related inputs. This lower rate eases production costs, supports sustainable agriculture, and helps keep food affordable for everyone.
3. Pharma Intermediates and Fine Chemicals
   Active pharmaceutical ingredients and fine chemicals used in drug making now attract GST at just 5%, down from 12%. This cut encourages innovation and local manufacturing, resulting in lower medicine prices and stronger health sector growth.
4. Industrial and Specialty Chemicals
   Everyday industrial essentials like solvents, commodity chemicals, and specialty products fall under the standard 18% GST. This rate keeps the tax system balanced while supporting industrial expansion and smoother credit flows.
5. Specialised or Luxury Chemicals
   Products typically used in cosmetics, fragrances, and luxury goods have moved from a steep 28% down to 18%. This rationalization cuts complexity and helps businesses manage costs better without compromising the taxation of discretionary items.

GST on Import and Export of Chemicals

Imports: IGST applies at either 5% or 18%, aligned with domestic classification. Full input tax credit (ITC) is available.

Exports: Zero‑rated supply mechanism applies. Exporters can export under letter of undertaking (LUT) without paying IGST or opt to pay IGST and claim refunds.

Positive Impacts and Challenges of GST 2.0 on Chemicals

Benefits

• Reduction in rate slabs simplifies compliance and classification.
• Enhanced ITC and refund framework improves working capital flow.
• Zero‑rating exports boosts international competitiveness.
• Uniform rate slabs align manufacturing cost planning and reporting.

Challenges

• Classification precision remains critical due to varied chemical applications.
• Concessional rate eligibility for R&D and intermediate inputs requires strong documentation.
• Transition to GST 2.0 digital systems demands updated compliance alignment and audit readiness.