Inverted duty structure hurts soaps industry

In an inexplicable departure from what should have been obvious and rational, the Union Finance Ministry has created an ‘inverted duty’ structure for some of the imported raw materials for the country’s personal care industry.

Palm fatty acid distillate (PFAD) and crude palm stearin (CPS) are raw materials used in the manufacture of toilet soaps, soap noodles, shampoo and other personal care products. They are imported for producing oleochemicals such as fatty acids and fatty alcohols.

Customs duty

Both PFAD and CPS were allowed at nil rate of customs duty under the ‘actual user’ condition in June 2017, providing a boost to the domestic personal care and oleochemicals industry. The logic of the ‘actual user’ condition was to ensure prevention of excessive import and leakage of revenue.

However, on July 5, in the Union Budget 2019-20, the Finance Minister imposed a 7.5 per cent customs duty on their import, the rationale for which is unclear. Whether it was by accident (oversight) or by design (succumbing to lobby pressure) is not known either.

While a change in customs duty applicable on imported goods from time to time is nothing unusual in our country, the imposition of 7.5 per cent duty on import of PFAD and CPS is proving to be counter-productive as the duty structure between the raw material and finished product has been inverted.

It is pertinent that imports of finished products such as soaps and soap noodle, as also fatty alcohols, attract zero duty when imported from Asean countries, while the raw materials (PFAD, CPS) now attract 7.5 per cent duty. The inverted duty structure has encouraged import of finished products, while at the same time threatening large investments made by the domestic personal care industry and splitting industry.

A combination of customs duty and the depreciating rupee is seen pushing the personal care industry’s costs higher, thus compromising the interests of consumers of the products. At the same time, there are no import substitutes available for the user industry.

Demand for 'status quo'

Frequent changes in customs duty on critical raw material imports for the manufacturing industry are best avoided. Predictability, transparency and certainty in fiscal legislation is critical. The extant change in duty has advanced none of these. If anything, it has challenged predictability, created uncertainty and is sure to discourage further investment. If tariff change becomes expedient, it is necessary to go public with the reasons.

The industry has demanded the restoration of status quo ante – that is to allow the import of requisite raw material such as PFAD and CPS at nil rate under actual user condition, as in the past. The ball is clearly in the FM’s court.

(The author is a policy commentator and commodities market specialist. Views are personal)

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