Naphtha – what is the classification?
A concerned Netizen wrote to us,
Your DDT 820 dated 07.03.2008 on "What is the duty on Naphtha?" is comprehensive reading both for Netizens and Hon. Board. In the above, you have touched that naphtha should perhaps fall under Heading 2710 11 19.
On the Naphtha classification, I would like to bring the following aspects to your notice, so that through your communication, this can reach to all the netizens and also to the Hon. Board.
(i) Under Central Excise, 8 digit Tariff was introduced on 28.02.2005. Prior to this introduction, naphtha had specific Heading 2710 14.
(ii) Some of the products of Heading 2710 also attracted Special Excise duty of Second Schedule and in view of this, Chapter Notes 6 was inserted stating that "In this schedule, tariff item 2710 11 19 does not include "Naphtha".
(iii) On introduction of 8 digit tariff specific heading of Naphtha was deleted although retaining the specific entry of "Natural Gasoline Liquid ( NGL )" under Tariff Heading 2710 11 20.
(iv) Under 8 digit tariff , "Light Oil and Preparations" are divided into two groups viz., "Motor Spirit" and "Other than Motor Spirit". The NGL is classified under "Other than Motor Spirit Group". The Motor Spirit Group has the Residual Entry "Other" (2710 11 19) and Other than Motor Spirit Group also has Residual Entry "Other" (2710 11 90).
(v) Naphtha per se is not Motor Spirit as defined under Supplementary Chapter Note. It is one of the input stream for producing Motor Spirit. So is the case for NGL . This perhaps appeared to be the reason for dividing Light Oil and Preparations into two separate sub-groups.
(vi) The Residual Entry in Motor Spirit Group viz., 2710 11 19 is for Motor Spirit popularly known as Petrol. When naphtha is obviously not Petrol (Motor Spirit), it should obviously be classified under Residual Entry of "Other than Motor Spirit" Group viz., 2710 11 90.
(vii) In the Budget 2006 when effective duty rates for First Schedule and Second Schedule were combined exempting duty for Second Schedule, Naphtha would attract 32% of duty if specific notification i.e. 23/2006 dated 01.03.2006 was not issued prescribing the duty rate of 16% for naphtha. Incidentally in this notification, sub-heading 2710 has only been referred while prescribing effective rate of duty on naphtha.
(viii) In the above background, Naphtha should appropriately be classifiable under 2710 11 90 and not 2710 11 19.
(ix) It may kindly be noted that internationally there are no sub divisions of Heading 2710 and all details are prescribed only under Excise & Customs Tariff Acts.
It is indeed heartening to note that we have such enlightened Netizens, who take the trouble of intensive reading and incisive analysis. Such Netizens make TIOL what it is and we are immensely grateful to this tribe. This places a huge responsibility on us – we have a very well informed audience who will not take crap and so we have to be very very careful of what we carry!
Thank You Sir !, That was a wonderful analysis – and this came from an assessee and not the Department, which goes on to prove how well informed our assessees are.
To know the trauma that an ill informed taxman can cause to an assessee, see the story below.