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Before the two national conferences were held this year, the Ministry of Finance and the State Administration of Taxation issued the "Circular on Adjustment of Certain Product Oil Consumption Tax Policies." It stipulates that by December 31, 2010, imported and domestic naphtha should be used as ethylene and aromatic hydrocarbons. The raw materials of products are exempted from consumption tax; naphtha produced directly by manufacturers is subject to excise tax.
At the same time, the Ministry of Finance and the State Administration of Taxation made it clear that this adjustment is to promote the fair competition between domestic ethylene and aromatic products based on naphtha and imported similar products.
According to a source from Sinopec, China's ethylene and aromatics products are still heavily dependent on imports. This time, the excise tax on naphtha used as raw materials for ethylene and aromatics products has been temporarily exempted. This has caused domestic companies to remove a heavy burden and will help improve the competitiveness of domestic petrochemical companies. It is understood that about 55% of ethylene and downstream products in China, and about 65% of chemical fiber raw materials, rely on imports. Since China’s accession to the World Trade Organization, the import tariff on ethylene is only 2%, and the current provisional tariff is zero. There is no import quota control, and the prices of ethylene and downstream petrochemical products have basically been liberalized. The price of imported products is to a certain extent. Affected domestic prices of ethylene and downstream products. Under this circumstance, if the state continues to impose a consumption tax on naphtha used as a chemical raw material, it will squeeze the profit margin of domestic ethylene and downstream products to some extent, and reduce the competitiveness of the domestic ethylene industry.
It is understood that over the past year or so, levy on the consumption tax on naphtha has led to a substantial increase in domestic petrochemical production costs, and on the other hand, it has increased the raw material costs of large ethylene joint ventures such as Nanjing Yangba and Shanghai Secco. Consumption tax as an in-quote tax exempted the price space of the company's products, while consumption tax as a VAT tax base also increased the burden on the company. The estimates from the China Petroleum and Chemical Industry Association show that due to the fact that Sinopec and CNPC mainly use naphtha as a raw material, Sinopec has increased its consumption tax by 3.6 billion yuan annually, and PetroChina has increased its consumption tax by 1.55 billion yuan annually. The 600,000-ton ethylene project of Nanjing Yangtze-BASF Co., Ltd., the 900,000-ton ethylene project of Shanghai Secco Petrochemical Co., Ltd., and the 800,000-ton ethylene project of Huizhou Zhonghai Shell Petrochemical Co., Ltd., which were put into operation in 2005, About 7.2 million tons of naphtha raw materials are needed each year, and 3 ethylene companies increase consumption tax expenditure by nearly 2 billion yuan each year. It is estimated that with the launch of ethylene projects such as Dushanzi Petrochemical and Tianjin Petrochemical, China will add approximately 12 million tons of naphtha demand in 2008.
In addition, because of the constraints imposed by the domestic refined oil pricing mechanism, some refineries are reluctant to use naphtha to produce gasoline, diesel, or low-margin ethylene with a controlled price, in order to reduce losses, and prefer to directly export. According to customs statistics, China’s naphtha exports in 2007 were 1.739 million tons, a year-on-year increase of 10.54%. This policy stipulates that the naphtha used for the production of ethylene, aromatics and other products shall be exempt from taxation, and the excise tax shall be levied on the total amount of naphtha produced directly for external sales. To a certain extent, this speculative practice of the refinery is also blocked. .
New policy enhances competitiveness of domestic petrochemical enterprises
During the two sessions last year, some members of the 10th National Committee of the Chinese People's Political Consultative Conference in the field of petroleum and chemical industry had proposed that the taxation of naphtha was unreasonable and submitted a proposal to adjust the consumption tax policy for refined oil. This is in response to China's consumption tax policy that was introduced on April 1, 2006—a 0.2 yuan excise tax on naphtha per liter. At that time, Wang Chih-ming, an academician of the Chinese Academy of Engineering and vice chairman of China Petroleum & Chemical Corporation, said that the excise duties on naphtha had seriously affected the development of the domestic petrochemical industry and caused the domestic products to repeatedly fail in competition with imported similar products.