The fundamental aspect of GST is the seamless flow of input tax credit along the entire value addition chain, believes Amman Devralia, Executive Director (Whole Time Director) and Head of Finance, IT & Administration, Humboldt Wedag India Private Ltd.
Is the GST rate of 28 per cent for cement appropriate, given its status of being an important input for infrastructure and housing industry?
Given the Government’s focus on developing infrastructure and affordable housing, a lower GST rate for cement would have certainly benefited the infrastructure and housing industry.
What are the biggest worries on the readiness of the supply chain in the cement industry, which is multi-layered, and the evolving rules?
Bringing the entire supply chain into the system will be a challenge. The ability to claim input credit under the GST regime will depend on the quality, accuracy and completeness of the data filed by the vendors. This makes it imperative to familiarise the vendors with the GST regime, and to ensure that they have the right systems and processes in place.
There is anxiety on the cut-over (from old to new regime), what do you think would be the process in the interim?
Any exercise, when it commences, will face issues in transition. Uncertainty with respect to treatment of taxes paid—such as excise duty and sales tax, how and to what extent businesses will receive input tax credit on unsold inventories at the time of transition to the GST regime, etc.—might lead to deferment of purchases, de-stocking and thereby disrupt the supply chain in the interim.
What are the topmost concerns for the industry – unless suppliers, distributors, retailers, logistics partners, etc, are prepared, will the credit mechanism work?
The top concerns for the industry are:
a)Limited timeframe to gear-up the existing IT and accounting systems;
b)un-interrupted connectivity to the GST network; and
c)increased time and costs of compliance on a monthly basis.
The fundamental aspect of GST is the seamless flow of input tax credit along the entire value addition chain, wherein credit on taxes paid on inputs at each stage will be available in the subsequent stage of value addition, thereby making GST essentially a tax only on value addition at each stage. This credit mechanism under the GST regime will depend on timely compliance and matching of data filed by the parties under the supply chain. Little underscores the practical necessity of this process more than the fact that the GST regulation provides limited timeframe for any rectification of input/output tax credits.
The fact that GST rules are still evolving and are complicating the process, what are your preparations to decipher them?
While, GST as a subject itself will take time for things to settle, we started with the basics like:
1)Communication with vendors and customers to register/migrate to the GST regime and share the GTN number;
2)review and updation of vendor and customer master;
3)engagement with tax consultants to conduct an impact analysis and understand the areas of concerns; and
4)most important, involvement of wider organisation to ensure that GST implementation is not viewed just as an F&A/tax initiative, but a business one.
While large-size companies would have a strong IT network for the transition, this may not be true for smaller companies and entities along the entire supply chain. What are the challenges you see for them to streamline?
Companies need to invest to gear-up their existing IT system for the GST regime. Also, companies in rural areas with limited network connectivity will require support of external IT companies/service providers for setting-up offline compliance models, entailing increased compliance costs.
Will GST entail less paperwork with ease of registering for new dealers and retailers?
Yes, online registration process will definitely reduce the paperwork for which uninterrupted connectivity to the GST network will be very important.
It is indicated that for a robust cut-over, will you opt for auditor verification of closing stocks of raw material, finished goods, spares, etc?
No, we will get the physical verification done by the internal team. However, large companies can opt for auditor’s verification to estimate the unutilised tax credit on closing stocks that can be carried forward to the GST regime.
The cost of compliance (IT, accounting) will go up, particularly at the customer level. Is the industry ready to compensate the channel for this?
While larger set-ups will have the required infrastructure, it will be quite challenging and expensive for smaller set-ups. Hope that the benefits of GST will outweigh the increased cost of compliance.
Supply chain issues could jeopardise operations and have financial implications. What worries are particularly higher in case of suppliers and service providers?
GST shifts the tax revenue base from where goods and services are produced (origin-based tax) to where they are consumed (destination-based tax), businesses will therefore need to closely re-assess existing operational structures. Suppliers with multi-state operations will possibly go for consolidation of manufacturing related registrations. Whereas, service providers currently having centralised registration will require State-wise registrations.
Will cost of doing business rise for the cement industry in general? If yes, what components will add to the cost. If no, what changes will bring in benefit both to the industry and the consumer?
GST is likely to have a positive impact on the cement industry. Lower GST rate of 5 per cent on key inputs/raw materials (like limestone, coal, lignite) should reduce the cost of production of cement. Further, cement manufacturers will also be able to save on their logistics costs due to rationalisation of warehouses and lower transportation costs due to decline in transit time.
However, following elements will continue to be included in the cost of production:
a)Royalty paid to State Government for quarrying limestone;
b)clean energy cess levied on coal, not subsumed under GST;
c)tax on electricity, not subsumed under GST; and
d)tax on fuels (diesel and petrol) used for running DG sets or RMC trucks etc., not subsumed under GST.
Will the need for working capital rise as all taxes must be paid right at the time of dispatch?
Yes, levy of GST on stock transfers, receipt of advance payments from customers, GST on inputs consumed for making zero rated supplies like exports, abolition of concessional tax form (such as Form C, F, H etc.) will raise the working capital/cash flow requirements.
De-stocking, which has already started, will it result in financial losses ahead of the GST rollout, although temporary?
Yes, de-stocking will entail selling existing stocks at discounts, thereby impacting the top line as well as the bottom line.
Do you perceive that cost of production will rise/fall in the GST regime. What will make them go up/down?
The cost of production depends on the price of key inputs/raw materials. Lower GST rate of 5 per cent on key inputs/raw materials like limestone, coal, lignite should reduce the cost of production of cement. However, the exact impact of these changes on the cost of production will depend on the fuel mix of a cement manufacturer.
Given that the GST rates for various inputs are fixed lower than cement and electricity outside its purview, will it increase or decrease the cost of production?
Keeping electricity outside the ambit of GST will break the credit chain and will increase the cost of production.
Freight is a major cost element in cement business, will the GST on transportation increase or decrease the cost or price to end-consumers?
The effective service tax rate on transportation of goods by road through the Goods Transport Agency after factoring in abatement was 4.5 per cent where-in input credit was available to the cement manufacturer for inward supplies up to the factory gate. Under the GST regime transportation of goods by road through the Goods Transport Agency will be subject to GST rate of 5 per cent with no input tax credit. Thereby, increasing the costs of transportation of goods by road through the Goods Transport Agency. However, the overall transportation costs is expected to come down due to rationalisation of warehouses in the long run, efficient movement of fleet and ease of cross border movement of goods (reduction in transit time).
Do you perceive that cement consumer prices will move up/down under GST. What will make them go up/down?
Cement manufacturers were expecting GST rate of around 18 per cent on cement. Therefore, GST rate of 28 per cent on cement might result in increase in price for the end-consumers, at least temporarily, until the credit chain starts working at all levels.
Will the GST regime attract investment into the sector?
The Government’s focus on infrastructural growth will certainly attract investment into the sector. Positive impact of GST will also help the sector, which is presently facing challenges with respect to lower capacity utilisation and low margins. Bringing the real estate under the ambit of GST will also boost the investment into the sector.
There is no clarity on GST’s anti-profiteering rules. It is not yet comprehendible whether businesses will be able to hike prices or not in case costs rise. What is your opinion on this uncertainty?
In principle, the anti-profiteering clause is clear – businesses must pass on the benefit of higher input tax credit or reduction in tax rate to the end-consumers by way of commensurate reduction in price of product. While the objective may sound simple, implementing the anti-profiteering clause is fraught with grave risks. Further, it is certainly questionable whether a free market economy should even have such price control mechanisms. After all, movement in price of product could be due to a host of reasons such as the demand-supply scenario, competition and in certain cases, prices of a commodity in international markets, the level of the currency and so on. In the absence of detailed rules and clear understanding of market dynamics, this clause remains an important open issue and will limit the ability of businesses to change prices in response to changing tax rates.
Will GST be more of self assessment service, less discriminatory and less corruption?
Yes, online filing of tax returns, assessments, refunds, etc. under the GST regime will reduce the interface between the assessees and tax officials.
In case cement prices go up marginally, will it impact the demand and therefore the construction industry?
Given the Government’s focus on developing infrastructure it is unlikely that marginal increase in cement prices will have much impact on the demand side. The increase most likely will be passed on to the end-consumers, which in turn, will increase the costs of infrastructure and housing projects.
Any other information you wish to share.
With the onset of GST, India will be adopting a unique invoice to invoice matching concept wherein the details of inward supply furnished by the recipient shall be matched with the corresponding details of outward supply furnished by the supplier. In case, it is successful, the world will follow.