A National Tax or Just Hype?
GST is not just an accounting changeover but a systemic one! And the countries who adopted GST faced inflationary pressures during early stages of the cut over time, but proved otherwise in the long run. Indian Cement Review endeavours to bring forth the apprehensions and convictions of the cement industry as it ventures into a new tax regime.
GST is an indirect tax throughout India that replaces various taxes levied by the Central and State Governments. Introduced as The Constitution (One Hundred and Twenty Second Amendment) Act 2017, following the passage of Constitution 122nd Amendment Bill, the GST is governed by GST Council and its Chairman is Finance Minister of India. Under GST, goods and services will be taxed at the following rates: 5 per cent, 12 per cent, 18 per cent, and 28 per cent respectively. There is a special rate of 0.25 per cent on rough precious and semi-precious stones and 3 per cent on gold. There will be no GST on the sale and purchase of securities.
That will continue to be governed by the Securities Transaction Tax (STT).
GST, which launched on July 1, 2017 midnight, will be levied on all transactions such as sale, transfer, purchase, barter, lease, or import of goods and/or services. Thus the GST subsumes the existing;
1.Central Excise Duty
3.Value Added Tax (VAT)
5.Central Sales Tax (CST)
The Government has adopted a dual GST model, meaning that tax will be administered by both the Union and State Governments. Transactions made within a single State will be levied with Central GST (CGST) by the Central Government and State GST (SGST) by the Government of that State. For inter-State transactions and imported goods or services, an Integrated GST (IGST) is levied by the Central Government.
GST being a consumption-based tax, taxes are paid to the State where the goods or services are consumed not the State in which they were produced. IGST complicates tax collection for State Governments by disabling them to collect the tax owed to them directly from the Central Government. Under the previous system, a State would have to only deal with a single Government in order to collect tax revenue.
Seamless GST network
For a smooth and seamless implementation of the new tax regime, a Goods and Services Tax Network (GSTN) has been created for all including stakeholders, government, and taxpayers to collaborate on a single window. The shared window or portal will be accessible to Government, which will track all transactions while the taxpayers will have a vast service to return file their taxes and maintain details. All functions relating to taxpayers like filing of registration application, filing of return, creation of challan for tax payment, settlement of IGST payment (like a clearing house); generation of business intelligence and analytics will be handled by the GSTN. All statutory functions to be performed by tax officials like approval of registration, assessment, audit, appeal, enforcement etc. will remain with the respective tax departments. The work distribution is depicted as follow:
Bonding GST with cement
The indirect tax structure on cement industry has always been the subject of debate and anomalies. The industry has been vocal about the differential tax system meted out to cement as compared to steel, which together are most essen-tial ingredients for infrastructure development.
The current excise duty levy on cement is full of complexity - with a combination of ad valorem and specific duties depending on various parameters ranging from status of the manufacturer (mini or others) to type of packing (retail or bulk). "This coupled with the VAT rate of 13.5 per cent to 14.5 per cent in most States results in an effective indirect tax incidence ranging 27-31 per cent (roughly) depending on the type of cement (bulk or packaged)," deciphers Anil Kumar Pillai, an industry veteran. Under GST, the industry was pinning their hopes of equality in rates between cement and steel. However, the principle of equivalence appeared to have not been followed and on account of which, the GST Council placed cement in the higher rate slab of 28 per cent as compared to steel (placed in the 18 per cent slab).
The GST Council's rate fixation can be explained by the current combined incidence of excise, VAT and other applicable local taxes that has been adopted as the base to arrive at the GST rate for cement. Considering the present incidence of excise and VAT of around 31 per cent for packaged cement, the GST rate of 28 per cent implies that this variety (packaged cement), which accounts of major portion of cement sales, is actually attracting a lower rate than the current one.
With GST subsuming all local and municipal taxes, which are levied in addition to excise and VAT and takes the actual tax incidence much higher, should augur well for the cement business, which largely operates on a retail price per bag basis.
The outgoing structure of indirect taxes was loathed with cascading taxes. The GST being levied only on value addition at each level of distribution means that the effective incidence of indirect taxes should come down further as compared to the present. Nevertheless, it is a pertinent place in perspective that indirect tax levies on steel are on a much simpler base compared to cement, while in GST regime both would be par in terms of the structure of the levies.
Cut over will be challenging for cement biz
Although the Government has been regularly stating that the cut over (from old to new regime) will be smoother and seamless, bringing the entire supply chain into a unified 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. While the vendors are still not familiar with the GST regime, any unprecedented exercise, when it commences, 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., may lead to deferment of buying, de-stocking and thereby disrupt the supply chain in the interim," says Amman Devralia, Executive Director, Humboldt Wedag India Private Ltd.
The top concerns voiced by the cement industry are limited timeframe, questionable un-interrupted connectivity to the GSTN; and increased time and cost of compliance on a monthly basis. Cement companies will have to invest to gear-up their existing IT system. "Companies in rural areas with limited network connectivity will have to take external support for setting-up offline compliance models. This may entail additional cost", believes Devralia.
"The only pain point will be that people in the chain are not accustomed to filling up new forms as required under GST. So these things will take some time which is normal when a new system is introduced and moving from an obsolete system to a better system", pointed Pillai. He also added that it is something that the industry will need to do improve cost efficiencies and reduce cost.
Direct impact on cement
The GST on cement has been fixed at 28 per cent, a highest rate of tax implying increased costs for the infrastructure and housing sectors. The GST on refractory cement, mortars, concretes (mainly used for building industry furnaces, huge ovens, etc.) has been fixed at 18 per cent. Cement Bonded Particle Board will attract 12 per cent.
The main raw materials for cement are limestone, coal and electricity. The tax rates on these are as follows:
- Limestone is taxed at 5 per cent
- Coal is capped at 5 per cent, which is a reduction from the earlier rate of 11.69 per cent
- Electricity is outside the purview of GST
While there is no mention regarding the royalty that the cement companies pay the State Governments for quarrying limestone, a clean energy cess has been levied on coal, which is not available as an input credit because it is not subsumed by GST. Thus, these two factors will continue to be outside the GST ambit and will be included in the cost of cement production even after GST is implemented.
But given the Government's focus on developing infrastructure and affordable housing, a lower GST rate for cement would have certainly benefited infrastructure development and housing industry by keeping cost low.
Positive effect on cement
Less warehousing: Most cement companies maintain multiple warehouses across States to avoid CST and State entry taxes. These warehouses largely operate below their capacity, which leads to operational inefficiencies. The supply chain management of cement will get a boost under GST due to one tax regime. Like other sectors, cement companies will consolidate their warehouses and maintain warehouses in areas where it is most beneficial thus leading to operational efficiency.
Reduction in transport costs: Most cement units are located near limestone quarries while demand for cement is pan-India which means high cost of transportation from manufacturer to consumer. With GST, the logistics industry is overhauled and the transit time will decline significantly as trucks will spend lesser time at checkpoints. This will lead to lower transportation costs for the cement industry.
Less complex taxes: The multiple rates of taxation are done away with under GST. With only one fixed rate of 28 per cent applicable on cement, it will result in greater compliances and less complexity. Under the outgoing system, there were multiple duties applicable on cement manufacturing. There are separate rates and specific duties applicable on different types of cements depending on whether they are supplied in bulk form or in packaged form, or whether they are for industrial or trade purposes etc.
Impact on production cost and cement price
Lower GST rate of 5 per cent on key inputs/raw materials like limestone, coal, lignite will reduce the cost of production of cement. Further, cement makers will also be able to save on their logistics cost due to rationalisation of warehouses and lower transportation costs due to decline in transit time. However, the exact impact of these changes on the cost of production will depend on the fuel mix of cement manufacturers. Since, electricity and petroleum are kept outside the ambit of GST; it will break the credit chain and may increase cost of production.
The effective service tax rate on transportation of goods by road through 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 GST, transportation of goods by road through Goods Transport Agency will be subject to GST rate of 5 per cent with no input tax credit thereby, increasing the transportation cost by road through Goods Transport Agency. Some large dealers may even explore own logistics in order to optimise on GST, though it may not be widespread due to physical challenges on the part of the dealer," Devralia opined.
Today around 20-25 per cent of the actual MRP is on account of logistics, ranging from 10-20 per cent in many cases. This is the cost of logistics for transporting cement from the factory to the end distributor. "Now under GST, this cost will come down as the truck's turnaround time will reduce substantially. There is a huge waiting time right now which is ultimately paid by the manufacturer and customer because the cost of the truck idling at check naka. Now the truck after it leaves the factory will reach back without having to stop anywhere because it will carry all documents," said Pillai, further adding that logistic and marketing costs may come down.
Maintaining godowns for non-trade and for the other sales that will be eliminated and bring cost of stocking down. So on a net basis, it will be beneficial for the consumer.
For example, as highlighted above, the effective tax under current trade comes to around 30-31 per cent which compared with 28 per cent of GST, is effectively savings of around 300 basis point (bps), a CLSA broadly calculated in its report on cement industry recently. Based on current retail price of around Rs 300 a bag, the savings could be around Rs 8 a bag.
However, the cement business should be mindful of the anti-profiteering clause contained in Section 171 of the CGST Act, 2017. It says, any reduction in the tax rate on any supply of goods or any benefit in terms of input tax credit is required to be passed on to the consumers. It also provides that an authority would be constituted to evaluate whether the benefits in terms of reduced rates or increased input tax credits have been passed on. However, the rules in this respect are not in detail as it is necessary to distinguish between input cost changes and tax changes, both of which may simultaneously become part of pricing.
Although in principle, the anti-profiteering clause is clear and the objective sounds simple, implementing the anti-profiteering clause will be accompanied with grave risks. "It is questionable whether in a free market economy, should such price control mechanisms ne ever present. Movement in prices could be due to multiple reasons like demand-supply scenario, competition etc," feels Devralia. In absence of detailed rules, this clause will remain an open issue and may limit the ability of businesses to change prices in response to change in tax rates.
Even if cement companies indulge in profiteering, it will definitely reflect in their profit and loss accounts and finally in the balance sheet. Here corporate tax on companies is 30 per cent.
Philip Capital, in its recent analytical report on the cement industry, expects volume growth is likely to decline in the June quarter due to subdued demand and the supply-chain disruptions caused ahead of the implementation of GST. However, going ahead, the savior for cement demand will largely be government infrastructure spending.
The online registration process will definitely reduce the paperwork for which uninterrupted connectivity to the GSTN will be very important. But the new regime requires plethora of digital papers to be submitted. A report estimates, if a company operates in 20 States, it need to file as much as 740 documents a year.
Rahul Akkara, Vice President, JSW Cement, pointed out that, "In cement business, dealers/sub-dealers will have to get themselves registered under GST if their business crosses a threshold limit to avail cenvat credit. This in turn will mean a marked a change in the way business is done. Compliance, returns filing transaction level details will have to be provided in returns, which was not in case of earlier regime. Return filing process will also involve reconciling data which is uploaded by business partners like vendors/customers."
All these put together may reduce operating costs of cement industry in the future. Till then, it is expected that prices of cement will increase, at least temporarily, once GST is implemented. In turn, costs for infrastructure and housing, which are highly dependent on cement, will also increase.
The industry is expected to grow over the next few years supported by a revival in rural demand and increased spending by Government on infrastructural projects. Also, development of 98 smart cities projects, Swachh Bharat scheme and hasty urbanisation can act as a demand booster.
Further, investment by the Government on road transport (Rs 29,000 crore) and highways (Rs 64,900 crore) will lift the cement demand during the next fiscal. Also with the Government decision to shift from bitumen to cement for construction of all upcoming road projects will have positive impact on the industry. The decision was taken as cement is more durable and cost effective and the move will benefit the cement companies both in the medium and long term.
The housing sector, which accounts for 67 per cent of total cement demand, is likely to grow over the next few years, supported by expanding urbanisation and easy home loan availability.
GST for under-construction projects has been fixed at 12 per cent and appears high, experts believe that input credit will help bring down the rate of a housing unit. However, the impact of GST on real estate will be known only after one quarter, experts opine.
- Current taxes are at 26-28 per cent and GST is at 28 per cent - should theoretically mean no impact; but stricter compliance will lead to operating cost increases, especially logistics.
- Logistics accounts for 20-25 per cent of total operating costs. Constraints on overloading and strict compliance will increase the logistics cost by Rs 100-200 per tonne - though there will be savings in terms of warehousing costs.
- Cement manufacturers suggest that the GST rollout implies savings of Rs 80 per tonne in trade and cost increase of Rs 80 per tonne in non-trade.
- Given the increase in compliance, we expect overall operations cost of operations to increase by Rs 100-150 per tonne.
- Cement manufacturers will plan a Rs 10-15 per bag price hike to compensate for the cost increase.
The 20-year journey of indirect tax reform
In 1986, VP Singh, then Finance Minister, proposed a major overhaul of the excise taxation structure. The aim was to reduce the cascading effect of multipoint excise levies, and eventually help reduce costs. Announced the introduction of a MODVAT scheme, which allowed manufacturers to obtain instant and complete reimbursement of excise duty paid on components and raw materials, along with the promise of transparency - disclosure of the full taxation on the product.
Manmohan Singh started early discussions on a VAT at the State level - after the Raja Chelliah Committee appointed suggested reforms in the direct and indirect tax regimes submitted its report.
Yashwant Sinha decided to put an end to the sales tax war among States, and to have uniform floor rates for sales tax of various commodities with effect from January 1, 2000. Set up an Empowered Committee of State Finance Ministers in 2000, headed by Asim Dasgupta West Bengal Finance Minister. The plan was to kick off VAT from April 1, 2003, but given resistance, it came into force only in April 2005
In 2003, Finance Minister Jaswant Singh's Economic Adviser, Vijay Kelkar, suggested shifting the focus from a tax on production to a tax on consumption, and thereby creating a single national market that would provide a huge boost to Indian manufacturing.
In 2004, Finance Minister P Chidambaram picked up threads and worked out the financial support to states and campaigned for the introduction of VAT.
In 2005, Chidambaram after overcoming resistance announced a national VAT or GST, covering both the Centre and the states. Later budgets signalled April 1, 2010, as the date for launching GST.
By 2009, the first discussion paper on GST was unveiled. The Finance Commission headed by Kelkar, recommended several steps for the launch, including a substantial grant to the Empowered Committee to help reduce dependence on the central government to carry out research.
In 2011, Finance Minister Pranab Mukherjee introduced a bill to provide the enabling framework for GST. The Parliamentary Committee on Finance led by Yashwant Sinha, suggested changes. There was strong resistance to the proposed GST from BJP-ruled Madhya Pradesh and Gujarat. The resistance was strong enough that the government was unable to push forward, despite Chidambaram - who returned to the Finance Ministry - approved most changes and provided higher compensation against potential revenue losses with the implementation of GST.
In 2015 the legislation was approved in the Lok Sabha. But the government's lacked Upper House support leading to a long standoff with the Opposition in 2016. Finance Minister Arun Jaitley led negotiations with several stakeholders - mainly state governments - and gradually got them on board. The passage of key bills paved the way for the launch of GST on July 1, 2017.
Impact of GST on Cement
Refractory cement, mortars, concretes (mainly used for building industry furnaces, huge ovens etc.) will attract 18 per cent tax.
Cement Bonded Particle Board will attract 12 per cent.
Limestone is taxed at 5 per cent
Coal is capped at 5 per cent, which is a reduction from the earlier rate of 11.69
Electricity is outside the purview of GST