GST: Dust Settling Down!
GST is not just an accounting changeover, but a systemic one. The countries who adopted GST faced inflationary pressures during early stages of the cut-over time, but proved otherwise in the long run. With GST regime in place for three months now, the Indian Cement Review takes a review of the status, process, apprehensions and convictions of the cement industry and suggestions made by industry players on what can make the regime more compliant and acceptable as a game changer.
According to ICRA, cement demand growth is expected to be around 3.5 to 4 per cent during 2017-18 financial year, a downward revision against its earlier estimate of 5 per cent. The revision arises due to a delay in the revival of demand during the first half of the year, cited the rating agency. It expects demand to rebound from Q3, even as Q2 was muted owing to the monsoons and GST implementation issues.
Demand in Q1 was adversely impacted by sand shortage (in southern and northern states), implementation of the Real Estate Regulatory Authority (RERA) and slowdown in construction activity in the West and drought and weak housing activity in South India. Hereafter, the demand growth is likely to be driven by a pick-up in the housing segment - mainly affordable and rural housing, and infrastructure segment, mostly road and irrigation projects, ICRA Ratings noted.
On pricing, July and August witnessed a decline in most markets, dropping by 4 to 8 per cent in August 2017 from their June levels. However, prices are expected to rise as demand picks up in Q3.
However, higher power and fuel (coal and pet coke) and freight costs (due to rise in diesel prices) during 2017-18, the increase in cement prices remain critical from the profitability perspective. Lumpy capacity additions in the recent years have led to an increase in debt levels and some deterioration in credit metrics, although there remains a comfort level for most large players. In addition, rising costs will continue to assert pressure on the margins and debt metrics of the cement companies.
According to the Cement Manufacturers Association (CMA), the industry was heading for a growth in the second half of fiscal 2017-18, due to benefits provided by GST. The government's increased spending on infrastructure is an added benefit. Due to the elimination of blockage time at state-check posts under the GST regime, the logistics cost is estimated to come down by 30 per cent, benefiting the industry considerably.
Around 5 per cent reduction in cost on bagged cement being sold in the market has happened under the GST. Loose cement sold to the institutional clients, the tax incidence has gone up by around 4 per cent. Both these categories have been placed under the 28 per cent tax slab under GST, which has an added advantage of input tax credit.
According to R Mukundan, Managing Director, Tata Chemicals, (who is also a cement producer), "It will take at least six months for GST to settle in given that there are pros and cons of the GST regime for the chemicals and cement industry." He said that the rollout was smooth, and there was a marginal reduction in output tax rates on cement and prices of cement. However, there has been some adverse impact on working capital for the industry due to IGST (Integrated Goods and Service Tax) on stock transfer.
On the process, GST-compliant customer invoices were generated through ERP systems. The first test of the GSTN system and the process of filing tax return was going on in August-September. "Overall, we feel it will take about 5-6 months for the new system to settle down," Mukundan hopes.
With almost two months into the GST regime, the Andhra Pradesh government was at loggerheads with contractors executing works contracts projects, including the construction of irrigation projects, over the impact of the GST over the sector. The contractors expressed concern over the high slab under which the key ingredient cement has been placed. At 28 per cent GST, the cost of cement is expected to increase further, thus impacting the arithmetic of the contractors. Contractors were seeking reimbursement of total additional tax burden imposed on the project works after GST regime came into operation.
According to SN Reddy, National Vice President of the Builders Association of India: "Building contractors, particularly those who are executing works of smaller magnitude are facing crisis. The effective tax rate on cement earlier was around 20 per cent, including the excise duty and value added tax." Reddy added, "The total differential between the previous taxes and GST should be borne by the government. Contractors are not able to bear the additional burden."
However, senior officials disputed the claims saying payment schedules for the contractors were made after factoring in the burden because various levies. "The government has in fact given directive to the departments concerned to pay 5 per cent over the above the original schedule after considering the impact of the GST on key materials like cement," a senior official told.
Officials maintained that although tax rate on cement had increased post-GST, other costs including those of inputs like coal and limestone had been reduced.
Impact on cement biz
Cement has been taxed at 28 per cent under the GST as compared to 30 to 31 per cent in the previous system of taxation. It was expected that the makers will have a sort of relief as the packaged cement rates fall between 29 to 31 per cent. The raw materials, taxes on coal, limestone and lignite are reduced to 5 per cent. Though there is not much clarity on the impact of GST, prices are unlikely to surge in the near future.
Impact on prices India's largest cement maker UltraTech Cement on July 3 announced reduction in prices by 2 to 3 per cent, extending benefits of tax reduction under the GST regime. The company began supply of batches at new rates from July 1 from its warehouses, when the new tax structure came into force. "There will be somewhere 2 to 3 per cent reduction in cement prices because of reduction in tax rates due to GST. We are extending our tax benefits to dealers who would then forward it to the end consumers," UltraTech Cement Chief Financial Officer Atul Daga told.
The reduction in prices vary from State to State, he said, adding "whatever the difference in rates according to each market has been computed and the impact has been given in the new prices". He expected cement demand to pick up following price reduction, but gradually depending on how housing construction and infrastructure development shape up.
GST and RERA hit demand
GST and RERA implementation, together with good monsoons, cooled off cement prices across the country by 2 to 3 per cent on an average in the immediate months of the new tax regime. It is expected that prices will continue to remain low until the bulk of cement dealers move over to the new tax framework.
Cement sector analysts opined that northern, central and eastern markets were particularly hit as most dealers resorted to destocking in June in anticipation of GST and the pace of restocking was not satisfactory. Moreover, dealers, particularly in the tier II to III markets were still skeptical of the input tax credit affecting volume uptake.
According to MotilalOswal's analyst, prices will continue to remain subdued as dealers, mostly in the northern-eastern markets are yet to understand the GST implications and how to claim input tax credit. RERA as well as GST requires tighter compliance norms which has affected construction activities by large real estate companies, which slowed down in the July-August period.
Cement prices showed declining trend since the beginning of the current financial year after the average prices peaked during April at Rs 307 a bag, rising by over 4 per cent, but then began to decline steadily, falling by 3.5 per cent in June, a month prior to GST implementation. However, prices dropped 6 per cent to Rs 289 a bag during July-August as compared to the April prices.
Demand and cement supply remained sluggish post-GST implementation and the channel network suggests that sluggishness may continue for another two months. Sustained sand shortage and RERA implementation will continue to adversely impact demand. Owing to weak demand, primarily from the channel partners, average trade segment prices (all India) fell 3 per cent on a month-on-month basis and trade prices corrected by 2 per cent in the north and southern region, 3 per cent each in central and eastern region and by 4 per cent in the western belt.
Thus, price correction in the West was sharper as prices rose in Pune area in August against the national price decline implying a higher base correction for the region. Overall dealers have indicated that about normal monsoon and the GST as well as RERA would further moderate cement offtake. However, cement marketing executives are upbeat that a good monsoon would lead to better cement offtake during the second half of the current fiscal year.
Prices continued to soften in September with all-India declining Rs 6 a bag. Cement prices in West continued to decline Rs 12 per bag, while prices in Central were almost stable at Rs 2 a bag.
Post rolling over of the GST regime, there have been several amendments to the rules and regulations regarding compliance. Cement is taxed at the rate of 28 per cent under GST, which is higher the earlier average rate of tax around 20-24 per cent. Its complementary in construction, iron rods and pillars are charged at 18 per cent, closer to the average of 20 per cent under the old regime. Paint, wall fittings, plaster, wallpaper and ceramic tiles are taxed at 28 per cent, higher to previous average rate of 20-25 per cent, sand lime bricks and fly ash bricks are at 5 per cent, slightly lower than the previous rate of 6 per cent. However marginal are the change in the percentage, these variables make a huge difference as transportation and logistics costs reduce in the single taxation system. In the long run, while there might be marginal impact on cement industry and its downstream real estate sector, cement makers are looking at a significant improvement in buyer sentiment and perception of this sector. Developers, too, will find the regime much simpler to work with, with the benefit of input tax credit being an added advantage.
- Nitin Madkaikar