Impact of GST on the cement industry

By Registrationwala

26th May 2017

 

Cement is linked to the hopes and aspirations of a young India. And rightly so, for it helps you to have your own roof in a heavily populated ecosystem. And an ecosystem so populated, where there is so much race, that owning a life is equivalent to winning at life, well somewhat. Think Mumbai!

And since India has one of the largest number of young people among one of the largest population, the industry assumes an importance of its own. And it becomes necessary to analyze what is in store, especially on the brink of a historic month that awaits us, when the Government of India will roll out the highly anticipated Goods and Services Tax (GST) on July 1.

The move will affect most industries in a good or a bad way, but it will cast its impression nonetheless. The many indirect taxes will be clipped into one tax as a result of GST taxation, and the end effect on the customers will largely depend on what rate of GST the government decides to levy on different industries.

The GST council recently sat together with the Finance Minister Arun Jaitley recently and zeroed on GST rates on many products from the many industries. And since products of one industry serves as a raw material to another, well in most cases, the entire thing will have a cascading effect on India's gwoth dynamics in the manufacturing industry and more.

For cement, the GST rate was decided as 28 percent. Currently, the many indirect taxes like VAT and service tax etc add up to about 31 percent. So the government deciding on the rate as 28 percent means a 3 percent lower rate, which is good news for everyone who wants to build a house or two.

Good for a growing industry

The cement industry in India is expected to grow leaps and bounds in the years to come. Right now, it is expected to be having a growth rate of 11.14 percent in terms of volume from the financial year 2011 to the ongoing 2017. The production is said to be recorded around 407 million tons by March 2017, which is a huge quantity and a mega achievement in itself.

How will the industry benefit?

Big players like UltraTech, Shree Cement, JK Cement will benefit from this change in nature of taxation. Now with the GST rate decided at 28 percent, which is lower than what it is now, i.e. the combination of different taxes, the industry is set to grow even further, and at a much quicker pace.

After China, India Cement is the largest producer of cement in the world. And by say the next decade or so, India can be the largest net exporter of cement on the global map. It's certainly a very realistic possibility.

What GST will do is allow the companies to make up for the logistics costs they incur. Moreover, even the warehousing industry, that costs millions to the cement industry as of now, will be reined. These are estimated to cost about 20 to 25 percent of the total generated revenue. And so, once these costs are covered for, the generated revenue will be more, leading to more profits and lesser costs to the end users. And so, the cement prices are expected to go down as a result of implementation of Goods and Services Tax. To put it out dramatically, making houses will be cheaper in India once the GST regime takes over.

Also with the GST rollout, the supply chain management in the cement industry is set to get better. There will be lesser number of taxes, some of them available as credit. Then there will be lesser paperwork and hence, even lesser hassles. Because once GST rolls out, India will be one tax regime, except a few exceptions here and there, which is understandable. So interstate transportations and dealings will be better, leading to a stronger evolution of how the supply chain.

The reality check

When it comes to cement production, the main raw materials that the industries use are these: limestone, coal and electricity.

Now out of these raw materials, which mind you are needed in very large quantities for India to produce the amount of cement it does, are not all under GST.

Limestone is used for quarrying. To be able to get it, cement making companies have to pay royalties to the state governments.

When it comes to coal, the companies have to pay clean energy cess. Now this cess, you will say, will be available as a credit but the answer is no. It is not a part of Goods and Services Tax, and hence will not be subsumed under the GST tax.

"I am delighted that the GST council has chosen to keep coal in the 5% slab and I am sure it will help discoms in serving their poor consumers and farmers with even more affordable electricity," Piyush Goyal, the Minister of Power, recently told the media.

The current summation of taxes on coal accounts to 11.69 percentage roughly. Though coal has seen a lower GST rate announced for it, it will still be difficult to tell if it will have positive impact on the cement industry. Moreover, the renewable energy sector has been dealt a short hand by the government. Piyush Goyal told the media that there was no need to lower the taxes on renewable sources of energy because GST will have no major impact on it. Only time will tell if this is a good move.

Also, to add on the challenges, the transportation cost exists too. If the service taxes paid on the transportation costs that the company incurs is not available as the level of the dealer, it adds to the cost of cement production and will need to be soaked in the lower GST rate in order to benefit the customers, and as a result, the entire industry.

 

Impact of GST on the cement industry

2017-05-26