GST impact ambiguity, weak demand to keep cement prices under check

26 June 2017

Given the government’s thrust on infrastructure and allied activities, cement makers were hoping for 18% goods and services tax (GST). Unfortunately, the sector was categorized in the highest tax slab of 28%, dashing these rose-tinted hopes.

But while cement manufacturers profess disappointment, tax experts and analysts say that post-GST, the tax burden of cement players should come down. In the pre-GST regime, effective tax incidence for packaged cement was in the 29-31% range including indirect taxes such as excise duty and value added tax (VAT), tax experts said. Tax rates vary across states since tax is levied depending on whether the sale is made for retail or bulk use.

As for key raw materials, tax rates for coal, limestone and lignite has been reduced to 5%. The exact impact of these changes on production costs will depend on the fuel mix of each cement player.

But for now, Gujarat-based Sanghi Industries is seen as a key beneficiary of tax cut in lignite. “With the rise of international coal prices, this cement maker shifted aggressively towards lignite usage and hence can expect savings on that front. Lignite usage in the March quarter stood at 75% and currently on 28% tax on lignite, input credit cannot be taken on VAT portion, which would now be available,” says an Antique Stock Broking Ltd report.

However, the clean energy cess paid by cement companies on coal remains and so does royalty paid to state governments for quarrying limestone.

On the warehousing front, savings can be expected as cement companies would shift from multiple small warehouses to fewer large ones. But that will be a gradual process since companies usually have lease contract for warehouses. “Currently, cement players selling cement manufactured in one state to other normally set up warehouses in the state of sale. This is done in order to avoid higher taxes as branch transfer is exempt from central sales tax (CST). In the GST era there won’t be any CST. Furthermore, service quality i.e. time taken to dispatch cement to dealers, would be a key variable players would keep in mind while making decision on consolidation of warehouses,” said Crisil Research director Rahul Prithiani.

Thus the impact on companies will vary depending upon diversity in markets and the pruning of logistics costs, on account of larger scale.

On the other hand, as of now the effective service tax rate on freight transported by road through goods transport agency after factoring in abatement was 4.5%. Under the new taxation system, a GST rate of 5% will be applicable. Since higher tax on freight would be claimed by cement players as input tax credit, analysts don’t expect any material difference on effective payable freight rates.

“The weighted average lead of cement is typically in the range of 300 to 500 kms for most of the players including us in the industry. Excluding the taxes, supply chain costs which include transportation, handling, warehousing, documentation, etc. are in the range of about 20-30% of total expenses,” Dr Shailendra Chouksey, whole-time director, JK Lakshmi Cement, told Mint. A final decision on e-way bills, which will have a bearing on logistics costs, especially of pan-India players, is awaited.

To conclude, usually during this time of the year, cement manufacturers resort to price hikes, but this time around that may not happen, analysts said. Apart from the seasonal slowdown in off-take, other factors like uncertainty about quantum of impact of GST on balance sheets and the fear of the government keeping a tab on cement prices would deter companies from raising prices.

Source-livemint