Steel sees temporary destocking in anticipation of lower GST rate

19 June 2017

Currently, iron and steel attracts taxes totalling to 20 percent, which includes an excise duty of 12.5 percent, VAT at an average rate of 5 percent and central sales tax at rate of 2 percent. However, under the new GST rate, iron and steel will attract a rate of 18 percent on all kinds of iron and steel products such as scrap, iron rods and bars. The lower rates under GST are precisely why dealers are cutting down on their old stock or running low inventory to avoid any losses after July 1.

“Dealers are reducing their inventories. Dealers used to have close to 12-15 days inventories, which has now come down to about 4-5 days. This is also a reason that we have seen slow steel demand as dealers are consuming the existing inventories. Even the buyers are not in a hurry as they expect lower rates,” said Rajesh Agrawal, who is managing director of the Raipur based Mahamaya Steel Industries, which manufactures structured steel products.

Dealers are also counting on credit entitlements. “Today, we end up paying both CST and local taxes, which our buyers often do not get compensated as input credit. Post the implementation of the GST, the buyers will be able to take credit on taxes paid, which we believe will reduce their cost by about 2% or Rs 600-700 per tonne,” said Agrawal.

GST will also help in reducing rates because of the uniformity of the taxes on different categories of the steel products. “There are certain products within steel that attract different rates of VAT ranging from 5 percent to 13 percent. With the implementation of GST we are hoping that the rates on certain steel products will come down,” said Kanti Enterprises a Mumbai-based dealer.

For instance, the effective rate on kitchen utensils currently works out to close to 20 percent, which will fall to 12 percent under the new GST rates, which is even lower than 18 percent rates attracted by majority of steel products. But, on the other hand, products like faucets and taps would become costlier as they will attract tax rate of 28 percent under the GST.

Moreover steel traders are also expecting lower rates as a result of possible pass-through of some of the benefits that will accrue to manufacturers because of the lower rates on input prices like iron ore, coal and other inputs. The Raipur-based steel manufacturer said that there would be Rs 300-400 per tonne benefit as a result of new GST rates for the inputs.

These expectations have led dealers to cut down on their inventories as buyers postpone their buying hoping to get a better deal post implementation of the GST. “We are reducing the stock at this point in time. We used to maintain close to 10 tonnes of inventory, which has been reduced significantly. We are only buying stocks that are in demand or (when) we have firm purchase order. Otherwise, we are not piling up any new stock as the demand is lower at this point in time,” said a representative of Mumbai-based steel trading firm Rajusuri Steel.

The steel manufacturers are hopeful that post GST implementation, the restocking will start and that will again push demand, which has so far been subdued because of destocking at the traders level and buyers playing a waiting game.

Source – moneycontrol