The Indian cement industry holds the impressive position of being the world’s second-largest producer of cement, just behind China. With the Indian Government’s strong emphasis on infrastructure development, affordable housing, and road construction, as highlighted by FM Mr. Arun Jaitley during the Budget 2017, the future of the cement industry appears promising. However, a pertinent query arises regarding the potential impact of the implementation of GST on this projected growth.
What is GST on Cement?
The cement industry falls under the 28% tax bracket in the Goods and Services Tax (GST) system. This relatively high tax rate has contributed to the increased costs within the infrastructure sector. However, despite this higher rate, the implementation of GST has brought positive changes to the operations of the cement industry.
Before the introduction of GST, cement manufacturers had to navigate through multiple tax rates and excise duties applicable to cement. These rates and duties varied depending on various factors, such as:
- The type of cement produced
- The location of the manufacturing unit
- The mode of transport used for delivery
- The state-specific tax regulations
This complex taxation system created challenges for cement manufacturers, leading to administrative burdens and potential ambiguities in tax compliance.
Impact of GST on Cement Industry
The implementation of Goods and Services Tax (GST) in India has had a significant impact on various industries, including the cement sector. With the Indian government’s focus on infrastructure development and affordable housing, it becomes crucial to assess how the GST rate affects the growth and functioning of the cement industry. In this article, we will explore the implications of the GST rate on cement and its influence on transportation costs, warehousing, and overall operating expenses.
Transportation Cost Reduction:
The GST regime has brought about a positive change in the transportation cost for cement manufacturers. Typically, cement plants are strategically located near limestone quarries, but the high demand for cement across the country leads to substantial transportation expenses. However, the implementation of GST has streamlined the process of interstate review and compliance. This has resulted in simplified documentation, reduced transit and turnaround time, and, ultimately, lowered distribution costs. Notably, seamless transit has also boosted the demand for logistics services in cement bag transportation.
Previously, cement manufacturers had to maintain multiple warehouses across different states to avoid state entry taxes and Central Sales Tax (CST). This practice often led to the underutilisation of warehouse capacities, impacting operational efficiency. However, under the GST regime, cement manufacturing companies can consolidate their warehouses, selecting locations that are closer and easily accessible. This consolidation has improved supply chain management, enhanced operational efficiency, and reduced overall costs for the industry.
Lower Operating Expenses:
In general, the GST rate on cement has the potential to lower the operating expenses of the industry. The simplified taxation system, efficient transportation, and improved warehousing have collectively contributed to cost reduction. However, it is crucial to note that the extent to which end-users can save on their cement purchases depends on the willingness of cement companies to pass on a significant share of their savings to consumers. Ultimately, the optimal utilisation of the supply chain and warehousing facilities plays a vital role in maximising the benefits of GST for both the industry and end-users.
Calculation of GST on Cement
The implementation of the Goods and Services Tax (GST) has brought about a simplified and streamlined tax calculation process for cement. Under the GST regime, all previous multiple rate systems and excise duties were replaced with a fixed 28% GST rate on cement. This rate applies uniformly to different types of cement, including slag, aluminous, super sulphate, and Portland cement. This change has made the computation of GST on cement much simpler and less burdensome.
Impact of GST on Cement Manufacturing Companies – A Case Study
Let’s examine the impact of the GST rate on cement through the example of Ultratech Cement Ltd., one of India’s largest manufacturers of ready mix concrete, grey and white cement. Ultratech Cement Ltd. holds a prominent position in the global cement market, accounting for 30% of India’s total exports with more than 2.5 million tonnes per annum. The company’s cement is exported to countries in the Middle East, Europe, and Africa.
In response to the reduction in the GST rate on cement, Ultratech Cement Ltd. has taken measures to lower the cost of its products by 2-3%. This strategic move aims to stimulate demand for their cement in the real estate and infrastructure sectors.
Current GST Trends and the Real Estate Industry
The introduction of the GST system has revolutionized the Indian tax landscape, simplifying taxation processes to a significant extent. However, it has both advantages and drawbacks.
Recently, the government decided to reduce the GST rates applicable to under-construction properties in the luxury housing category from 12% to 5%. Initially, this decision was aimed at boosting demand in the real estate sector. However, the withdrawal of Input Tax Credit (ITC) benefits somewhat offset the impact of this reduction.
Despite these changes, considering the upward pricing trend in the real estate industry, it is expected that the cost of cement will further increase under the prevailing GST rates for cement. As the housing and infrastructure sectors rely heavily on the cement industry, experts believe that this will lead to an overall increase in their costs as well. Hence, the implementation of GST on cement has played a crucial role in bringing about significant changes not only in the cement industry but also in all related sectors.