The Rs 140,000-crore cement industry has been witnessing demand-supply mismatch in recent times as the capacity exceeded demand. The widening demand-supply gap was exerting downward pressure on prices, hitting both the top line and the bottom line of companies. Further, rising costs have adversely affected profitability as revenue growth was tepid during September-December 2010 quarter on account of low price realisation.
In its pre-budget memorandum, the cement industry has urged the government to bring the value-added tax (VAT) on cement on par with other building materials like steel, and scrap the import duty on coal, pet coke, gypsum and other fuels. While steel attracts 4 per cent VAT, for cement it is as high as 12.5 per cent. Industry players argue that since both the materials are inputs for construction, cement should be on a level playing field to that of steel. Cement has a complex excise duty structure with specific as well as ad-valorem duty and it is the only product on which excise duty is levied on MRP without allowing any abatement. The industry also wants the status of ‘declared goods’ like steel, which will enable the sector to reduce expenditure on taxes.
According to the Cement Manufactures Association (CMA), the total levies and taxes on cement account for more than 60 per cent of the ex-factory price, far higher than most producers in the Asia-Pacific region.
In India, cement is highly price elastic (higher the price, lower the demand). Most of the demands put forth relate to levies imposed on value which include a high portion of post-manufacturing expenses, notably the freight and VAT components. Pegging VAT at 4 per cent would reduce the end-consumer price by at least Rs 15-20 a bag (Mumbai). And levying specific duty in lieu of ad-valorem duty would further lead to drop in prices and remove anomalies. Thus, the overall price reduction would be significant and given the capacity built-up, will boost demand rapidly.
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