Ashish K Nainan, Research Analyst – Industry Research, CARE Ratings

GST has come into existence nearly a year back. How do you review GST and changes made in GST on Cement and downstream products over the last one year?
The sector has benefited from the way GST has infused efficiency in terms of logistics and warehousing which has helped the industry save both time and costs.

The changes are yet to take place for the larger cement industry in terms of the tax-slab and incidence of GST on cement (at 28 per cent vs expectation of 18 per cent). But the industry has been buoyed by the demand from infrastructure and affordable housing. The renewed demand has seemed to ward of some of the challenges of GST. Interestingly, the Government has been instrumental in creating the renewed demand because of their focus on infrastructure and real-estate development.

What has been the impact of GST on cement and its other downstream products on the industry and users at present? Do you think GST process has stabilised by now?
Cement (Portland, slag, aluminous, etc.) falls under the highest tax bracket, i.e, 28 per cent. Other cement products used in industry like refractory cement, cement-based particle boards, etc. are taxed at 18 per cent. Cement is a majorly demand driven product coming from real estate and infrastructure segments and these two segments constitute for over 90 per cent of the total demand. Bringing all cement and its by-products under the same tax slab (at 18 per cent) would be favourable for the industry and would augur well for growth, thereby also helping in creating employment.

Real estate and infrastructure are significant in supporting growth of the economy, and are major employment generators in our economy. The present NDA government too has been focused on providing stimulus to infrastructure and real estate. Tax slab rejig would be considered a positive and enabling step from the government.

What are the benefits that have accrued to the industry – particularly intangibles like doing away with paperwork, transparency, speeding up logistics, etc.
One of the major benefits has been ease in movement or transportation of cement across States. There have been considerable cost savings w.r.t. the number of warehouses these companies have to maintain. Now, a cement manufacturer could maintain one large warehouse in one of the States, which would serve as a hub, and continue to supply the surrounding region from this hub which would include markets in the neighbouring States. Given the significance of transportation and storage costs which at times is as high as 25 per cent in the overall cost for cement manufacturers, the industry has been able to save considerably on storage and transportation cost due to GST. Paperwork too has eased and there are expectations of it easing further once the E-way bill processes get stabilised over the next six to nine months for the industry.
How GST has impacted the building materials industry, most of which has been in the unorganised sector as far as tax compliance was concerned?
It would be difficult to comment on building materials industry as a whole. Cement, steel are highly organised given the nature of the industry. On the other hand, ceramics, granite, marbles, etc. continue to have a sizable proportion of unorganised players. Paints is another industry which has a sizable number of unorganised players (approximately 35 per cent).

Tax compliance is not a choice anymore. They will have to be compliant if they want to cater to institutions like EPC companies, real-estate developers and government agency since these companies need to avail input tax credit. Interestingly, GST has brought awareness among retail consumers too. It is hence a matter of time, before majority of these industries become organised and become tax compliant.

What percentage of building material suppliers ecosystem has come under tax net after GST and its impact on prices generally?
Difficult to comment. Cement and steel like I mentioned is completely organised. Paints and glass used in construction too are majorly organised. Ceramics was about 45-50 per cent organised. This segment would witness a larger number of companies becoming formal, due to the segment they cater to. Their consumers will have to procure from GST-compliant companies in order to avail input tax credit.

Marble and granite industry too would follow trends in ceramic industry. Products with granite and marble industry are taxed at two separate tax slabs (18 per cent and 28 per cent). Bringing them under same tax slab would increase compliance and would also improve the ease-of-filing for these companies.

To what extent construction industry – building and infrastructure – is able to avail the input credit benefits and set-off their tax commitments? Is there any general estimate on the percentage of benefit claimed by them?
The modalities and incidence of inverted duty structure in some of the infrastructure segments especially in EPC contracts is still being discussed and resolved. Thus, specific data on input credits is awaited.

Broadly, the incidence of GST on infrastructure sector has been higher at 18 per cent than the previous tax regime (approximately 12-16 per cent). But input tax credit offers the much needed respite bringing down the overall tax incidence. Issues related to inverted tax structure in EPC contracts and ease in refunds need to be streamlined. These are some of the major hurdles or issues. Yet to come across any insight on input tax credits and overall tax incidence.

What is the general impact of GST on cement and building materials on their product prices and their end-products – building and infrastructure costs?
Prices of cement are driven by regional capacity utilisation and demand-supply scenario. The demand-supply has improved but are far lower from their historic highs in terms of capacity utilisation which has kept the prices subdued. GST has not had a major impact on the prices of cement. Th e prices have remained range bound post GST even though there were expectations of increase in prices.