India’s move to a Goods and Services Tax (GST) last month has been generally heralded as a good thing.
Unifying tax codes across states and allowing the free movement of goods between states will speed up internal trade and simplify companies’ reporting — that is, if the government had resisted the temptation to meddle with multiple tax rates.
The introduction of the GST in India creates complexity out of simplicity. Whereas markets like the U.K. that have a similar VAT system have one main rate of 20%, with a reduced rate for home power of 5% and zero on a very limited range of goods like food and children’s clothes, India has five rates (0%, 5%, 12%, 18% and 28%), with many very similar products falling into a lower or higher bracket – encouraging distortions in the market as producers switch ingredients, product focus or labeling to try and circumvent higher bands.
Still, the benefits are expected to be significant even if reality doesn’t live up to expectation. The metals industry is predicting savings of 40-45% in the time taken to move goods as border tax points to collect state taxes and hence lengthy delays of up to 10 hours will become unnecessary.
For metals producers, it will come down to what rates apply to inputs and outputs for the industry — and there does appear to be some good news on that front.
Steel producers, at least, will face lower input tariffs, as raw materials like iron ore and coking coal will attract one of the lowest rates at 5%. Of course, like all GST systems, firms can either claim back what they pay to suppliers and collect for the Treasury what they raise — such that GST becomes net neutral for processors — but there remains a cash-flow implication. If producers are only paying out 5% but collecting 18%, it is beneficial for them from a cash-flow perspective.
Maybe not surprisingly, power costs are exempt from GST (that is not the case in other countries), but for an emerging economy and one with a large contingent of poor people, exempting energy costs from the taxation system has some logic.
A pre-GST Clean Energy Tax of Rs 400 per ton is not recoverable but was previously, so its exemption now represents a minor cost to steel producers that they will not be able to reclaim. Likewise, a state royalty of 15% on iron ore is another tax outside of GST, as are various Forest Development Fees and contributions to the District Mineral Foundation and National Mineral Exploration Trust, which are considered to in effect be taxes that steel producers cannot reclaim, according to the Indian Express.
Steel producers’ input costs for natural gas — a fuel source increasingly becoming the preferred choice for steel producers switching to intermediate sponge iron or hot briquetted iron — will face some impairments as a result of these taxes being unreclaimable (either partially or completely).
Like the old swings and roundabouts, there will be some opportunities to win and some that will lose, but in general the industry sees it as positive – not least because it will encourage the unregulated end of the market to join the mainstream and take part in the tax system.
For firms that are not operating within the tax system, there will be significant cost implications and no opportunity to reclaim.
More than anything, that is probably the underlying purpose of India’s GST: to bring all enterprises into the tax system, speeding up boarding crossings and eventually simplifying tax collection and transparency are welcome benefits.
But getting everyone to pay their fair share will, in the long run, be the biggest win.