GST: Cheer for power sector; capital goods awaits final rates

Coal has been placed under 5% slab, capital goods will be under the 18% slab

New goods and services tax (GST) rate slabs for coal and capital goods are expected to bring cheer to the power sector. However, the fate of capital goods companies will still hinge on final rates for other industries and those on imports.

Coal, the key raw material for about 60 per cent of the power produced in the country, has been placed under the five per cent slab, while capital goods and intermediate industries will be under the 18 per cent slab.

Senior power sector executives said the five per cent rate for coal, down from 11.7 per cent in the current tax regime, was a major breather as it would help reduce the final tariff, which would be passed on to the consumers. 

“We were paying six per cent excise duty and other cess and taxes over and above it. We are guessing the new five per cent rate does not have the coal royalty amount subsumed, hence would still be lower than current rate,” said a senior executive at NTPC, the country’s largest power generating company. 

The company, he said, would be able to determine the exact impact only after understanding the fine print.  A Delhi-based power sector analyst said, “This is in line with the efforts of the government to not let power prices increase for consumers. A major component of the power rate will now be uniform.”

At the same time, capital goods falling in the 18 per cent tax slab would also help the power project developers to reduce their cost, and hence the capacity charge will reduce. “Over the excise duty of 12 per cent, we were paying two to three per cent central sales tax and differential VAT. Now a single 18 per cent rate would have a positive bearing on project finances,” said an executive with a power generating company.

Engineering, procurement and construction (EPC) companies, such as Bharat Heavy Electricals, Larsen & Toubro, etc, are among the firms that will see the impact of GST rates.

“The drop in rates to 18 per cent will surely help the capital goods industry in a big way, helping improve revenue and the margin bit,” said Suresh Nandlal Rohira, partner, Grant Thornton India LLP. 

A senior executive from a heavy goods manufacturing company pointed out that most of the benefits would be passed on to clients. “These rates are provisional and the fine print is awaited. So, to what extent there will be a real impact needs to be seen. In most cases, projects operate on a full pass though basis. So, recovering costs isn’t much of a concern. Nevertheless, this is a sentiment booster for local manufacturing,” the executive said. 

But, not everyone is convinced. “The new rate slabs are a positive for engineering companies manufacturing and selling in the same state, but for those selling to companies in other states there is an effective increase of 3.5 per cent, which in most cases would be passed on to the end customers,” said M S Unnikrishnan, managing director and chief executive officer, Thermax. In addition, the capital goods industry may wait to know the larger impact of the new rates on its business operations.

“The capital goods industry would want to wait and watch for the roll out of rates for other industries, which would decide the order book growth or its lack thereof,” Rohira said. 

Steel, cement and other raw materials are also key to estimate procurement costs for capital goods manufacturers.  Executives in the steel sector said the new GST regime was positive for steel, based on initial calculations. Analysts also added that unless the customs duty is hiked significantly on engineering imports, it might not move the needle much for domestic manufacturers.

What bearing would GST have on startups?

The biggest tax reform in independent India is on way to implementation with a four-slab structure proposed by the government. The Goods and Services Tax or GST is essentially a single tax on the supply of goods and services, all the way from manufacturers to consumers. The final consumer will be charged GST by the last dealer in the supply chain. GST is a consumption tax, and will be applicable at the stage where a product is consumed rather than at various stages of production.

How will GST impact startups?

• Ease of doing business:

The main criterion for establishing ease of doing business in a country is the number of steps involved in setting up a business. Startups often end up spending most of their time in registering their company; getting service tax registrations, VAT registration in all states they will function out of among the various other procedures.

VAT registration from the sales tax department is mandatory to start a new business. Any business that operates in multiple states needs to comply with different procedures and fees structures. With GST being implemented, startups will need a single license. A centralised registration will also make the expansion process simpler.

GST will be a game-changer for startups. Entrepreneurs will need to get just one license before starting operations.

• Higher exemptions to new businesses:

Going by the existing structure in India, any company with revenue of over Rs 5 lakh needs to pay VAT. Once GST is implemented, the exemption will be pushed up to Rs 10 lakh. Any business that has a turnover between Rs 10 to 50 lakh will have lower tax slabs. More tax savings would simply mean more expansion.

“Big startups will not benefit from this exemption directly. …But smaller startups will definitely gain from GST. The bigger companies can in turn work with the smaller companies to benefit indirectly,” says Harish H V, Partner at Grant Thornton, a US-based accounting network.

• Taxation made simpler:

India’s complicated tax structure is not unheard of. Startups are often seen grappling with elaborate procedures and paper work. With GST, all the taxes will be integrated, easing out the process of taxation. With a better and simpler taxation system in place, India might just be able to retain its ‘startup hub’ tag as per NASSCOM’s Product Council report published in October.

“Once GST is in place, the economy will grow, which means more capital and more growth. Startups will need to operate efficiently to benefit from GST. Of course a simpler taxation system helps them grow better,” said Harish.

• Reduction in logistics cost:

Inter-state transportation of goods often takes more time than usual due to border tax and various check posts. GST will eliminate these taxes and make the process more cost-effective and faster. As per a CRISIL analysis, GST will reduce logistics costs of companies producing non-bulk goods (comprising all goods besides the primary bulk commodities transported by railways – coal, iron ore, cement, steel, food grains, fertilisers) by as much as 20%.

“Companies such as Flipkart, Amazon all are big on logistics. They will benefit a great deal. Cab aggregators like Ola and Uber will also leverage from GST,” said Harish.

But all good things come to an end. With startups benefitting from GST, there are also downsides of the tax regime.

Startups in the manufacturing sector will bear the brunt. Going by the existing laws, a manufacturing business that has a turnover less than Rs 1.50 crore is exempted from paying duty. However, with the implementation of GST, the turnover limit will be pulled down to Rs 25 lakh and making it tough for many startups.

E-commerce companies will have to file quarterly and monthly returns and pay tax on sales on their portals once GST comes into force.

Despite the few drawbacks, GST remains to be the friendliest tax reform in India. With GST, will come transparency, efficiency and more growth.

Source : - http://mbp-bearings.com/