Despite being in highest tax slab, why cement under GST may actually get cheaper

The indirect tax structure on cement has always been a subject matter of discussion amongst industry members, Government officials and tax experts.

The industry has often been vocal about the differential tax treatment meted out to cement as compared to steel which together comprise of the most essential ingredients for infrastructure development.

The present excise duty levy on cement is a complex one- being a combination of ad-valorem and specific duties depending on various parameters ranging from status of the manufacturer (mini or others) to type of packing (retail or bulk). This coupled with the VAT rate of 13.5% to 14.5% in most states results in an effective indirect tax rate in the range of 27% to 31% (approximately) depending on the type of cement (bulk or packaged).

With the present Government’s focus on infrastructure and affordable housing, the industry was pinning their hopes of equality in GST rates between cement and steel. However, the principle of equivalence appears to have been followed on account of which, the GST Council placed cement in the higher rate slab of 28% as compared to steel (placed in the 18% slab).

The GST Council has been forthright about the principle for fixation of GST rates. The present combined incidence of excise, VAT and other applicable local taxes has been adopted as the base to arrive at the GST rates.

Considering the present incidence of excise and VAT of around 31% for packaged cement, the GST rate of 28% means that this variety (packaged cement), which comprises of major portion of cement sales, is actually expected to attract a lower rate than the present

The fact that GST would also subsume all local and municipal taxes, which are presently levied in addition to excise and VAT and makes the actual tax incidence much higher, should certainly augur well for the cement business, which largely operates on a retail price per bag basis.

The present structure of indirect taxes on cement is loathed with tax cascading. The proposed levy of GST being only on value addition at each level of distribution also means that the effective incidence of indirect taxes should come down further as compared to the present. In fact, it is pertinent to mention that present indirect tax levies on steel are on a much simpler base as compared to cement, while in GST regime both would be par in terms of the structure of the levies.

Therefore, it appears that benefits in terms of tax incidence (pre and post GST) could be potentially higher for cement as compared to steel.

However, the business should be mindful of the anti-profiteering provisions contained in Section 171 of the CGST Act, 2017. In terms of the same, any reduction in the rate of tax on any supply of goods or any benefit in terms of input tax credit is required to be passed on to the consumers.

It has also been provided that an authority would be constituted to evaluate whether the benefits in terms of reduced rates or increased input tax credits have been passed on. However, the rules in respect of the same are awaited as it is necessary to distinguish between input cost changes and tax changes, both of which may simultaneously become embedded in the price. It is hoped that the cement sector would continue to grow and expand in the GST regime as it is a key contributor to the country’s infra growth and one of the most important determinants of the GDP.