The time has come for India Inc. to buckle up and get ready for a momentous transformation in the nation’s industrial infrastructure. The Goods & Services Tax (GST) was passed on the 3rd of August and is projected to be one of the most compelling tax reform in the post-Independence India. GST rates for chemicals & chemical industry as per the discussions in the GST Council Meeting held on 18 May 2017.
Touted as one of the most poignant Constitutional Amendment Bill (122nd) passed by the Government of India (GOI), the GST will be recognized across all business verticals from the beginning of the 2017 Fiscal Year. As the nation’s finance & administrative structures prepare for a comprehensive implementation, it is essential for the Indian industries to postulate the direct as well as the indirect impact of the GST Bill.
The chemicals sector in India, in particular, is on tenterhooks regarding the result of GST implementation, considering the fact that Indian chemical industries have continued facing severe challenges owing to the mounting taxations.
The GST Bill is designed to be a pragmatic tax alteration aimed at simplifying the complexity of the existing tax systems, bringing down the production costs of goods & services, and clearing the disarray of variable value-added taxes (VATs) at all transaction levels. Simply put, the GST can be defined as a tax which takes into account the input credit tax liability while being levied and assessed at every stage of transactions of goods or services.
The framework of GST is based on the input tax credit method that shall allow businesses to assert their input stage tax liability during the next resale transaction. For example, when a manufacturer of polymer chemicals sells some volumes to a buyer, a certain amount of tax is imposed on the buyer while the manufacturer pays the required income tax.
After the first transaction, the buyer sells the polymer chemicals to an end-user industry. In the existing tax system, the tax rate of the first transaction will be added to the tax paid by end-user industry. In the GST mechanism, the second buyer (the end-user) gets to claim the input (first transaction) tax as a credit to the implied output (resale transaction) tax.
In order to ease the business operations among the states, the GST aims to reduce the procedural barriers, benefitting all the stakeholders by amalgamating the Central and State GSTs. Moreover, the reduced risk of tax evasions has been represented as a primary feature of the GST implementation.
The Bill will also revolutionize the existing taxation systems by defining a taxable event, measuring the levy rate based on the valuation provisions, and uniformly classifying every practicable statute of the Bill.
Almost every predictable impact of GST on the Indian industrial sector looks positive, especially for the chemicals industry. Chemicals businesses in India have long suffered the wrath of added taxations on their production capacity as well as their consumption demands.
The existing taxations have impelled the rise in the production costs of manufacturing vital chemicals, which has resulted in the price-hike of the end products and made such goods unaffordable for gross consumption.
That’s why the GST Bill is trusted to be seminal for the unbarred progress of the Indian chemicals industry in the years to come.
The prime benefit of implementing the GST legislation is that it will integrate the chemicals market by decimating the tax complications grappling the interstate trade of chemical companies. To accomplish this, GST will incorporate the crucial Central and State taxes such as the Central Excise, the Service Tax, the Countervailing Customs Duty, the Special Additional Duty, the Central Sales Tax (CST) and other VATs. Such double taxations get more tedious when the end-user industries are located in various states and the taxations witness additions from the duty levied by the concerned State Governments. Owing to the fact that the Service Tax, CST and VAT levied upon interstate transactions differ according to the involved States, the GST will subsume them under three taxable levies – the Central GST (CGST), the State GST (SGST) and the Integrated GST (IGST).
The GST Bill will avoid any double taxation at combined rates and keep the rates of State-level tariffs consistent throughout the country. The inferring taxation will allow chemical manufacturers to produce chemicals and supply them to different States without any additional taxable duties.
The facilitation of national trade has been hampered by the surging VATs implied on manufacturers of chemicals. The mitigation of CGST and SGST will also lower the cascading effect of multiple taxations on the production capacity of chemical industries
For an instance, an agrochemicals manufacturer in Ludhiana has to deal with the burden of paying diverse taxes to the State Government in Punjab as well as the Central Government. In the process, the manufacturer ends up paying more than 25 percent of aggregated levies, and has no option but to hike the production value of the chemicals. The implementation of GST will result in exertion of IGST for interstate trade and SGST & CGST for transactions within a State. Consequently, the production costs and the resale prices of chemicals will be extensively lowered, urging the industry leaders to concurrently expand the gross production capacity of the chemicals sector in India.
The aforementioned benefits of lowered production costs and reduction of transactional tax rates will have a major influence on the growth of paints and construction chemicals industry. The booming real estate sector will continue to generate demand in construction chemicals market, but the implementation of GST will make sure that the construction chemicals retailers are not edged away from the sales profits. The absence of warehousing or supply chain costs will help maintain the affordable prices and promote the consumption of chemicals. Non-uniformity of VAT rates will be irrelevant as GST will be implied at a common rate (18-20%) upon every product sold in the chemicals industry.
The area-wise tax exemptions will not exist as every State will be taken into consideration equally, under the GST Bill. Lowered transit time, availability of chemical materials at the desired time, and hassle-free transportation systems are also observed as the indirect advantages of implementing the GST in the Indian chemical businesses.
Among all the levies merged, the Basic Customs Duty will be the only taxation exempted by the Bill and will continue to be charged post-GST implementation. While there aren’t many drawbacks of enacting the GST on the chemicals industry, there are a few aspects that need to be premeditated prior to the Bill implementation. The GST rates need to be same in every State in India, avoiding the conflict of interests between the State Governments. Varying GST rates will factor the diversity in profit based investment decisions throughout the chemicals sector.
The GST mechanism is based on the destination of the transaction, not the source. Therefore, the specification of where the goods are sold is necessary, which can be difficult for complex purchase orders existing among chemicals companies and other end-use industries. The efficient execution of GST in the chemicals sector is solely dependent on the acceptance and the onus of industry professionals and can lead to opposition in a worst-case scenario.
The service segment of the chemicals industry will take the most adverse effect owing to the surplus benefits allotted to the manufacturing and trading segments. On the other hand, the improved input tax credits and surging headline rate of the GST are likely to soften this “goods vs. services” inequity.
The assured compensation from the Centre to the designated State Government upon revenue losses experienced over a five-year period from the implementation date has made GST a promising prospect for the industrial growth of the nation. The ‘Make in India’ initiative, launched two years ago, has endorsed the imp