The GST effects

Analysing how GST rates will affect the electrical equipment industry in India.

Goods and Service Tax (GST) which has come into force from 1st July has revolutionised the way India pay the taxes. It is expected to give a major boost to make easier business operations. The One Nation, One Tax has been designed to tax transforms India into a single market. The dawn of GST, celebrated in a way similar to the dawn of independence for India is by itself an indicator of the extraordinary expectations from GST in the years to come. This article describes how GST rates will affect the electrical equipment industry in India.

A big booster for organised sector
The manufacturing sector has been a chief market driver for many developing economies across the world. Gautam Seth, Joint Managing Director, HPL Electric and Power Ltd believes that the new GST regime would craft a transformative shift from a complex multi-layered indirect taxation system to all inclusive indirect taxation system. He adds, “GST will be a big booster for the organised sector by enabling a common tax regime. This taxation regime will reduce competitiveness of the unorganised sector by ensuring standardised taxation rates for all, helping the organised players significantly.”

Making business operations simpler
While explaining how the GST rates will affect electrical equipment industry, Rajeev Sharma, Head – Corporate Services and Strategic Planning, Mitsubishi Electric India Pvt Ltd says, “For the Indian electric and electronic industry, GST is expected to give a major boost since it will make business operations simpler in the longer run.”

According to Rajiv Kumar, Director–Marketing, Electrical Sector – India, Eaton Power Quality Pvt Ltd, the overall impact of GST should be positive. He observes, “With the simplified tax structure, input costs for manufacturing are expected to be generally lower and reduction in logistics costs due to enablement of warehouse consolidation can together result in lower manufacturing cost. The OEMs will be able to pass this cost reduction to customers through price reduction which should drive increased demand.”

Ease of doing business
After removal of check post, Octroi and other bottlenecks, the transportation of goods will be faster and the freight will also come down, Dilip Kumbhat, CEO, K-Lite Industries observes. He adds, “Elimination of C forms is a great relief and the price parity for interstate sales are good features.”

According to Sharma of Mitsubishi Electric India, “As higher than optimal time is consumed per transportation, logistics costs incurred in India is approximately 1.5 times compared to the global benchmarks. With the introduction of GST, India will become a seamless market without any difference between inter-state or intra-state sales. This will essentially disrupt the existing ineptitude and facilitate structural re-engineering of the logistics network. Service providers would be incentivised to leverage hub-and-spoke supply chain networks by operating large central warehouses and remodelling transportation routes. We assume that this will be resulting to some reduction in logistics and warehousing cost. This will indirectly affect costs and prices reduction will happen as a trickledown effect in the mid-term.”

Kunwar Sachdev, Managing Director, Su-Kam said, “GST is one of the biggest reforms implemented by Central Government. The reform will have a positive impact in cash flow due to change in rate of taxes. Credit of Input taxes is now available against supply of solar goods – this would improve cash flows and EBITDA. Some of the other benefits of GST are removal of cascading effect of taxes, reduction in purchase cost which would have a positive impact to EBITDA subject to negotiations with the vendors and abolition of multiple forms like ‘C’ form, ‘F’ Form, CST which was an unnecessary cost for the industry and shall boost inter-state trade directly with the customers. The reform would also be a step forward in moving towards a common market.”

Will benefit manufacturers using electrical machinery
The price of commercial electrical machinery is expected to stay neutral, believes Avinash Khemka, Chief Manager at International Copper Association India (ICAI). He briefs, “Handlooms used in the handicraft industry are the only machinery charged at ‘nil’ rate of tax under GST. Most of the electrical machinery was charged tax at a similar rate to the rate declared under GST.”

Equipment which come under renewable energy segment such as biogas plant, solar water heater, pumps, panels etc. will be attracting 5 per cent GST. While equipment like pumps, dairy machinery, and nuclear power generation elements will be around 12 per cent and motors, generators, transformers, boilers and turbines machinery is around 18 per cent.
Khemka notes, “Though not much of variation is observed for the end consumers, the manufacturers using electrical machinery will benefit from the availability of input tax credit on the services used which was not available under VAT.”

Let’s wait and watch
The electric and electronic items have been majorly placed in the 28 per cent tax slab. According to Sharma, the new tax slab is 1-2 per cent more than the tax slab used earlier which will keep the prices unchanged. However, he observes, “Once we start getting back input credit from the freshly purchased raw material, operational business expenses etc, which would happen down the line in two to three months, then we would be in a better position to decide our pricing strategy.”

Lukewarm response from LED industry
In the lighting industry, the tax structures under GST are LED lighting at 12 per cent and conventional lighting including CFL/FTL is 28 per cent.

Energy efficiency and saving being the mantras for a decade, some of the states like Uttar Pradesh levied zero tax on LED fittings and in most of other states the tax was just 5 per cent. Similarly, in most of the states, the VAT for the energy efficient CFL lamps was around 12-13 per cent. Now the GST for LED fittings is fixed at 12 per cent and for CFL it is 28 per cent.

“With a composition of lighting industry at around 60 per cent in organised sector that are subject to Excise Duty (ED) and Value Added Tax (VAT) and the balance 40 per cent in unorganised sector without ED, it is difficult to make inferences about the immediate future,” observes Kumbhat of K-Lite Industries.

He adds, “The tax hikes are likely to increase the prices of conventional lighting products. This may not be acceptable to a majority of consumers who are yet to migrate to LED fixtures. Their argument will be: why CFL, which is energy efficient, was taken to 28 per cent. In fact most of the persons we are interacting, feel that the LED should have been under the 5 per cent GST bracket and CFL/ FTL in 12 per cent bracket. High pressure lamps can be at 28 per cent.”

However, Khemka from ICAI notes, “The new GST regime is likely to benefit the lighting as well as electrical sector significantly through an overall reduction in tax rates.”

Threat to ‘Make in India’!
Even though, there will be a lot of benefits of GST in the long term, we can expect short-term negative impact too. In case of lighting industry, both fixtures and the components have been kept in the same bracket at 12 per cent as compared to 6 per cent customs duty on components earlier. “Importing components like MCPCB/diodes and LED drivers might rise as the taxes would be roughly the same in both cases. In turn such a shift towards import will not encourage the ‘Make in India’ concept,” Kumbhat opines.

Pain points
Kumbhat also points out, “We are afraid that filing of GST related documents on 10th, 15th and 20th of every month looks cumbersome including the ITC process. We are hopeful that the system, with the guidance of tax officials, will take care of the immediate problems seriously and also look forward to revision of GST for LED and other energy saving CFL and T5 lamps.”

Conclusion
Experts observed that the success of GST will depend on how effectively the government is able to enforce the new tax system. “Simplified tax structure and unified market will improve operational efficiencies,” concludes Kumbhat.