India petrochemical industry braces for unified GST in July

09 June 2017 06:26 Source:ICIS News
India GST 9 June

SINGAPORE (ICIS)--India’s petrochemical industry players are bracing for the unified goods and services tax (GST) taking effect in July, wary that a disorderly implementation could lead to a knee-jerk market disarray reminiscent of the disruption that followed the surprise demonetisation of high-value rupee notes last year.

An 18% GST rate will apply to chemicals and polymers as announced by the Indian government on 18 May.

It was the second highest in the tiered tax rates of 5%, 12%, 18% and 28%, based on classifications of 1,200 items of goods and 500 services items, as approved by India’s GST Council.

“GST is a single tax on the supply of goods and services, right from the manufacturer to the consumer… It will ensure that indirect tax rates and structures are common across the country, thereby increasing certainty and ease of doing business,” according to a GST-devoted website of the Indian government.

India taxes 9 July


Market players in the domestic polymer industry are not worried about the 18% GST tax rate, which is not higher than their current cost as they pay a 12.5% excise tax and a 6% value-added tax (VAT). There is also a consensus among them that the new tax regime will be beneficial in the long run.

Some plastic manufacturers expect the new GST structure to boost their packaging export sales as its implementation will level the playing ground in the regional as well as global markets.

According to information posted on the GSTIndia website, the country's Central Board of Excise and Customs (CBEC) was scheduled to holding trade awareness and GST outreach programmes across  the country between the last week of May and the third week of June.

Uncertainties over proper implementation are causing market jitters, some industry sources said. 

“We are seeing a slow start to the month partly due to this uncertainty but it is early days yet. We do hear some sort of disturbance from the market due to the GST but we think this is overdone,” a domestic manufacturer said.

“I believe there are some sections of the market that are not ready for the implementation of the unified tax structure and that may have created some uncertainty. But I think people just need time to adjust,” he said.

For ethanol, the indirect tax rate will increase to 18% from 12.5% under the GST reform, which may hit the production of the chemical, according to local sugar millers.

Some industries were lobbying for a delay in the GST implementation, to better prepare for the shift to a unified tax system.

“[It’s] too early to comment because we are also not very sure how it’s going to shape up…. [but] I don’t see GST having [long-term] impact on demand, only in the short term,” a local acetic acid trader said.

Outside of India, some petrochemical market players that deal with the south Asian market are wary about what the GST would mean in relation to India’s demand.

“I think buyers will be cautious buying any material now,” an international trader said.

The shift to GST is India's biggest tax reform that was 10 years in the making, according to media reports.

Still fresh on people's minds was the government's sudden demonetisation of the rupee (Rs) 500 and Rs1,000 notes in early November 2016 that has left the economy cash strapped, hitting overall consumption.

The shock measure shook the markets and its effects are taking time to wear off, slowing down the pace of growth in Asia’s second-biggest emerging economy.

In the March quarter of 2017, the economy grew at an annual rate of 6.1% - its slowest growth in more than two years.

The International Monetary Fund (IMF), which is the global financial stability watchdog, forecasts India’s economy to post an average 7.2% growth this year as it continues to recover from temporary negative consumption shock induced by cash shortages and payment disruptions from the government’s recent demonetisation initiative.

In its Indian Development Update issued on 29 May, multilateral agency – The World Bank – expects the country’s adoption of a unified GST bodes well for the economy.

“India remains the fastest growing economy in the world and it will get a big boost from its approach to GST which will - reduce the cost of doing business for firms, reduce logistics costs of moving goods across states, while ensuring no loss in equity,” World Bank’s India Country Director Junaid Ahmad said.

The World Bank noted that the GST is on track for implementation in the second quarter of India’s current fiscal year, which ends March 2018. Its implementation “is expected to yield substantial growth dividends from higher efficiencies, and raise more revenues in the long term,” it said.

The Indian economy is expected to post a 6.8% growth this fiscal year, representing a slowdown from the 7.9% pace recorded in the previous year.

Focus article by Pearl Bantillo

Picture: India will implement the GST reform in July. (Source: Indian Photo Agency/REX/Shutterstock)

Additional reporting by Veena Pathare, Felita Widjaja, Izham Ahmad and Helen Lee

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By Pearl Bantillo