After much waiting and after lengthy deliberations at various levels, the GST Act is brought in operation from 1-7-2017. The system being new and also replacing various indirect taxes into one rate, there are bound to be effects on various aspects of trade and industry. Here an attempt is made to analyse the effects on metal industry.
Metal Industry – Pre-GST
Metal Industry is a very wide term. It can include both ferrous and non-ferrous metals as well as precious metals. Iron and Steel is major industry in the category of ferrous metal, whereas copper and aluminium etc. are major industries under non-ferrous metals. There can be further classification as per manufacturing sector and trading sector. The effects of GST on these two sectors can be briefly analysed as under.
Pre GST the manufacturing sector was under Excise. Excise was attracted at about 12.5% including Cess on Excise. There was also class of small manufacturers who were not under Excise. The obvious effect was that there was disparity whereby the non excisable manufacturers were having lesser burden of taxes. In fact there was scope for planning, rightly or otherwise, to avoid the excise duty by boundary line manufacturers. Further, it is known from the industry that there used to be cross billing whereby the goods used to be supplied to one party and invoice to another party for making adjustments.
The manufacturers also have to deal with more than one Government authority like Excise, VAT, LBT, Cess and others. There was VAT at the rate of 5%/6%. The overall taxation burden was about more than 18.5% etc.
The metal industry being heavy material industry, there used to be further hardships in relation to transportation. Because of various check posts, there used to be lot of wastage of time and additional financial cost.
The industry has to maintain dual records i.e. for Excise department and VAT department. The requirements were different and hence there was need for separate details. There used to be separate assessments and audits. The manufacturers were finding the same as unwarranted burden.
Similar was the position with non-ferrous metal industry. There used to be differential VAT rates, though generally the non-ferrous metals were also covered by VAT slab of 5% to 6%.
In relation to precious metals like gold, silver, there used to be safer position. Rates were minimum like 1% under VAT.
The trading sector was also divided into two categories, one registered under Excise and other not so registered. The VAT rate used to be around 5% to 6%. In trading sector, the major fear was of getting ITC. As per the provisions under VAT Act, unless the vendor has paid the tax, ITC was not eligible. Though there used to be cross checking, but it was after lapse of years, after the completion of return period. Therefore, the traders did not get live information about the position of vendors and the mismatch after lapse of time used to put them in financial demands.
The traders were also having issues about check post and LBT etc..
The traders in precious metals were having reasonably good period as the rules/regulations about movement of goods etc. were not stringent. The rules regarding maintenance of records were also comfortable. Due to VAT system, the trading commodity was having good time for business.
Metal Industry – Post GST
As we are aware the GST is made applicable from 1-7-2017. The industry did not get sufficient and enough time for making preparation. In fact the final rules etc. came at the last minute and therefore, the industry had no time to judge the implications as well as the requirements of compliances.
The overall feeling in manufacturing sector is to welcome GST. The rate of GST is in general 18%, which is almost same burden as it was in pre GST period.
However, the removal of excise has reduced the burden of the manufacturing sector. The extra advantage the non-excisable units used to enjoy, has gone. This has brought a level playing field. Therefore, this is considered as positive sign for the industry.
The industry is also expecting further control in the industry by way of e-way bill system. Though at present it is not brought in operation, it is likely to come within short time.
The industry is expecting that the adjustment billing, which used to take place,will stop. This will create healthy market and only real stuff will remain in the market.
There was heavy competition from importers. Now industry is of the opinion that they will have lesser competition from the importer.
The industry is also expecting positive effect in export business. Due to removal of various hurdles there will be cost effect.
There used to be various disallowances of ITC under Excise and VAT. Now the ITC is expected at higher level due to reduced disallowances and merging of both major taxes.
The industry is also happy that they will require to maintain only one record which will be easier for them.
However, at present because of certain ambiguities about interpretation of provisions there are teething problems like deciding place of supply, maintenance of records for job work and others.
Though the requirement of maintaining records under GST will be more, but industry feels that it will not be more than it was required to maintain separately under Excise and VAT.
Though overall the industry is in the mood of welcoming GST, the industry has also expressed concerns about certain negative effects. The foremost amongst them is disallowance of ITC on capital investment mainly in building and other civil structure.
Metal Industry is heavy industry requiring huge civil infrastructure like factory building, godown and also civil structures and inside roads for moving the goods. The ITC on above inward supply is disallowed.
Under GST the overall expectation was that the ITC will be allowed on all inward supplies. This is what is happening in various other countries where GST is operative. By restricting the ITC, on the major component of investment, the industry feels that the overall mission of GST of avoiding cascading effect is not getting fulfilled.
Trading sector is more worried about future of business. The provision of treating branch transfer or transactions between principal and agent or vice versa as supplies, will create difficulties for the trade. The agency transaction will be costlier as there will be outward liability though there is actually no sale/purchase transaction. This will require more funds cutting into profits of the trade.
The traders are also having reservation about maintenance of records. The elaborate requirements of records about inward/outward stocks, payment vouchers and reverse charge will also add in their cost. The traders are having grievance that they are already having low margin in the trade. The increase in cost will certainly affect them adversely.
However, the traders are positive about ITC matching mechanism. It is feeling that the defaulters will be identified at the very initial stage which will save them from unexpected liability in future.
However there is also other line of thinking which says that by making the buyer liable for paying tax, when vendor has failed, the Government has skipped its obligation of controlling the vendors. It is feared that once the tax is collected from the buyers the vendors will remain scot free where as they should be taken to task for failure to make payment of legitimate tax which they have collected from buyer. The expectation is that though the tax is initially collected from the buyers by disallowing ITC, it should be recovered from vendors by using all Government machinery and the buyers should be reimbursed to restore their financial position.
The trading community is also having fear about e-way bills. They feel that the ‘inspector raj’ will be back. Though the requirement of e-way bill will be for consignments of more than ₹ 50,000/- even to prove that the consignment is below ₹ 50,000/-, the requirement of carrying same papers, as required for e-way bill, will be required. The traders are also having fear that their documents may be doubted and the authorities may apply the stringent provisions. There is also confusion about registration and the deciding the nature of transaction whether intra State or inter State.
The small traders are also worried about computerisation and the cost increase due to same.
In spite of all above negative issues, there is also feeling that the bad elements in the trade will be ruled out and the regular traders will have good time for business.
Precious metal trade, though objected to the rate of tax at initiate stage, now well settled with the GST rate of 3%. There will be difficulties about e-way bill and also about maintenance of records, especially for small traders.
The provisions about reverse charge and also rate of taxes on job work etc., are still under confusion.
The GST is brought in with high hopes about ease of business. However, at present due to sudden increase in compliance work, the business community is finding difficulties and therefore some initial negative effect is there. However, in the long run the business community in metal is set to welcome the GST. Let us hope that the stringent provisions will not be used for harassing the business community and there will be human touch to see that the technical errors are ignored. This will really create good atmosphere for the metal business.