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India's new Goods and Services Tax will promote domestic interstate trading by unifying fragmented taxes under one system, but may hurt smaller converters due to less generous exemptions, industry sources said.

Since July 1, India's plethora of multi-tiered state and central taxes have been brought under a single tax structure.

Related Commodity Spotlight podcast: India GST overview and impact on commodities

Primary polymers, such as polypropylene, polyethylene and PVC will be taxed at 18%, while finished polymer-based goods used in packaging and for conveyance such as bags, will also draw an 18% tax, according to India's GST Council.

The GST replaces previous indirect taxes affecting interstate polymer trading, such the central sales tax, value added tax, and entry tax, and allow participants to fully claim input tax credit, which was not possible before, according to industry sources.

"As a manufacturer, you benefit because you recover the tax credits in the end," an Indian Oil Company manager said, adding that previous mix of interstate taxes were perceived more as a cost to producers because it could not be fully used to offset input costs.



"The GST will abolish state boundaries and make India one market," a trader from polymer trading house Shyam Group of Companies said.

Prior to the implementation of GST, the varying tax differences between Indian states meant that interstate trading focused on tax optimization rather than logistical efficiency, he added.


TAX ON POLYMERS FALLS


Analysis of a typical polymer supply chain shows that the effective tax rate for larger converters that were previously paying VAT, will save up to 4% post-GST, while smaller converters that were exempt from VAT will incur new taxes.

"The GST is going to take out the smaller converters. Under the previous rule, converters with a turnover of less than Rupees 20 million/year (about $300,000/year) did not have to pay VAT," a trader from the Shyam Group of Companies said.

Table: Tax on polymer fall, smaller end-users may see higher effective tax rate post-GST

After July 1, the exemption limit has been reduced to Rupees 4 million/year, he added.

"Now anyone with a 10 mt/month machine will have to register for GST. Their cost of operations will go higher and they cannot compete with bigger players," he said.

"In the past, converters formed multiple companies to stay within the tax exemption limits," the end-user said, adding that this would not be possible any more.

Small and medium-sized enterprises, which were competitive because they had found ways to avoid taxes will likely lose out under the new GST regime, Director of CRISIL Research Rahul Prithiani said.

"Everything will have to be done by the book and consequently you will need to [give] input credit to everybody in the chain. A lot of the smaller players are likely to get marginalized. However, the overall tax compliance will improve substantially," he said.

CRISIL is majority-owned by S&P Global.


CHALLENGES AND GAINS


GST will temporarily weaken polymer demand but may be a boon in the long term, industry sources said.

"We expect a month-on-month slowdown [in business]. The GST requires a huge IT backbone and this activity may be slow or have problems initially. Customers will be buying enough stocks just to get by," the IOC manager said.

Anticipating potential disruptions, the government is allowing the tax filing for July and August to be deferred until September, industry sources said.

"Over a period of five years, GDP could go up by up to 1.5 percentage points from the efficiencies that will accrue on implementation of GST," CRISIL chief economist D.K Joshi said, referring to gains expected from increased interstate trading, reduced inflation, and improved taxation.

India's polymer demand growth has been falling from the double-digit growth seen in previous years, but was still expected to be the fastest expanding polymer market in the world over the next five years, Eshwar Yennigalla from Platts Analytics said.

"In the long run, the government's tax base will improve and will lead to more consumption and more business investments," he adds.

According to S&P Global Platts Analytics, polypropylene demand is expected to grow at an average rate of about 8% year on year to 7.1 million mt/year by 2022, while polyethylene consumption is expected to grow at 10% to 7.5 million mt/year.

--Yi-Jeng Huang, yi.jeng.huang@spglobal.com
--Hui Li Yong, huili.yong@spglobal.com
--Edited by E Shailaja Nair, shailaja.nair@spglobal.com

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