India's new Goods and Services Tax (GST) will be implemented starting July 1, which will likely streamline taxation systems and open up inter-state trading. What's the impact on commodities?
S&P Global Platts petrochemicals editor Yi-Jeng Huang and agricultural editor Xiaojuan (Fay) Gao interview CRISIL Chief Economist DK Joshi and CRISIL Research Director Rahul Prithiani on the impact of the GST on the economy at large and on specific commodity sectors -- steel, petrochemicals and agriculture.
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India Goods and Services Tax (GST) overview and impact on commodities
Yi-Jeng Huang: Welcome to this episode of Platts Commodity Spotlight podcast. My name is Yi-Jeng Huang, Petrochemical Editor at Platts Singapore, with me is fellow editor Fay Gao, from our agricultural desk, and today we’ll talk about the impact of India’s New GST on India’s economy at large and on specific commodities.
Xiaojuan (Fay) Gao: Joining us from CRISIL in Mumbai to shed some light into this very interesting development, is Mr. DK Joshi (Chief economist, CRISIL) and Mr. Rahul Prithiani (Director, CRISIL Research).
Yi-Jeng: Mr. Joshi, what is the new GST and how will it impact India’s future economic growth in terms of a potential GDP bump and headline inflation?
DK Joshi: Well over the medium run GST is expected to push growth, help reduce inflation, improve tax buoyancy and help exports become more competitive, but we do not expect it to push the economy up in the short run, so the next few months could be really disruptive when the GST gets implemented, but I would assess meant is that over the period of five years GDP could go up by up to 1.5 percentage points and these benefits will accrue from the efficiencies to the system on the on implementation of GST.
As far as inflation is concerned I think that is what the authorities fear, because whenever GST is implemented -- and that's been the experience of many countries -- there is asymmetry in transmission of tax changes. The tax increases are passed on much faster than the tax cuts.
To ensure that the benefits of lower taxation is passed on doing to the end consumer the government is also initiated anti-profiteering clause, so overall it will be inflation neutral to mildly inflationary in the short run. Over the medium run it is good for inflation control.
Yi-Jeng: Let’s dive right in and look at the impact of the new GST on three important commodities: Steel, Petrochemicals and Agriculture.
Fay: Mr. Prithiani, how will the GST impact India’s steel and iron ore sector -- and downstream consuming sectors such as Automobiles?
Rahul Prithiani: If you look at this GST for the steel segment here we're not expecting any material changes to tax rates per-se. However the benefits to companies doing inter-state sales - that would be available.
As far as the automobile sector is concerned the effective tax rates have reduced across and the benefits are actually higher on the largest size vehicles and mid-sized sedans, where incidence of taxes declined by almost around 12%. In many of the cases the manufacturers are likely to benefit out of this and also there is a significant inter-state movement in terms of manufacturing of automobiles -- that will clearly be supported by the tax credits that will be available and the lower incidence of tax.
Yi-Jeng: Thank you very much. Moving on to petrochemicals what is CRISIL’s prediction of India’s overall petrochemical demand growth over the next few years, and how will the GST impact this demand if at all?
Rahul: Over the next few years we get expecting overall demand growth to be in the region of 9-10%. I think the demand growth has been fairly robust in the domestic market, and we expect that to continue due to the various structure factors as well increasing substitution of the various petrochemical products with respect to the other alternatives out there in the market.
As far as the GST is concerned we are not expecting any material impact on account of that in terms of the overall demand growth per-se.
Yi-Jeng: Zooming in specifically to India’s huge polymer sector, the industry tells us the biggest impact of the GST will be on inter-state trading, I know you did some research into this – could you elaborate?
Rahul: As far as the interested trading is concerned you know a significant production in India is concentrated in the western part of India whereas sales happen all over the country and in certain states on account of the interested movement the tax rates incidents were significantly higher.
Going forward due to the tax credits will be available, the inter-state movement will be much easier, the tax rates will be lower because of the credit that is available and as a consequence movement of the products internally will be much more easier. So to that extent it will be positive for manufacturing in the domestic market.
As far as the manufacturers are concerned who are using naphtha, there has been a reduction in the effective tax rates from about 32% to about 18%, so they will clearly have benefits in terms of lower working capital requirements which will positively impact some of those players.
Xiaojuan: I see, so let’s talk Agriculture and Renewables. India currently has a nationwide E5 mandate in place since 2008, which requires oil companies to sell petrol blended with at least 5% ethanol, and government has a target to raise it to 20% by 2017. How will the 18% GST on domestic ethanol impact their biofuel and sugar industry and will there be any knock-on effect on the Indian sugar farmers?
Rahul: As far as the impact on ethanol is concerned the effective tax rates has gone up from 12.5% to 18%. As far as ethanol is concerned which is produced through the sugar farmers and the sugarcane route, there is a complete past-through when it is being produced in the same mills you produce sugar, so there is not likely to be much of an impact.
But it is going to impact players who are purchasing molasses externally and then selling sugar then selling ethanol, so there will be some impact there. Having said that the higher tax incidence we are expecting the same to be passed on to the oil marketing companies which in turn will pass it on to the end consumers they without taking any hit on account of this.
Yi-Jeng: Thank you very much for your insights. Mr. Joshi, bottom line -- what key benefits India will see after July 1 when the GST is formally rolled out, what are potential challenges to watch out for?
DK: For successful implementation of GST, we definitely need a strong and seamless IT and other digital infrastructure which connects all the stakeholders, and this is where the worry is and some hiccups could be expected as the GST is rolled out. Anticipating problems on this front, the GST council has already decided to defer the filing of transactions for July and August till September -- so they have given some relief on this count.
The second disruption is for the small and medium enterprises because they derive their competitiveness by avoiding taxes, and now because they have to be part of the chain, they will lose out on that front.
So overall net/net, while short term hiccups cannot be ruled out, the efficiency gains over the medium run will ensure that the economy is a net gainer in terms of growth, in terms of inflation, in terms of exports, and also in terms of fiscal health.
Yi-Jeng: Mr. Joshi, Mr. Prithiani, thank you again for sharing your valuable insight on the impact of the GST with us.