Friday, May 26, 2017

GST-issues for Granite Industry

The most awaited rate schedules for proposed Roll out of GST is out. While most of the sectors experienced lower Tax than the current State VAT/CENVAT Regime, there is a huge blow to Granite Industry. Listing below the demerits of the proposed GST as below in Q&A Format

Q: What is the proposed GST rate for Granite Industry.
A : For Blocks(Chapter 25) 12% and Slabs(Chapter 25 and 68) 28 %. This includes hand cut granite

Q: what is the current rate of Taxes
A : Blocks 5% to 14.5% depending on states; Slabs 14.5% in most states. Interstate sale @ 2% against C form

Q: It looks for Blocks the rates are on line with current tax regime, but why the tax for slabs are raised steeply

A : Indian granite Industry consists 3 types of factory
      A) 100 % Export oriented Unit (EOU)- They typically pay 27 % Tax if the goods are sold in domestic market - there are about 100 such factories in India. Usually they export 95% of their production and sell only rejects /export surplus in domestic market. Since they make their profit in exports, their pricing for domestic market is less than half of the export value. Effectively this is never more than 14-15% on the cost of goods. They are completely mechanised with automatic cutting and Polishing. Typical investment is around 10 Crore per Unit- Eemploy around 100 people

    B) Medium sized Non EOU: Any factory who sells more than 1.5 crore rupee worth of goods in domestic market. They are also typically required to pay an effective 14.5% to 27% ( 12.5% CENVAT and 14.5% VAT or 2% CST) depending on whether ,their sales is interstate or intrastate
In this category also there are only handful of them as these factories also sell more than 80% of their products in export market. They use semi-automatic cutting machine and Automatic polishing machine. Typical investment is 1 Crore to 5 crores. Typically employ 30-50 people

c) Small scale unit: There are over 3000 such granite cutting and polishing unit spread in states of Rajasthan, Telangana, Andhra Pradesh, Karnataka, and Tamilnadu.  They use semi-Automatic cutting machine with completely manual polishing. They are usually owner managed and located near the Granite quarries and use substandard blocks (second and rejects) from them. Usually they employ less than 15 persons in each unit and set up at a cost of anywhere between 15 lakhs to 1 crore. Their usual turnover would be 30-150 lakhs per year and they never came under CENVAT (central excise regime) so all they paid so far are either a 2 % CST on interstate sale or 14.5% on intrastate sale. 

in proposed GST regime category C factories will be affected the most as their tax incidence is almost doubled without any consultation. This factories typically produce 10000 sqft of slabs a month and margins will never be more than Rs 10/sqft . The increased tax incidence will be more than the profit of the factories.This will kill the one of key employement sector over night

Q: Why they have to suffer? They can pass on the tax to consumer? After all this is applicable for all factories and even other building materials such as cement and ceramic are also coming under this category. Then why there is a big Hue and Cry

A: let us look at what happened to the other building materials first before answering
a)     Cement : In the current tax regime, cement attracts 12.5% Cenvat and 14.5 VAT -27% combined . There is only 1 % increase in the effective tax under GST. Moreover there are less than 50 cement companies in India and most of them in large scale sector. Typical investment for a cement company is more than 500 crore. It is Injustice to compare such corporate run compnies to tiny owner managed granite factories
b)     Ceramic tiles : Here also the current tax incidence is 27% and under GST their rate has gone up only by 1%. Typical ceramic tile unit needs at least 3 crores to set up and it too comes under Medium and large scale industry and they are predominantly located (about 80%) in one single state in western India.
Usually ceramic tiles price ex works basis is between Rs 15-40/sqft. The 1 % increase in GST will make them to rise their price by  Rs 0.15 to 0.40 per sqft. It is not a Big deal. But in case of granite slabs from a typical small factory is sold for Rs 90-125 on ex works. The increased tax burden is 13.5% or Rs 12 to 16/sq.ft.  As such the demand in export markets are very much down. In domestic market too because of cost consideration very few use Granite in lieu of ceramic tiles.  Post GST implementation when the small granite factories pass on this huge increase to buyers, there will be very big resistance from buyer’s side and many buyers will opt for ceramic tiles as alternative option. Result –closure and destruction of one of the most promising self-employment providing sector, unless the GST is brought back to the level of 14.5 %

Alternatively to stay relevant in business, the entire supply chain from Quarrying to transportation to processing will resort to cash transaction to limit the extent of damage. Which is not good for the economy.

Q : Anyway Big factories in Granite sector are already under 27% . If the rate is reduced , won’t it benefit to Big factories too?

A: No, as most of the big factories especially 100 % EOUs are selling more than 90%  their goods in export market. Moreover Like GST council distinguishing between various category of Hotel under services (5 start hotel attracts 28% GST while and Lodge is levied only 12%), here too they can have differential rates of duty for small scale units and large factories . Over 90% of factories in granite sector comes under small unit categories only and this will give a huge relief to them

Q: what are the other issues to this sector on GST front?
A : 1. Except Blocks all other products will come under 28% tax. This is applicable to Hand cut stone, cubes, kerb stone, Flagpost, fencing stone, Temple works, monuments, plaques, figurines, fountains , Kitchen top, Vanity tops etc. Kerb stone and pavers are completely hand dressed. Is it justified to keep hand cut cubes /kerbs at 28 % and factory made ceramic table ware, sinks and toilets at 18 %.??

2. Packing cost of products will go up under GST. Currently there is no CVD for sawn timber and the VAT is only 5 %. Under GST this is slated to go up by 18 % .    

3.Under Goods transport service tax, the proposed GST is 5 % without input tax credit. Unlike other goods granite slabs/Blocks have a substantial cost of transportation. As high as 30 % of the cost of granite is spent on transportation. While we transport 100 MT of raw block from quarry to factory only 30 to 40 MT is produced as slabs and balance goes as saw dust and debris. Even in finished slab the weight of granite is 3 -5 times higher than ceramic tiles. So GST levied on Goods transported to Industry should be given input tax credit to offset the substantial transport incidence in granite manufacturing.
     4. There is a unique problem in Granite industry. In all other industry you can predict the output per unit of input. Example If you put 100 Kg of scrap melted, you will get 95 % finished steel. But In Granite because of the crack and breakages happens due to the unpredictable nature and lack of any quality guarantee from quarry side, many times factories end up selling the goods for loss. This is not the case with Ceramic /Cement/steel. This is unique to Granite and other natural stones. Levying 28% GST here is hence not appropriate and cannot be compared with Cement/Ceramic/steel

   5. Unlike other building materials, there is a huge seignorage fee as high as 20 % on the raw blocks, this fee will not be allowed to be set off as it is not subsumed under GST . This too is an additional cost which takes the total Tax incidence to as high as 40% which will make granite slabs as one of the highest taxed product

  6. Compliance cost will be a big burden for most of the  small processors who constitute 90 % of the industry. When typical output of an unit is only 10000 sq.ft/month and bill value is 8-9 lakhs/Month, employing a dedicated accountant, a stable internet connection and a ERP software will involve a onetime compliance cost of not less than 50000 and monthly cost of at least 20000 rupees. This it will cost 2.5 % in addition to 14% more tax.

 7. Granite quarrying is not an organised Industry. It is more like a lottery and many quarries shut as early as 6 months with in commencement of the operation because of the quality /recovery issues. Under GST the buyer of the goods will get input credit only if the seller remits the GST on time. Being a perpetually cash starved industry and lack of availability of formal financing, many quarries may delay or default in remitting the GST levied on customers. This will also have a serious negative impact on the finances of the small factories.

Q:How does the Exporters get affected ?. Minister already promised speedy refund of input GST ??
A: In Value terms almost 60% of Granite processed in India gets exported. As such Because of the Environmental Clearance issue, rough block availability become scares and exports are down because of this. Now factories started shutting down in protest of the high rate of GST. This completely cripples the already fragile supply system. Transport departments of many states are also imposing restriction on movement of Big sized blocks, which further complicates the situation. Indian Rupee has weakened by 7% so far in this year, hurting the margin realisation. Demand in overseas market is skewed towards low end products, further hurting the unit value realisation. Working Capital is another issue when exporters have to manage their borrowed finances. For same value of the export, It is estimated that the working capital requirement will go up by 50%. This additional working capital requirement will increase the cost of goods by at least 2% on FOB terms.

Q: Granite is a Luxury good, what’s wrong in clubbing them under A/C, refrigerator and washing machine??

A: It is only a perception that Granite is luxury good. In China Granite prices are starting at 0.6$/sq.ft which is comparable to that of Ceramic tiles. Even India many granite tiles are sold for Rs 40-50/sq.ft or at similar prices of ceramic.
In the same argument (luxury) we should be placing diamonds under the highest slab. But they would attract much lesser duty (not yet announced) than Granite. Both are quarried as rough and further cut and polished. So the argument of Luxury goods
won’t be valued here.

Q : What is the suggestion and How the Industry must face the GST ??
1)     Petition the GST council to reduce the GST on Granite slabs from 28% to 12% for small units and 18% for others
2)     Bring uniform Seignorage fee for granite Blocks across India
3)     Allow input Credit for GST on  Goods transport

4)     Exemption for Exports instead of refund.

Monday, May 8, 2017

Environmental clearance issue and shutting of quarries in Tamil nadu

Since 2016 December  80% of the Granite quarries, many of them Black quarries, located in state of Tamilnadu were unable to to obtain permit from mines and geology department to move the produced rough blocks from their quarry. Reason-many of them including Government run quarries are either not procured the NOC  or renewed the NOC for Environmental impact from state unit of environmental committee. The prevailing political situation in the state is not conductive. Since December 2016 , There is no chief for environmental committee. All files sent for approval are kept pending for want of  chief's signature , where there is no body till today . So every one hoping that they will get 6 month extension to comply with the norms or until the new chief takes charge, for obtaining NOC from Impact assessment committee

On April 19  the Green tribunal dismissed the petition filed by the quarry owners and strictly advising them to start the operation only after obtaining the NOC.

Now only the state government recommended the names to head the committee to the centre. We have been told several times that the issue will be over quickly and as soon as the new chief takes charge we have most of this issue will be over. The question is when. It may take any where between 30 days to 90 days on most optimistic estimate

we hope the situation gets better soon and seeking the support of all customers. Individual mails giving details of effect has been sent to all customers

In black granite 4 of our quarries are having issues and still offer black from rest of the quarries.

There is no big impact of the colour granite blocks we offer currently