India's steel market weakened during the first week of the Goods and Services Tax regime in the country, while the polymer and biofuel commodity markets largely dodged the bullet, industry sources said.
GST came into effect on July 1, superseding India's plethora of multi-tiered state and central taxes and bringing it under a sigle tax system.
S&P Global Platts takes a deeper look at how the new tax regime has impacted India's important commodities sectors of metals, petrochemicals, and agriculture.
STEEL TRADING WEAK IN FIRST WEEK ON CONFUSION OVER GST
Confusion prevailed in India's steel market during the first week of GST, as suppliers and consumers tried to determine their legal and financial responsibilities under the new tax system, industry sources said.
Domestic steel trade was weak, as traders and buyers postponed business to gain clarity, with many attending government- and industry-sponsored workshops and seminars to understand the nuances of the new tax regulations.
In April, India's finance ministry unveiled the new GST rates, which include an 18% tax on domestic steel transactions intended to replace the central excise duty of 12.5% and state-wise Value Added Tax rates.
On July 1 alone, the Steel Users Federation of India in Mumbai received about 60 queries from traders, many of whom had queued up at the SUFI office to obtain clarity on the procedures they must follow to comply with the GST, said SUFI president Nikunj Turakhia.
Traders said that ahead of the new tax's debut, steel sales almost came to a standstill in the last week of June, as they scrambled to clear inventories.
They were unsure about how the new tax might be applied to sale of old stocks and were trying to clear their yards just to be safe.
Orders declined from all steel-using sectors, including automobiles and consumer durables manufacturing, mill officials said.
Finished steel inventories at Indian steel mills in end-May had climbed to 6.2 million mt from 5.6 million in the beginning of April, according to the latest data published by the steel ministry's Joint Plant Committee.
"The long-term benefits of the GST are tremendous, but there will be teething issues in the short term," Turakhia told Platts, adding that the confusion will probably last for at least three months as amendments and changes are likely to be announced to the new GST rates.
Platts India domestic prices of hot-rolled coil have remained unchanged since early-May, as traders and end-users crimped buying and kept purchases to a minimum.
Buying activity was negligible and Indian traders said they were unable to sell any steel during the last week of June.
Ex-Mumbai prices on June 30 for IS 2062 HRC 3-mm thick prevailed at Rupees 35,500-36,500/mt ($550-$565/mt), including freight.
This included the 5% VAT and 12.5% excise duty -- both of which the GST has replaced -- to compute to Rupees 41,934-43,115/mt.
However, once there is clarity, the GST will help streamline taxation procedures, sources said, explaining that the new tax documentation would be less time-consuming overall.
The GST negates the need for freight movers to pay entry taxes at state borders, mill officials said.
Vehicle drivers would be spared the need to stop at state borders and wait in long queues to fill up numerous tax-related forms, which means faster movement of goods across states, sources said.
Indian states previously collected a fee for passage of all goods crossing borders, supposedly as development tax for the respective states.
Meanwhile, there is likely to be a spike in sales in mid-July, as traders begin to replenish stocks after their GST-related concerns get addressed, sources said.
POLYMER PRODUCERS LESS IMPACTED THAN DOWNSTREAM RETAIL
Reaction from India's large polymer market to the new GST appears to range from business as usual for the larger "organized sector" players to uncertainty for the downstream retail sector, industry sources said.
"Domestic producers so far have started deliveries under the GST without any hiccups," a Renuka Agencies trader said, adding that "the retail segment is a bit confused because their system may not be fully upgraded for the GST."
Retailers who sell polymer finished-goods to end-consumers, liquidated their stocks in the weeks before the GST to avoid taxation on existing inventory, and will look to restock in the next one-two weeks, once they adjust to the new system, sources said.
"Converters, on the other hand, will be looking to clear a build-up of finished goods inventory right now," a trader said, so there should be no shortage of finished-goods stocks in the supply chain.
Polymer converters are expected to see some adjustments due to the GST.
Platts' analysis of a typical polymer supply chain shows that the effective tax rates on GST implementation for larger converters previously paying VAT will gow down by up to 4%, while smaller converters previously exempt from VAT will likely have to pay more tax under the new rules.
VAT exemptions covered small converters with less than about $300,000/year of turnover, leading some participants to form multiple companies to gain a tax advantage by staying under the exemption cap.
Under the GST, such exemption cap has been reduced five-folds, according to sources.
As short-term teething problems are worked out, medium-term challenges may arise when the first GST filings are due, industry sources said.
"GST reporting should be on a monthly basis, but the government has given a window until September for July fillings. It is all IT driven, less work on paper, but will need to wait and see how it pans out in [practice]," a trader said.
Under the GST, primary polymers such as polypropylene, polyethylene and polyvinyl chloride, along with finished polymer-based goods used in packaging and for "conveyance," such as bags, will now be taxed 18%, according to India's GST Council.
The CFR South Asia PP raffia assessment, predominantly India, fell $15/mt week on week to $1,090/mt on July 5, as Middle East producers concluded deals below their official offers, to entice buyers amid GST-related uncertainties.
BIODIESEL DELIVERY HALTED AS OMCS RE-ASSESS TAX IMPACT ON RAW MATERIALS
Indian state-owned oil marketing companies suspended biodiesel deliveries from existing tenders in a bid to renegotiate biodiesel prices with producers and reduce the impact of an effective tax hike with the implementation of GST, an OMC source said.
OMCs are negotiating for a reduction in biodiesel purchase price if raw material cost of upstream biodiesel manufacturers -- mainly palm stearin -- is found to be reduced under the GST.
After July 1, biofuels like ethanol and biodiesel fall under the 18% GST category, which works out to be about an effective 8% increase in tax rate and is expected to be borne by OMCs according to tender conditions, the source said.
The pre-GST biodiesel taxation regime was variable across states, depending on policy, and included a 6% central government excise duty, VAT ranging at 5%-12.5%, and entry duties between states at around 1%, said an another Indian OMC source.
Some states, including West Bengal, previously were exempt from cross-border state tax in order to promote the biodiesel industry, the source added.
For fuel ethanol, a market source with a major OMC said that "it is just some marginal increase in tax. Actually, the tax rate is higher in certain states and lower in other states. So I would say overall, the impact is not very significant."
Before the implementation of the new GST, fuel ethanol was subject to 12.5% central excise duty, alongwith an inter-state duty of Rupees 3-5/liter (5-8 cents/liter) on inter-state transport of ethanol.
India has blending mandates for fuel ethanol and biodiesel into regular mineral fuel to promote cleaner-air policies.
Fuel ethanol is blended into gasoline, while biodiesel is blended into diesel or gasoil.
India currently has a 5%-ethanol blending mandate, while general biodiesel blending guidance allows for biodiesel blend of up to 5%.
Effectively, however, blend ratios for both ethanol and biodiesel vary upon feedstock availability.
Last year, India blended 4% ethanol into gasoline due to ample molasses availability.
Biodiesel blending, however, is negligible because of very limited availability within the country, and only within southern Indian states.
The Biodiesel Association of India has, however, protested against the 18% GST on biofuels because it believes that higher taxes will stymie a newly developing biofuels industry in the country.
GST TO BOOST INDIA'S GDP, BUT SHORT-TERM CHALLENGES REMAIN
In the long term, the GST may boost India's overall consumer demand due to efficiency gains, according to CRISIL Ltd.'S chief economist D K Joshi.
"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," he said, with gains expected from increased interstate trading, reduced inflation, and improved taxation.
In the short term, GST's success hinges upon working out any bugs in the supporting digital infrastructure.
Small and medium-sized enterprises deriving their competitiveness by avoiding taxes will likely lose out under the GST, CRISIL Research's director Rahul Prithiani said during an interview with Platts on June 30.
"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 largely marginalized. However, the overall tax compliance will improve substantially," he said.
