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Rediff.com  » Business » Cement: Excise duty structure remain unchanged

Cement: Excise duty structure remain unchanged

July 07, 2009 18:27 IST

The unchanged duty structure for the cement industry is a major disappointment. However, impetus for rural growth and infrastructure development will ensure healthy demand to continue.

Budget Provisions

Some of the provisions in the budget that could have a direct and indirect bearing on the cement sector are:

  • In order to provide incremental lending to the infrastructure sector, Indian Infrastructure Finance Company (IIFCL) will evolve a takeout financing scheme in consultation with banks. IIFCL will refinance 60% of commercial bank loans for PPP projects in critical sectors over the next 15 to 18 months. IIFCL and Banks are now in a position to support projects involving total investment of Rs 100,000 crore.
  • Allocation under Jawaharlal Nehru National Urban Renewal Mission (JNNURM) was stepped up by 87% to Rs 12,887 crore in B.E. 2009-10 over B.E. 2008-09.
  • Allocation for housing and provision of basic amenities to urban poor enhanced to Rs 3,973 crore in B.E. 2009-10. This includes provision for Rajiv Awas Yojana (RAY), a new scheme announced.
  • Allocation for Bharat Nirman increased 45% in 2009-10 over B.E. 2008-09. Allocations under Pradhan Mantri Gram Sadak Yojana (PMGSY) increased 59% over B.E. 2008-09 to Rs 12,000 crore in B.E. 2009-10.
  • Under Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY), allocation increased by 27% to Rs 7,000 crore.
  • Allocation under Indira Awaas Yojana (IAY) increased 63% to Rs 8,800 crore in B.E. 2009-10. Allocation of Rs 2,000 crore made for Rural Housing Fund (RHF) in National Housing Bank (NHB) to boost the resource base of NHB for refinance operations in rural housing sector.
  • Unchanged corporate tax rate whereas Fringe Benefit Tax on the value of certain fringe benefits provided by employers to their employees has been completely abolished. Minimum Alternate Tax (MAT) has been increased to 15% of book profits from 10%.
  • Service provided in relation to transport of goods by rail will attract service tax.

Industry expectations not addressed

The cement industry is one of the most highly taxed industries, with complex 3-tier excise structure. The industry had requested for rationalization of these tax structures besides various other measures in order to maintain its competitiveness. 

Apart from excise duty, other taxes on the commodity comprise duties on power tariff, sales tax, royalty and cess on limestone, coal and gypsum. Lower excise duty and abatement on it would have enabled the industry to pass on the benefit to the final consumer.

The Industry had also requested for abatement of 55% on the MRP of the cement bags. In order to establish a level playing field for the domestic cement manufacturers with the importers the industry body had requested to re-impose import duty on imported cement.

Exemption in import duty on Pet coke and coal and reduction of VAT in line with similar important construction material like steel was desired by the industry.

The industry's demand was completely unaddressed during the budget 2009-2010. Rather the service tax on transportation of goods through rail will increase the freight charges for the industry.

Budget Impact

Although the budget was silent in addressing the demands of the cement industry, various measures introduced in the budget to stimulate rural growth in infrastructure and increased allocation in various government-sponsored schemes will help to sustain the demand that's emanating from the rural market. However the major concern is high tax and lower margins.

Very soon the cement industry will go into overcapacity stage as new green-field capacity gets stabilized. Thus in the absence of major push by the government for the sector in this budget, the cement industry will turn uncompetitive going ahead.

The hike in Minimum Alternate Tax (MAT) from 10% to 15% is an irritant for the corporate sector.  On the positive side, this hike has come with a benefit of extending the period allowed to carry forward the tax credit under MAT from seven years to ten years.

Also, the hike in MAT will not be earnings dilative but will only be cash flow dilative.  The increase in liability towards MAT will be matched by an incremental deferred tax credit.  Hence, the net profit or EPS of a company will not change due to hike in MAT from 10% to 15%.

But it will mean increase in cash outflow, and if the company is not returning to profits as per Income tax act within ten years, then it may have to forego them.  So, from a current year(s) point of view, increase in MAT from 10% to 15% is not earnings dilative but cash flow dilative.  On the other hand, the removal of Fringe Benefit Tax (FBT) is a major positive for Corporate India.

Companies to watch

Shree Cement, JK Cement, Grasim

Outlook

In the absence of major announcement in the budget for the cement sector, the outlook is maintained neutral.

The demand from the rural infrastructure and semi-urban areas for the cement sector will continue for some time in the back drop of increased provisions for various social projects like Jawaharlal Nehru National Urban Renewal Mission (JNNURM), Rajiv Awas Yojana (RAY), Bharat Nirman, Pradhan Mantri Gram Sadak Yojana (PMGSY), Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) and Indira Awaas Yojana (IAY).

However, increased capacity will lower the operational efficiency of the industry going forward. The capacity of cement production in the country is expected to increase to 298 million metric tonnes by the end of the fiscal 2012.

The industry, which has grown by an average of 10% in the last three years, is expected to add around 45 million tonnes of fresh capacity in FY2010, taking the overall capacity to over 260 million tonnes per annum.

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