GST: Cheer for power sector; capital goods awaits final rates

Business Standard By Amritha Pillay & Shreya Jai May 19, 2017. 02:35 IST

Coal has been placed under 5% slab, capital goods will be under the 18% slab

New goods and services tax (GST) rate slabs for coal and capital goods are expected to bring cheer to the power sector. However, the fate of capital goods companies will still hinge on final rates for other industries and those on imports.

Coal, the key raw material for about 60 per cent of the power produced in the country, has been placed under the five per cent slab, while capital goods and intermediate industries will be under the 18 per cent slab.

Senior power sector executives said the five per cent rate for coal, down from 11.7 per cent in the current tax regime, was a major breather as it would help reduce the final tariff, which would be passed on to the consumers.

“We were paying six per cent excise duty and other cess and taxes over and above it. We are guessing the new five per cent rate does not have the coal royalty amount subsumed, hence would still be lower than current rate,” said a senior executive at NTPC, the country’s largest power generating company.

The company, he said, would be able to determine the exact impact only after understanding the fine print. A Delhi-based power sector analyst said, “This is in line with the efforts of the government to not let power prices increase for consumers. A major component of the power rate will now be uniform.”

At the same time, capital goods falling in the 18 per cent tax slab would also help the power project developers to reduce their cost, and hence the capacity charge will reduce. “Over the excise duty of 12 per cent, we were paying two to three per cent central sales tax and differential VAT. Now a single 18 per cent rate would have a positive bearing on project finances,” said an executive with a power generating company.

Engineering, procurement and construction (EPC) companies, such as Bharat Heavy Electricals, Larsen & Toubro, etc, are among the firms that will see the impact of GST rates.

“The drop in rates to 18 per cent will surely help the capital goods industry in a big way, helping improve revenue and the margin bit,” said Suresh Nandlal Rohira, partner, Grant Thornton India LLP.

A senior executive from a heavy goods manufacturing company pointed out that most of the benefits would be passed on to clients. “These rates are provisional and the fine print is awaited. So, to what extent there will be a real impact needs to be seen. In most cases, projects operate on a full pass though basis. So, recovering costs isn’t much of a concern. Nevertheless, this is a sentiment booster for local manufacturing,” the executive said.

But, not everyone is convinced. “The new rate slabs are a positive for engineering companies manufacturing and selling in the same state, but for those selling to companies in other states there is an effective increase of 3.5 per cent, which in most cases would be passed on to the end customers,” said M S Unnikrishnan, managing director and chief executive officer, Thermax. In addition, the capital goods industry may wait to know the larger impact of the new rates on its business operations.

“The capital goods industry would want to wait and watch for the roll out of rates for other industries, which would decide the order book growth or its lack thereof,” Rohira said.

Steel, cement and other raw materials are also key to estimate procurement costs for capital goods manufacturers. Executives in the steel sector said the new GST regime was positive for steel, based on initial calculations. Analysts also added that unless the customs duty is hiked significantly on engineering imports, it might not move the needle much for domestic manufacturers.

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