GST blues: Earth-moving, construction equipment majors fear dip in growth

Business Standard By T E Narasimhan June 7, 2017. 11:26 IST

Modi govt's ambitious infra projects may also be hit due to high rate of tax on sector under GST

The earth-moving and construction (ECE) equipment industry is worried that after the roll out of the goods and services tax (GST) it will start seeing a dip in growth.

Despite the fact that these equipment are used for infrastructure development, almost 50 per cent of them will be taxed equivalently to luxury items.

Indian Construction Equipment Manufacturer's Association (ICEMA) President Anand Sundaresan said that the ECE industry had witnessed year-on-year de-growth until the end of 2015.

ICEMA members include Escorts Construction Equipment Ltd, Cummins, Caterpillar India Pvt Ltd, CASE Construction, JCB India, SCHWING Stetter India Pvt Ltd, SREI, Tata Hitachi, Terex India, Komatsu India Pvt Ltd, L&T, and Mahindra Construction Equipment, among others.

It was in 2016, the first year in the past five years, that the industry grew positively after a much-required push from the government in terms of Budget allocation and restarting of stalled projects, especially in the road sector.

This has pushed the industry's capacity utilisation to nearly 50-70 per cent, from around 40 per cent in 2010-11.

In December last year, the industry was initially hit by demonetisation, though for a very brief period. Then, in April-May this year, the industry's sales were hit badly due to the confusion around the Supreme Court's order banning BS-III automobiles.

"Now, the new GST rates for ECE are a matter of surprise. GST has put the industry in the highest bracket of 28 per cent from the current tax rate of around 18 per cent," said Sundaresan, who is also the chairman of SCHWING Stetter India, a subsidiary of German construction equipment major SCHWING Stetter.

Around 50 per cent of the total equipment used for such purposes will come under the 28 per cent bracket. These include wheeled loaders, backhoe loaders, soil compactors and excavators, to name a few. These are vital for the Union Ministry of Road Transport and Highways' target to build 40 km of road per day by March 2018 from the current 23 km per day.

The ECE industry also plays a significant role in the Modi government's flagship Swachh Bharat programme, where the bulk handling of solid waste is possible only with the usage of these machines.

"We are catering to the infrastructure sector, which is key for the country's growth. But we are charged equivalent to luxury item," said Sundaresan.

He added that this would have a double effect. First, the impact on the cash flow of the contractors. Second, while the input tax will be 28 per cent, the output will be taxed at 12 per cent, with the industry having to bare the balance.

Due to this anticipated price hike, the current surge of infrastructure-related activities will get adversely affected as there is a fair possibility that the purchase of fresh equipment will get deferred, leading to a delay in the completion of projects, said Sundaresan.

"The immediate impact would be a drop of around 15-20 per cent in sales due to GST, which is huge," he added.

He ruled out the possibility of exports since most of the original equipment manufacturers are 100 per cent subsidiaries of multinational firms. "Despite the fact that we have cost advantage and quality, we will not be able to export since we have territorial issues," he added. At present, only five per cent of the total that the industry produces in India is exported.

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