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Cement: Taxes purge competitiveness

Nov 21, 2008

Cement is a basic construction material. It is a key raw material used in the construction of houses, bridges, dams, roads (concrete), etc. India is the second largest producer of cement after China. The total domestic industry capacity is over 200 MTPA. Cement sector growth prospects are highly correlated to the growth of the economy. Hence, if the GDP growth slows down, so should the demand for cement. If the Indian policy makers have to put the country on a high GDP growth trajectory, sizeable investments in infrastructure will have to be made, thus boosting the demand for cement. With the government going in for 25% concretization of roads, six-laning 6,500 km Golden quadrilateral and selected National highways, four-laning and widening of roads, constructing new rural roads, capacity addition of major ports, additional 70,000 MW generation of power capacity, upgrading and modernising of railways and ports, improving irrigation facilities etc is likely to translate into higher demand for cement. While these are positives, there are some factors that affect the industry's competitiveness. One of the factors is high incidence of taxes and levies.

Structure of taxes and duties levied: Tax on cement is subject to government levies by centre and state. Taxes and levies comprise of duties on power, tariff, sales tax, royalty and cess on limestone, coal, gypsum and also excise duty. Average tax on cement is as high as Rs 931 per tonne. The table below shows different duties levied.

Break-up of govt levies on cement* Rs tonne avg
Avg. sales tax / VAT 12.5% 362.0
Excise duty (Rs 400 + 2% education cess) 408.0
Service tax 1.0
Rolaty on cess and limestone 69.0
Rolaty on coal 22.0
Duties on power tariff 27.0
Sales tax on stores/spares/raw materials/packaging 15.0
Octroi 23.0
Excise duty on stores and spares 4.0
Total 931.0
Per bag (50 kg) 46.6
Per kg 0.9

Taxes and levies % of sales
India Around 20
China 19
Malaysia NIL
Cement is one of the highly taxed commodities in our country. Infact, the highest taxed essential infrastructure input in India. Taxes and levies account for nearly 60% of the ex-factory cost and nearly 20% of the current selling price. The current VAT on cement is higher compared to important construction materials, which is at 4%, such as steel. Even when compared to other developing nations that compete with the Indian cement industry in the exports market, such high incidence of tax deters the competitiveness of the cement industry.

Futile measures: In the budget 2008-09, the excise duty on bulk cement was revised to Rs 400 per tonne or 14% ad-valorem duty whichever is higher. The excise duty on clinker has been hiked by Rs 100 per tonne to Rs 450 per tonne. Moreover, the government favoured import of cement to lower inflation. As per the CMIE, the average monthly prices (Mumbai prices) per bag (50 kg bag) of cement hovers around Rs 250. The landed cost was lower by Rs 10 to 20 per bag. Cement being a commodity does not enjoy brand distinction. On account of removal of duties on cement, imported cement near borders is competing with domestic supply. Inefficient infrastructural facilities do not facilitate cement imports into the interior parts of the country or regions away from ports.

If the BIS (Bureau of Indian Standards) certify the quality of the product, it hardly matters which cement brand one is buying, the ultimate usage is to construct a sturdy structure. Favouring imports to some extent exerts pressure on domestic prices but imposition of higher excise duty will not as manufacturers can pass on the increase in cost of cement to consumers. If the taxes and duties are lowered, ultimately it would be beneficial to the consumer.

*Data sourced from CMA (Cement Manufacturers' Association) - Report of the working group committee on the cement industry.

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