The Indian paper makers feel that GST, through its sincere implementation, would surely have an overall positive impact along with noticeable outcomes such as improving the cost competitiveness, competitiveness against imports, higher tax compliance, undercutting of unorganized sector, greater cash flow, etc. Some however also feel that rate on the input materials and hygiene products could have been little lower.
Touted as the biggest tax reform, GST has now become a reality from July 1, 2017. Policy makers and the Govt. claims GST to be a winning stroke, which would bring benefits to the entire Indian economy and make the production of goods and provision of services globally competitive. Aimed at making India a common market, GST is also assumed to push forward towards an integrated economy at the national level with the help of common tax rates and procedures. GST has subsumed most of the Central and State taxes and allows a set-off of prior-stage taxes across the entire value-chain, making sure to get rid of the cascading and improving liquidity of the business. However, not all agree on purported benefits of GST regime, especially the rates decided for various brackets of businesses.
Largely a technology driven taxation regime with minimal human interface, GST is though sure to usher in better tax compliance and convenient tax payments in future, it’s initial implementation saw industries facing some blues. Paper Mart recorded the feelings of the Indian pulp and paper industry to know their perspectives on the new tax and how GST-ready they are. Responses were largely positive, ranging from the trust that GST would lead to better compliance and a belief that it will greatly undermine the survival of unorganized sector to a feeling that greater cash flow would be ensured.
Overall Positive Impact on the Indian Paper Industry
By and large, we are satisfied with the GST rates on the output side; however, the rates on raw material and inputs could have been lower as this might lead to some blockage of working capital, especially for the smaller players, says Mr. Saurabh Bangur.
GST is a major economic and tax reform which the entire country was waiting for several years. I expect GST to have an overall positive impact on the India’s paper industry. Although there will be some short-term transitional and implementation issues, which are to be expected whenever such a major change in the system takes place. We expect the policy makers to expeditiously address these issues and make the transition smooth.
In the days approaching the changeover to the GST regime, many paper dealers had put orders on hold as there was lack of clarity about the treatment of stocks and in-transit inventories. We expect things to settle down in a few months with the supply pipeline coming back to normal.
Ideally, we would have liked a uniform GST rate on all grades of paper to avoid any classification problems, but the Government worked on the principle of existing tax incidence being converted into the nearest GST rate. By and large, we are satisfied with the GST rates on the output side. However, the rates on raw material and inputs could have been lower as this might lead to some blockage of working capital, especially for the smaller players.
The GST rate on tissue paper should have been lower since this segment is one of the fast growing categories for the paper industry in India, and for reasons of hygiene and sanitation, its usage needs to be further encouraged with lower taxation.
GST will also help Indian manufacturers to compete with imports in the domestic market by levelling the playing field to some extent with imposition of the full IGST on imports. Exports to other countries will also get some boost, with full refund of input tax credit to the manufacturers.
In the medium term, the cost competitiveness of the paper industry should improve with unification of the fragmented domestic market and reduction in costs associated with inventories and logistics, especially with the removal of entry barriers in different states. Hopefully, the Government will relook at reducing further the costs associated with procedural and tax compliance in the GST regime.
Under the GST regime, informal and cash transactions are expected to significantly go down in the paper industry also, like in other industries, as the incentive to stay outside the system has been curbed to a large extent. Government will need to work towards bringing the unorganised and small sector of the paper industry into the formal system.
Transparency & Better Enforcement Will Lead to Higher Tax Compliance
With the elimination of cascading taxes and availability of input tax credit, it is expected that the unorganized producers will lose their relative advantage over the large organized players, feels Mr. Santosh Wakhloo.
Implementation of GST will have a very positive long term impact on the Indian economy. With transparency and better tax enforcement leading to higher tax compliance, government revenues are bound to surge. This will eventually lead to lower taxation rates and higher spends on infrastructure and public spending. Both Central and State Govt. will spend more on education, healthcare, social security etc. All these would lead to a much higher growth of the Indian economy. Paper industry will reap the benefits of these higher spends and overall growth of the economy.
In addition to growth, there would be major changes in the paper industry, both at the manufacturer level as well as the trade. With the elimination of cascading taxes and availability of input tax credit, it is expected that the unorganized producers will lose their relative advantage over the large organized players. This will lead to realignment in profitability of the industry. The unorganized players will be forced to increase prices and the organized players getting some cushion in their businesses. Eventually, all this would lead to a shift towards a larger organized industry. In terms of the geographical spread of sales for the manufacturers, there would be realignments since the home state would no longer enjoy the advantage of Nil CST.
The larger impact, I feel will be with the trade and distribution network. Increased enforcement and traceability through electronic means will lead to organized traders getting an upper hand in the business. The advantages being enjoyed by unorganized trade would get lost. At the customers end too, the risks of doing business with unorganized/ financially weak traders will be too high and would force buyers to procure material from the organized ones. Only serious players would remain in trade and the small unorganized traders will get marginalized. Also, a section of trade whose business was only to take advantage of tax through evasion will no longer find this business attractive and will move out. Eventually, profitability of trade is bound to improve.
However, on a cautious note I must state that a lot of these benefits will fructify only if GST is strictly enforced. While GST as a concept looks very good it can lead to significant increases in malpractices if not implemented in the right spirit. With the Govt.’s focus on using technology as an enabler for implementation, there is no reason to believe that enforcement will be weak.
Overall, in the foreseeable future there is tremendous growth opportunity for organized players, both manufacturers and traders, in the industry as they stand to gain the share of unorganized market in addition to the normal growth of the market.
GST Implementation, a Threat to the Unethically Operating Sectors
Although newly introduced GST rates would not result in any profitability appreciation directly for the paper and board industry as it falls under the tax slab of 12 percent, which more or less is equivalent to the taxes that industry used to pay earlier, says Mr. S. K. Khetan.
Passage being stuck for rather a long duration, GST has finally made its way in the Indian economy. Multiple taxes in the erstwhile tax regime were somewhat affecting the growth of the paper industry, giving unorganized sectors an edge over the organized ones. Although newly introduced GST rates would not result in any profitability appreciation directly for the paper and board industry as it falls under the tax slab of 12 percent, which more or less is equivalent to the taxes that industry used to pay earlier. I would definitely say GST through its implementation will become a threat to the unethically operating sectors and consequently would benefit the paper industry in an indirect manner.
There is a mismatch in the duty structure of the input and the output in the newsprint. Input (waste paper) is under 12 percent class of tax while the input services are configured under the 18 percent slab. There is GST at 18 percent for even on a number of chemicals and spares & stores. The GST on newsprint is 5 percent and is has an adverse impact on the overall structure of GST for newsprint.
There, however, is no impact on logistics. Everyone has to give 5 percent and I feel that is okay. Although, there is a transitional confusion in the guidelines, which will get clear with time.