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GST Impact on Chemical Industries

The chemicals sector in India, in particular, is on tenterhooks regarding the impact of GST implementation, considering the fact that Indian chemical industries have continued facing severe challenges owing to the mounting taxations.

The GST Act is designed to be a pragmatic tax alteration aimed at simplifying the complexity of the older tax systems, bringing down the production costs of goods & services, and clearing the disarray of variable value-added taxes (VATs) at all transaction levels. Simply put, the GST can be defined as a tax which takes into account the input credit tax liability while being levied and assessed at every stage of transactions of goods or services.

The framework of GST is based on the input tax credit method that shall allow businesses to assert their input stage tax liability during the next resale transaction. For example, when a manufacturer of polymer chemicals sells some volumes to a buyer, a certain amount of tax is imposed on the buyer while the manufacturer pays the required income tax.

After the first transaction, the buyer sells the polymer chemicals to an end-user industry. In the existing tax system, the tax rate of the first transaction will be added to the tax paid by end-user industry. In the GST mechanism, the second buyer (the end-user) gets to claim the input (first transaction) tax as a credit to the implied output (resale transaction) tax.

In order to ease the business operations among the states, the GST aims to reduce the procedural barriers, benefitting all the stakeholders by amalgamating the Central and State GSTs. Moreover, the reduced risk of tax evasions has been represented as a primary feature of the GST implementation.

The Bill will also revolutionise the existing taxation systems by defining a taxable event, measuring the levy rate based on the valuation provisions, and uniformly classifying every practicable statute of the Bill.

GST can have long-term positive impact on the chemical sector

Almost every predictable impact of GST on the Indian industrial sector looks positive, especially for the chemicals industry. Chemicals businesses in India have long suffered the wrath of added taxations on their production capacity as well as their consumption demands.

The older taxations caused the rise in the production costs of manufacturing vital chemicals, which resulted in the price-hike of the end products and made such goods unaffordable for gross consumption.

That’s why the GST Act is trusted to be seminal for the unbarred progress of the Indian chemicals industry in the years to come.

Unification of taxes

The prime benefit of GST is that it has integrated the chemicals market by decimating the tax complications grappling the interstate trade of chemical companies. GST has accomplished this by incorporating the crucial Central and State taxes such as the Central Excise, the Service Tax, the Countervailing Customs Duty, the Special Additional Duty, the Central Sales Tax (CST) and other VATs. Such double taxations used to get more tedious when the end-user industries were located in various states and the taxations witnessed additions from the duty levied by the concerned State Governments. Owing to the fact that the Service Tax, CST and VAT levied upon interstate transactions differed according to the involved States, the GST has subsumed them under three taxable levies – the Central GST (CGST), the State GST (SGST) and the Integrated GST (IGST).

[ Read: Types of GST ]

The GST Act will help avoid double taxation at combined rates and keep the rates of state-level tariffs consistent throughout the country. The inferring taxation will allow chemical manufacturers to produce chemicals and supply them to different states without any additional taxable duties.

Reduction of Production Cost

The facilitation of national trade suffered at the hands of surging VATs implied on manufacturers of chemicals. The mitigation of CGST and SGST will also lower the cascading effect of multiple taxations on the production capacity of chemical industries.

For an instance, in the previous tax regime, an agrochemicals manufacturer in Ludhiana had to deal with the burden of paying diverse taxes to the State Government in Punjab as well as the Central Government. In the process, the manufacturer ended up paying more than 25 percent of aggregated levies, and had no option but to hike the production value of the chemicals. In the GST regime, IGST is exerted on interstate trade and SGST & CGST on transactions within a state. Consequently, the production costs and the resale prices of chemicals should be extensively lowered, urging the industry leaders to concurrently expand the gross production capacity of the chemicals sector in India.

Ancillary advantages

The aforementioned benefits of lowered production costs and reduction of transactional tax rates will have a major influence on the growth of paints and construction chemicals industry. The booming real estate sector will continue to generate demand in construction chemicals market, but GST should make sure that the construction chemicals retailers are not edged away from the sales profits. The absence of warehousing or supply chain costs will help maintain the affordable prices and promote the consumption of chemicals. Non-uniformity of VAT rates has become irrelevant as GST applies at a common rate of 18% upon every product sold in the chemicals industry.

The area-wise tax exemptions will not exist as every State will be taken into consideration equally, under the GST Bill. Lowered transit time, availability of chemical materials at the desired time, and hassle-free transportation systems are also observed as the indirect advantages of implementing the GST in the Indian chemical businesses.

Future prospects

The assured compensation from the Centre to the designated State Government upon revenue losses experienced over a five-year period from the implementation date has made GST a promising prospect for the industrial growth of the nation. The ‘Make in India’ initiative, launched two years ago, has endorsed the importance of manufacturing sector. So, GST has the potential to serve the long-term interests of the chemicals industry.

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Niteesh Singh
Niteesh Singh
Niteesh is a Tax Researcher and Content Lead at H&R Block (India). He holds an MBA with a specialisation in BFSI domain. In his career spanning over six years, he has helped thousands of people understand taxes in a simple and effective manner. Outside work, Niteesh is an astronomy geek who is also involved in wildlife conservation activities.