GST impact on domestic steel market

gst mechanism & structure

For the domestic steel industry, the GST brings in a ray of hope.

The Problem: The Steel industry has been plagued by the decrease in prices of steel due to a drop in the global commodity prices in the year 2015. This situation led to a severe impact on the operating margins of the domestic steel plants. The steel sector is a major contributor to the non-performing assets (NPAs) of the public sector banks. Currently valued at around 3 lakh crore, the gross NPAs are expected to rise 4% in this year to nearly 12% by March 2017

Dumping: When the international prices of commodities had dropped, the major steel producers like China, Japan and South Korea, resorted to aggressive pricing adding to the woes of the domestic steel producers. Some of the steel product prices hit the ten-year lows in the Indian market. This predatory pricing led to the dumping of steel into the Indian market and impacted the capacity expansion plans of steel producers and the Bank NPAs. In the FY 2016 alone, the steel imports into the country increased by 25 per cent, which was over and above the increase of 71 per cent in FY 2015.

The action: The government sprang into action and imposed the Minimum Import Price (MIP) provisional safeguard duty on 173 grades of steel in Feb 2016. This 20 per cent duty had the impact coming into the reduction in imports in April/May 2016 by close to 30 per cent over the previous year. The Health of the domestic steel industry would depend on the government’s decision to extend the MIP beyond Aug 2016 and the findings of the antidumping investigations.

The saviour: The only solace for the industry was the hardening of the steel prices by 25 per cent till the middle of Jun 2016, notwithstanding the increase in iron ore price and coking coal going up by 9% and 11% in the same period. Though the government is initiating many actions to help out the steel industry come out of the crisis, the cure that it needs is likely to come from the implementation of GST from April 2017.

The change: Today, a variety of taxes, Octroi etc. are paid when the steel is transported across states to its destination. There is corruption playing the spoilsport and adds to the cost and time delays. This is more so in the underdeveloped states like Orissa and Jharkhand which happen to be the largest producers of steel in the country. This will change.

Development: GST will give more money to the underdeveloped states through the removal of middlemen and reduction in corruption. These states will be able to develop the infrastructure that they have not been able to do in the past. This will augur well for the steel industry in these states.

Global parity: The most important aspect is that GST will give a level playing field to the domestic industry, as the same GST rates would apply as in the case of imports. The duty that is levied under GST will be based on the reverse charge method. Despite the fact that India is signatory to agreements with some partner countries who are not liable to pay the import duty, they will be subjected to GST at the national level.

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