Key areas of Impact of GST for Lubricants Industry

We all thought that GST was going to be the biggest news of FY 2016-17, whereas demonetisation has stolen the lime light for the past two months.

No doubts demonetisation has pushed every other agenda to the back seat be it for the common man or for the government or for RDI and hence the first blog!

Nevertheless GST is an equally important Economic reform. I certainly believe that this is not just a tax reform but a major economic reform which, if implemented in the right way, can result in a boost to the economy.

Before I could elaborate on GST, I would like to mention that we are analysing the likely impact of GST on Lube sector only and not the entire Oil & Gas sector. It is essential to understand that while all the products in the lubricants sector are covered under the GST net, products like Crude Oil, natural gas, motor spirit, high speed diesel and aviation turbine fuel are out of the GST net as of now.

As we all know, GST is an Indirect Tax subsuming most of the taxes currently levied on Goods & Services.

Goods and Service Tax (GST) is a multi-point levy of tax on “supply” of goods and services. While the erstwhile Indirect Taxes like Excise Duty, VAT, service tax had various taxable points such as manufacture, Sale of Goods and Provision of Service respectively, GST has adopted ‘Supply’ of Goods / Services as the single taxable point.

The Government has yet again proposed a two tier taxation regime wherein Central GST would subsume the Central Levies and State GST would subsume most of the State Levies. Apart from CGST & SGST, Integrated GST has also been proposed which would be equivalent to CGST + SGST. While CGST & SGST (not mutually exclusive) would be leviable on ‘Intra’-state transactions, IGST would be leviable on ‘Inter’-state transactions.

The Government has recently released the revised Model GST law (in Nov 2016) which has detailed various provisions in the proposed GST Regime. Thought the law is still evolving to its Final shape, the revised model GST law has thrown light on many of the anomalies.

Now let us proceed to understand the Key areas of Impact as far as Lubricants Industry is concerned.

Supply Chain & Logistics

We all would agree that the Indian Taxation structure had always played an important role in setting up the supply chain of an organisation. An apparent example could be the need for transferring stock to your own warehouses even in lesser known markets in order to avoid CST which could become a cost your dealers/distributors.

I would even go one step further and question the need for manufacture of some special lubricants in India in case the technology and the associated cost would be cheaper if manufactured outside India. Since the entire supply chain would be able to avail credit of IGST (in the place of CVD/ED & SAD) paid on imports unlike the current scenario wherein the credit of CVD can only be passed on in case of OEM sales. While GST may not be a deterrent to make in India Scheme, it is definitely an driver for the scheme!

Let us also see the other end of the Supply Chain – Procurement. In the current scenario, levy of CST on interstate transactions which would become a cost to the company is one of the factors influencing procurement pattern. Whereas under the GST regime, IGST payable on interstate supplies would be available as Credit. This will enable the procurement decisions to be purely commercial without any influence from the tax perspective.

Pricing Strategy

Another major area of impact would be Pricing. As we all know, any change in rate of tax would have an impact on the cost of the product to the end consumer and consequently would require a change in pricing strategy depending upon the impact. More importantly, cascading of taxes within state and central levies in present which itself results in increased costs would also be done away with which could mean in additional savings to the industry.

In case of retail trade, All along Excise Duty was paid on MRP Value of lubricant packs which was not available as credit to the distributors / dealers. Moreover paying Excise Duty on MRP while transaction price being different. Whereas under the GST scenario, GST would be paid on the transaction value on until the last part of the chain where MRP would be considered inclusive of tax and tax would become payable. This will allow lube companies to rationalise the prices for such retail packs.

Further, in view of a seamless credit chain in the GST Scenario, there would be savings to lube companies in the form of additional credit which the companies would wish to leverage for a better position in the market.

It is also important to note that the revised GST Model law released in November has introduced an anti-profiteering clause which would ensure that the benefit of lower taxes are passed on to the customers. The pricing strategy should also ensure that the companies are not violating this anti-profiteering clause.

In view of the above it would be most important to review and determine the distributor / dealer arrangements entered in to with various distributors / dealers.

A major sigh of relief also comes from abolition of statutory declaration forms such as C Forms / H Forms / I Forms which had always resulted in increased costs to the company since non-submission of forms would attract highest rate of taxes

Working Capital & Business Decisions

Since IGST would become payable on even on stock transfer of goods, there might be a working capital blockage to the extent of Tax paid goods lying in stock at warehouses. Further, increase in tax rate may lead to a negative impact on the working capital requirements.

In fact under the GST regime, Lube companies would also be expected to pay GST on advances they receive from their customers even before supply of goods. This will also result in working capital blockage.

In fact tax exemptions given to specific areas was an important factor for considering the location of toll blending stations and also for the location of the sector’s vendors and customers. But in the GST regime we don’t envision any area based exemptions which would allow the decision to be made more from a business angle rather than just the cost (tax cost) angle.

It is also relevant to note that there will be positive working capital effect in the form of GST paid on goods available for set off against Service Tax and vice-versa as against VAT paid on goods not able to be adjusted for Excise / Service Tax.

The vendor selection and procurement strategy may be re-invented to source uniform volumes from reputed vendors thereby minimising the vendors data base. This will also improve the operational efficiency as well as compliance of the companies.

GST also calls for a complete review of the long term rate contracts enter in to with key suppliers and customers for considering price revision in view of the impact in costs GST might bring upon.

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