In an interview to CNBC-TV18, MS Unnikrishnan, MD of Thermax said that 18 percent goods and services tax (GST) will reduce tax outgo for capital goods industry.
He added that capital goods industry pays 24-25 percent for goods sold in same state as manufactured whereas the industry also pays central sales tax (CST) for goods sold in another state.
However, GST will help exports for capital goods industry, he said.
"Four or five stages of manufacturing where a different manufacturing set up where it is going to pass-through, it is going to be certainly bringing in a level playing field which is what is available to the competition of Indian companies in the global market," he said.
Below is the verbatim transcript of MS Unnikrishnan’s interview to Prashant Nair & Ekta Batra.
Prashant: How is the capital goods manufacturing industry watching the entire Goods and Services Tax (GST) rates debate which is playing out at this point of time. What is the rate which is going to be acceptable to your industry, to you?
A: If you look at manufacturing industries the excise incidence is ranging between 12-13 percent right now and including the cess and everything put together it will come to 12-13 percent. However, if it is a sale within the same state itself, there is a sales tax incidence of almost varying between 10 and 14 percent depending upon the item that you are manufacturing. So, the cumulative impact - the same states sale would be in the region of around 24-25 percent. So, if the government were to fix 18 percent as GST rate then that is going to be reducing the total incidence of tax while a purchase is made, that is point number one.
However, when you are going to make an interstate sale, which is also very regular in the manufacturing industry, which means you manufacture in a state and sell it in another state. So, the excise is remaining constant. The central sales tax as of today is only two percent. So, the cumulative tax is maybe around 15-16 percent on the total sale. Now, when it is going to become 18 percent certainly it is going to have a minor increase in the incidence of tax at the time when a consumer purchases it. So, that is the way one has got to understand same state sale versus interstate sale, but if they are going to be limiting at 18 percent for general rate which should encompass, in my opinion, between 65 and 75 percent of the entire sale that has being done in the country. It is going to be benefitting the industry.
Second and most important is this should be reducing the way you are going to be managing your tax management system within the company because the country should be treated as one market however complications are going to be increasing because you could have a sales tax registration in every individual state of the country right now as per the new law and you are going to file your returns in each of the state and it is supposed to be online progressively. So, those are the operational impacts which one may have to understand. Now, larger companies who have got a very large balance sheet and virtual presence trans-country, across all the states will find it very easy to transit into this.
However, smaller companies which are - I would possibly put at companies which have turnover of maybe Rs 100 crore to Rs 1,000 crore, the medium sale industry, who maybe predominantly operating in a couple of states; their home state plus a couple of peripheral states, they will have to come up with a better tax management system, registrations, a lot needs to be done. So, that is the initial part, but overall I would say for the manufacturing industry it is a step change which all of us should be willing to accept with both hands and it is going to be helping the industry.
Ekta: In terms of export-import competitiveness do you think a low rate will discourage import and maybe even encourage exports?
A: Certainly because there are unknown taxations in the company which is not cumulated because you may not be buying an equipment for export which would have undergone maybe three or four layers of value additions of three-four different companies. Each one of them wouldn't have been able to offset the Value Added Tax ability (VATability), that is the Central Value Added Tax (CENVAT) or VAT wouldn't have been done.
In the current law, once GST is fully amplified and applicable and in vogue then at every stage compounding is reduced. So, the ultimate incidence of taxation on export goods will come down. So, it will be improving the level playing capability, facility that is going to be available for the Indian exporters.
A single process may not be having a great benefit but multiple stages of manufacturing where components - say, you make steel, convert that into bar steel, from that you make a component, that component gets into an assembly of a motor or a pump, that pump is utilised in a water treatment plant or a boiler or equivalent to that. Four or five stages of manufacturing where a different manufacturing set up where it is going to pass-through, it is going to be certainly bringing in a level playing field which is what is available to the competition of Indian companies in the global market.