GST 2.0: Cement makers will have to balance price cuts with healthy margins

Cement makers may have to pass on substantial benefits, in order to avoid regulatory scrutiny

The GST council’s decision to cut the tax on cement from 20 percent to 18 percent has left manufacturers facing the dual challenge of passing on the benefit to consumers while keeping margins healthy and avoiding regulatory scrutiny, analysts have said.

The industry has welcomed the GST council’s proposal to lower the goods and services tax on the commodity from 28 percent as part of a new two-tier structure, which does away with 12 percent and 18 percent slabs. GST 2.0, which kicks in from September 22, also has a special rate of  40 percent for the so-called sin goods.

“The cement industry considers it a progressive step towards simplifying the tax structure,” Neeraj Akhoury, managing director of Shree Cement and president of the Cement Manufacturers' Association, has said.

“A reduction in GST stands to enhance the competitiveness of the Indian cement industry by creating a fair game with global peers."

For a long time, cement has been taxed at one of the highest rates among essential building materials compared to sectors such as steel and other input materials, he said.

Lowering the rate to 18 percent corrects this anomaly and ensures parity with other core materials, Akhoury said.

Demand boost?

The rate cut may help push demand for affordable housing, as well as help increase sales of premium cement brands, experts said.

"Reduced prices of cement and higher purchasing power, especially increase the affordability of housing for middle and lower-income groups, spurring the demand for cement," said Dharmender Tuteja, CFO, Dalmia Bharat.

Lower prices will also improve the affordability of premium categories of cement, leading to a likely shift of demand towards these categories.

After a dull FY25 in terms of pricing, cement manufacturers have been hoping to raise prices this fiscal on higher demand from real estate and infrastructure verticals.

Ratings agency Crisil expects cement demand to grow by 6.5-7.5 percent in FY26, driven by real estate, particularly rural housing, while prices are seen growing by around 2-4 percent this year.

Analysts, however, have been more cautious, noting that demand is relatively inelastic and constitutes a smaller portion of construction costs, and the overall impact is likely to be limited as a result. This is despite incremental levels of construction cost decline as a result of the rate rationalisation.

"The GST Council's decision to reduce tax… will lower construction costs by around Rs 30 per bag. However, given that cement constitutes only 4-5 percent of overall construction costs and demand for cement has historically been price inelastic, this move is unlikely to have any meaningful impact on demand or pricing," Satyadeep Jain, lead analyst for cement at Ambit Capital, said.

What happens to prices?

Experts also say the industry may have to pass on the benefits to customers to avoid regulatory scrutiny, particularly from the Competition Commission of India (CCI). The industry has been in CCI's crosshairs over allegations of cartelisation and tender rigging.

"In the near term, the benefit of the GST rate reduction must be passed on to customers under anti-profiteering regulations. However, in the medium to long term, we believe that during periods of cost inflation, the industry’s ability to implement price hikes will improve and is likely to encounter lower resistance from channel partners," said Ravi Sodah, equity analyst, Elara Capital.

Some cement makers, who get benefits from respective state governments through the state GST (SGST) setup, may see these incentives getting affected, analysts said. However, demand and prices for cement are largely market-driven and the potential reduction in tax incentives may have a limited impact, they added.

"While there could be some impact on SGST-linked state incentives, particularly for certain regional players, we believe this tax change does not alter the structural dynamics of the industry. The current improvement in spreads and EBITDA per tonne remains cyclical rather than policy-driven," Jain said.