Dungsam Cement Corporation Limited (DCCL), which was called the country’s cash cow when it was first established, is down before it could stand on its own feet.
DCCL, A Druk Holding and Investments (DHI) owned company, started with losses in billions. At a time the company was about to come out of the red, the India’s goods and services tax (GST) has killed all its dreams.
The real impact was brought by the 15.125 percent tax implication, which has actually created a level playing field between local cement industries like DCCL and Indian cement manufacturers.
In the earlier regime, Bhutanese manufacturers exporting to India are levied with 14.5 percent value added tax (VAT). However, for Indian manufacturers, an excise duty of 12.5 percent was levied (which was exempted for Bhutanese manufacturers) in addition to the VAT. So, Bhutanese cement enjoyed an advantage of 15 percent, including landing charges and insurance.
After the implementation of GST, in India on July 1, 17 forms of state and central taxes were subsumed under one regime. Exports going out of India are zero taxed while imports to India come with IGST (integrated goods and services tax). This means a level playing field is facilitated between inter-state trade and imports into India in terms of taxes.
“For Indian cement manufacturers, moving from a VAT regime to GST is simply a change in name as the effective tax rate is the same (28 percent),” said board director of DCCL and an analyst with DHI, Sherab Namgay.
After the GST, Dragon Cement produced by DCCL is also slapped with 28 percent IGST. Including the insurance and landing charges, total levy comes to 30.125 percent.
Real level-playing field actually is non-existent given other incentives Indian manufactures enjoy, particularly DCCL’s primary competitors in the North East states of India. As many as 4,284 industrial units in the North East and Himalayan states are granted relief from the GST in form of GST refund.
IGST is levied on imports coming to India. For inter-state trade, instead of IGST, central GST (CGST) and State GST (SGST) are levied. But the effective tax rate of CGST and SGST combined is equal to IGST.
For cement manufacturers in the North East, 14 percent of CGST is refunded by the central government. This makes cement from the North East cheaper. In addition, GST regime grants freight subsidy of up to 90 percent. This makes transportation cost for the Indian manufacturers cheaper by 90 percent.
Indian cement manufacturers are also given input tax credit, which is as good as exemption. Input tax credit is the credit manufacturers receive for paying taxes towards buying raw materials used in the manufacture of products.
“This way the level playing field on the tax front is eroded by such incentives,” sherab Namgay said.
This is not the only agony the company is facing. As worthy as the financial implication, administrative hurdles are adding fuel to the fire.
Sherab Namgay said that there is no preparedness on the part of Indian customs station at the Khamardwisa post in Assam. “GST is supposed to be an online system, but there is no Internet connectivity at the check post,” he said.
So, the transporter and distributors in India will have to avail of a bill of entry from company, take that to Guwahati to avail of GST slip, deposit the tax in a bank, and then head back to Khamardwisa post to allow the entry of trucks to India.
“Trucks are held up for days and it does not make business sense for transporters too,” Sherab Namgay said, adding that trucks coming to Dungsam are decreasing by the day.
Notwithstanding the adverse impacts, GST has also benefited the company from zero taxed export commodity incoming from India. Raw materials like fly ash and slag are imported from India. Even the servicing and spare parts of the machineries, which form the operation and maintenance cost, are imported from India. Since all goods going out of India are zero taxed, the benefits to DCCL comes to the tune of Nu 47M should the plant operate at 100 percent of its capacity.
However, the implication of taxes and subsidy under the same conditions come to around Nu 739M. This leaves implication of Nu 692M per year even if the plant operates at its full capacity. Currently, DCCL operates at 40.5 percent of its capacity.
The average monthly production dropped from 25,000MT to 6,200MT a month. Sherab Namgay said the amount of benefit is small compared to implications. This means Indian manufacturers could either offer low ex-factory price or it has the luxury to reward its agents handsomely.
Immediately after the implementation of GST, Dalmia Cement, one of the main competitors in India, has reduced its price by Rs 15 a bag. DCCL is not able to bring down the price by such a margin.
Domestic consumption has dropped with slow progress of the hydropower projects in the country.
“After the flooding of the coffer dam in Punatshangchhu II, the supply dropped,” an official said.
The board and the management are going all out to explore ways to address the adverse impact of GST. The company has appointed numerous sales and marketing agent in India. The company is also targeting institutional buyers like hydropower projects and infrastructure development projects in India.
The company is also trying to shift its focus from Portland Pozzolana Cement to that of Ordinary Portland Cement, as the later fetches higher price.
“The DHI board and management of DCCL is going all out to turn around the GST implication this year,” Sherab Namgay said. “Had it not been for the GST, DCCL would have experienced a drastic drop in losses.”
The management is also working on a proposal to be submitted to the government seeking its interventions wherever possible.
DCCL has been selling its products in the entire North Eastern states of India such as Assam, Arunachal Pradesh, Manipur, Mizoram, Meghalaya, Tripura, and North Bengal, including Sikkim and East Bihar.
The initial cost of establishing the DCCL was Nu 10.5B, most of which was raised as loan from consortium of Indian Banks. To shed its high interest bearing financing cost, the company resorted to inter-corporate borrowing and offered bonds at a lower interest. Following this, the company managed to reduce its losses by Nu 284.6M in 2016, which is a drop from Nu 1.03B in 2015 to Nu 755M in 2016.