Local beverages and cement industries the hardest hit
The application of Indian goods and services tax (GST) has hit some of the largest export-oriented manufacturing industries in the country.
Since all imported goods coming into the country from India are zero taxed, the country experienced a consumer price drop in commodities like fuel, vehicles and construction materials.
This is in line with the whole concept of Indian GST – boost its export and limit imports. Consequently, 17 different state and central level taxes are subsumed by the GST in India. In other words, exports going out of India are zero taxed while its imports are levied GST. This makes inter-state trade within India as competitive as international trade.
As such, Bhutan lost its competitive edge. The only competitive edge it has is the cheap power and electricity, which is now outside the purview of GST.
The GST regime is so robust that even the comparative advantage of electricity nullifies the benefits if the local industries are not reliant on raw materials imported from India.
The general secretary of Association Bhutanese Industries (ABI), Jochu Thinley, said that before the GST, Bhutanese products had an advantage of 24 percent on account of taxes alone.
But after the GST, he said that an average of about 18 percent tax are imposed on all exported products.
“Although it is the Indian buyer who pays GST at the entry point, ultimately the prices of Bhutanese goods in the Indian market increase,” he said.
For the industries that do not require raw materials from India, he said impact is more. This is because for the industries importing materials from India, it comes at a cheaper cost now because it is zero taxed.
“There is no question of advantage for industries that rely on domestic raw materials,” he said.
Jochu Thinley said that the association has sent a letter to the Prime Minister stating that imports from India will invariably increase because of the drop in prices of goods imported from India. In addition to this, Bhutanese manufacturers are levied 18 percent GST, limiting exports to India and exerting more pressure on the country’s INR reserve.
The letter states that if there were a slight increase in the Bhutan Sales Tax (BST), it would help with the imbalance caused by GST and negate the revenue loss incurred by the government from the excise duty.
According to Asian Development Bank’s recent study, India’s GST may have an adverse impact on the Bhutanese economy through trade and revenue channels.
The study stated that the total trade between India and Bhutan was valued at USD 817 million in 2016-17, up from USD 750 million a year ago. India’s exports to Bhutan totalled USD 509 million while imports came in at USD 308 million.
According to the report, Bhutan’s imports will likely increase as Indian exports are zero rated under GST, making the imports cheaper. “Exports to India will be subjected to GST, removing Bhutan’s previous competitive edge over Indian producers,” it stated.
Additionally, rebates of Indian excise duties to the Bhutanese government will end as these taxes have been subsumed within GST, implying a loss of budget revenue, it said.
Impact on the ground
Since cement carries 28 percent of GST, Bhutan’s cement manufacturers are hit the hardest.
As the main raw materials for cement are limestone, coal and electricity, in India limestone is taxed five percent, coal is capped at five percent, which is a reduction from the earlier rate of 11.69 percent, electricity is outside the purview of GST. This means that the production cost of cement industries in India will decrease and make their prices more competitive and more so because of the declining transportation and operation costs derived from the GST.
However, the Bhutanese Industry has to face the brunt of loss of an upper edge they used to receive on tax front, particularly excise and Inter-state taxes.
The impact of GST also came as a big burden for the Dungsam Cement Corporation Limited, which is a DHI-owned company. Having suffered huge losses since its inception, the company was hopeful of making some profit.
Sources said that the company’s supplies dropped from about 28,000MT pre-GST to 5,000MT post-GST.
Ice Beverages, which produces carbonated drinks under the brand name ‘BIG,’ has suffered a regression in its production.
Until the application of GST, the company produced 153,295 cases of carbonated drinks a month on average. Since July till September, the production dropped to 62,296 cases a month, which is a decline of 146 percent.
Likewise, its monthly sales dropped by 203 percent and export by 254 percent. The company had no option but to raise its maximum retail price.
In the earlier regime, beverages produced from Bhutan enjoyed an advantage of 21 percent excise duty, which was levied on beverages produced in India.
Bhutanese beverages were levied a total tax of 15 percent, earlier. This however, increased to 40 percent (28 percent GST and 12 percent Cess) after the GST. Cess is a form of local taxation levied usually as a surcharge.
As for the customs clearance at the land customs station at Jaigaon, an official from ABI said that things have improved compared with July this year.
However, recently the Indian central government has issued an order to shift the commissioner’s office from Siliguri to Kolkata. As such,all customs issues arising from trade with Assam and Bangladesh have to be routed through commissioner’s office in West Bengal.
Shifting of the office to Kolkata would mean more harassment.
Sources said that the chamber of commerce and industries in the region and exporter association from both countries have raised the concern with the relevant authorities.