The government recently proposed to hike the goods and services tax (GST) to 18% from the previous 5% on mineral ores, raising several questions as to what the ultimate impact would be on mills’ revenues. Do they stand to lose?
SteelMint went behind the scenes to find out
If we take the cost of iron ore to be INR 100 per tonne (t), then, in the existing set-up, steel mills were paying 5% towards GST while procuring their iron ore from the merchant market. So, the total payment for the ore they procured amounted to INR 105/t (INR 100/t + 5% GST). However, post-the recent proposed increase in the GST to 18% from the previous 5%, mills will now have to pay INR 118/t (INR 100/t + 18%).
- 13% impact: However, the GST on the mills’ selling price of finished steel is 18%. Therefore, mills will feel an impact on the additional 13% they will now pay to the miners. This total 18% GST is going out of mills’ pockets in advance, while procuring the ore.
- Few months’ capital block: Generally the time taken from the time of purchase of iron ore to production and finally the sales stage is four to five months.
Earlier, mills were adjusting 5% against the ‘out’ liability. Now, they will have to adjust the additional 13% against the ‘out’ liability. Added to that, they will have to wait for around four to five months before they can sell the finished steel produced from the ore purchased with 18% GST on it. Therefore, 13% gets blocked for that period of months.
For DRI and pellets producer, SteelMint learnt that the working capital impact would be 1-2 months.
- Interest burden: Since most businesses run on credit, steel is no exception. That 13% will attract an interest burden that ranges from 8.5-10.5%. If the interest rate is taken at an average 9.5% per annum, as per SteelMint’s calculations, it works out to a loss of 0.82pc per tonne of finished steel.
This is calculated as follows: For every tonne of steel manufactured, 1.6 t of iron ore is required. Thus, at 5%, the GST worked out to INR 8 for every tonne of steel produced. At the proposed 18%, the GST is INR 28.8 for every tonne of steel. Thus, the GST difference would be 28.8-8=20.8.
The estimate for 0.82pc is arrived at by the following calculation: 20.8*5/12*9.5=82.33.
Sources at a leading primary mill, while discussing the impact of the proposed higher GST, told SteelMint: “No impact on mills except the working capital being blocked.”
“The additional capital is 13% of the cost of the ore which attracts interest on the capital cost account as an additional burden on the company. If the sale price is not considered for this effect, the company will lose part of the profit towards this interest cost,” revealed a source.
Conclusion
However, the mills will be able to neutralise this 0.82% loss if they raise their finished steel prices by the same amount or even higher so that they can keep margins.
Where exports are concerned, if a trader buys iron ore from a miner for the purpose of export, he will have to pay 18% to the miner but he can claim a refund later from the government.
In the case of transactions between a parent company and its subsidiaries GST will be charged at 18% if it is an interstate deal. However, there will be no need to pay GST in case of intra-state transactions.
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