GST rate cut: Cement companies profitability will be under pressure for the near term

MUMBAI - The reduction in tax rate for cement, while seen beneficial for the sector in the long run, is expected to weigh on the profits of the producers in the near term, as they are likely to pass on the benefits of lower taxes to end users, effectively limiting the scope for price hikes from here on.

The Goods and Services Tax ( GST) Council, headed by finance minister Nirmala Sitharaman, on Wednesday cut the tax rate on cement to 18% from 28%.

This rationalisation in cement taxation comes at a time when the industry is aggressively adding capacities to meet the expected rise in demand. Except for the last few weeks, prices of the building material have been lacklustre for several quarters, especially in the southern and eastern markets of the country.

While cement prices have been resilient of late, this tax rate cut may delay the improvement in profitability that cement-makers have been aiming for, given that pricing would be a key component.

An analyst said that given that the demand for cement is inelastic, it may not immediately lead to higher demand.

With several other costs related to construction–even in home building–lower cement prices may not lead to more infrastructure and construction activity.

“This move further strengthens our resolve to scale capacity, deliver premium and sustainable solutions backed by world-class R&D, and energise the infrastructure that underpins India’s growth story,” said Vinod Bahety, the chief executive officer of Adani Cement.

The government has reduced rates for portland cement, aluminous cement, slag cement, super sulphate cement and similar hydraulic cements, irrespective of whether it is coloured or in the form of clinkers.

Over the longer term, individual home buyers, real estate companies and infrastructure and construction companies will benefit from this tax cut as it will help bring down costs. For the current fiscal, the government has outlined a capital expenditure of Rs 11.21 lakh crore.

UltraTech Cement, Adani Cement, Shree Cement, Dalmia Bharat and Nuvoco Vistas Corp are among the largest cement companies in India, the world’s second-largest producer of the building material with an installed capacity of close to 600 million tonnes.