GST Countdown: Blue Star Sees Neutral Impact, Banks On Supply-Chain Efficiency
GST puts a question mark on the proposed Jammu manufacturing plant, Blue Star says.
Area-based exemptions, supply-chain efficiency, change in rates, benefit of set-off of input tax credit, warehouse strategy – the Goods and Services Tax (GST) regime which is now just 33 days away will impact India’s manufacturing sector in more ways than one. To understand the impact of all of these, BloombergQuint spoke to B Thiagarajan, joint managing director at Blue Star.
Edited excerpts...
Blue Star is a manufacturer, contractor and also an after-sales service provider. At a very broad level, how will GST impact all these verticals?
It is going to benefit us. It will have a different impact on different segments (including) manufacturing. One big decision which is pending is whether to go ahead with the Jammu project – there we are to invest close to Rs 125 crore. The decision to go with Jammu was based on CENVAT exemptions which we were supposed to get but there is no clarity. CENVAT gets replaced with CGST and 11 hilly states were supposed to get the benefit but the central government’s position is 52 percent of that CGST is retained by the Centre, 48 percent of that goes to the state government. Therefore, the state government is supposed to take a decision. In that context, there is a question mark on whether the manufacturing facility in Jammu will happen or not, which in turn is going to impact the Sri City project, which was not set up for any CENVAT-related concession but for supply chain, logistics efficiencies.
Sri City can serve Karnataka, Andhra Pradesh, Telangana, Tamil Nadu and Kerala overnight. The Kaveripattinam or the Enoore Port is nearby, it has got different benefits. The fall out of all this is my whole manufacturing footprint will change and there is enough evidence, calculations available to say that more and more of manufacturing is profitable in Blue Star context. So certain products which are not having scale – for example curved glasstop, deep-freezers – we import from China. In the GST context, it may be worthwhile for us to manufacture; so domestic value addition can go up.
The air-conditioning-refrigerating category, unfortunately, has fallen under 28 percent GST and it’s higher than the current weighted average rate of 26.5 percent. How will you ensure that your prices do not go up? It will mean ensuring supply-chain efficiency so that you are able to improve your cost to maintain profitability without increasing the price; that will be one of the actions.
While you will get the benefit of a set-off for your input taxes, rates have gone up to 28 percent. What can be the impact on costs?
The very fact that the rate has become 28 percent on air conditioning and refrigeration, the cost will go up. Because I do not think that we procure any items from any unregistered vendor. Earlier, in the MRP-based excise system, there was an MRP, there was an abatement, and you paid CENVAT on that even though your average price realisation would have been lower. The good news in GST is the selling price attracts the GST. So therefore, your incidence of that maybe lower. I think it will be a neutral (impact) eventually.
So to that extent we should compliment the government for going ahead with the formula to fit (products) it in the nearest (bracket). Though I am particularly unhappy about the government not conceding to one long-pending demand of the industry: the inverter air conditioners, or the five-star air conditioners, should have been placed at 12 percent, because it saves more than 35 percent energy, which will be cash-neutral for the government because you need not invest in power plants or the distribution costs. China or Japan grew the inverter AC market by going ahead with such incentivisation. The government had an opportunity which they have not done, which is unfortunate.
Also, every coffee shop is air conditioned, cinema theater is air conditioned, bar will be conditioned, but schools and hospitals are not air conditioned in a big way. The penetration is very poor. And the government had an opportunity to say that educational institutions or hospitals will fall under 12 percent because in GST, you can administer that rate based on registration. Otherwise, I think they have done a great job of fitting the rates.
What are you doing with your existing stock. Are you de-stocking?
This is a very practical issue. There is pain involved, but it is not a big worry. It is happening post peak season. If it were to happen on March 31, it would have been a big problem to prepare for a season and plan your inventory. At this point of time, it is the end of the season. We are still assuming the rollout is on July 1. Many rumours are floating around that it will happen on August 1, it hardly matters.
Next is the formula that is being adopted for the stock lying with dealers. I think this 40 percent (deemed credit) for CGST is going to be reviewed on June 3. Hopefully, something will happen. We have (also) proactively converted our warehouses to excisable warehouses.
When was this done?
In the month of March itself. We (made) warehouses excisable so that invoices (mention) excise duty and help dealers get the credit. That is the second aspect of the migration process. The third part is (that) you can always take back the goods on July 1 and re-bill them. The government does not prevent you from doing so. Indeed, you can do so. Finally the question is that some margin is eroded. (But) it doesn’t matter in these big reforms, some things have to be passed on to dealers or consumers.
What about the registration process. Was it smooth? Also, in terms of technology and systems, how much of a change will you have to undergo to come onto the GSTN?
It is very smooth. The government exceeded our expectations in that respect, no doubt about it. We have been helping dealers, business associates and partners to migrate.
Big corporates can afford the Big-Four: whether it is KPMG or E&Y, or Deloitte, or PricewaterhouseCoopers. Small guys depend on chartered accountants. So there is a need to reach out to them to understand the implications.
You also undertake certain works projects, and the rate for which has now come to 12 percent from the existing 15 percent. How do you see the impact there?
There are two. One, if it is a civil immovable property, it falls under 12 percent. So, it is affecting only the builders. The builder has to charge 12 percent, and the excess input credit will not be available to him. Suppose he’s buying an electrical item, or there is a plumbing item, he will end up paying me 18 percent, and his outflow will be restricted only to 12 percent. So, the overflow of 6 percent has to be absorbed by him.
That is to do with civil immovable properties. But in an air conditioning plant and equipment, it is 18 percent. So there the overflow is allowed. I may buy a chiller at 28 percent or I may buy an air-handling unit which is part of the system by paying 28 percent, but I will charge the customer 18 percent, but I can still avoid the overflow. So therefore, under works contract, there could be benefit.
In terms of supply-chain efficiency, it’s estimated that 60 percent of the time is wasted on state borders – the transit time. How do you think that will change when GST kicks in and what will it convert to for a company like yours?
In warehouse and footprint, you will save because it is not necessary that at every state you have to have a warehouse.
Have you started working on it?
We are already migrating there, that is not a problem.
Can you elaborate on some of the changes that Blue Star is making?
In Tamil Nadu, we might hire, it’s a bigger state. In Pondicherry, we would have had a warehouse. It is no longer necessary for you to have the Pondicherry warehouse because even though it is a different state, you will get the bill there. Noida will be different and Gurgaon will be different, Delhi will be different. This (need) of having (warehouses) in different states partly disappears. It is probable that you can do with a minimum number of warehouses, that way I have no problem. But, the yield per month and moving goods is going to have serious problems. What dealers do is that they take the stock for a month’s sales, and then plan for the next month.
They decide on the 30th of the month how much more material they need for next month. So, the month-end skew is a very common thing in most of the companies. Maximum billing, maximum collection takes place on 27th, 28th, 29th and 30th. Similarly, there is a quarter-end skew, whenever it is a quarter-ending month: June, September, December or March. There will be the year-end skew. What is going to happen with e-permit (under GST) is a huge chaos. When you are moving from one location to other, you are supposed to have an e-permit. Though we don’t think that this is rocket science for people to figure out a solution.
Rates for most of the goods and services are out. The GST Council will meet on June 3 and hopefully the final rules will also be cleared. What areas of concerns you would like resolved at the earliest?
First is the transition stock. People need some assurance because it is the first time it is happening. Specifically, in the FMCG and pharma (sectors), the trade channels will need that clarity. Other than that, I think they have done it very efficiently.
The next part about it is consideration. It is also called as self-declaration. In the initial stages, there will be some doubts about “how do I go ahead?” and treat a particular contract. For example: There is a huge office, there will be air-condition system but there will be also air conditioners which will be a part of it. Now, if I do a contract in this building, it will be at 18 percent. If I buy an air conditioner and install it, it’s 28 percent. There will be grey areas like this. Two years later, some sales tax authority will open up (such cases) so the corporates will have a doubt. If you ask any advisory firm, they will tell you “play it safe” now. These are some of the things which always keep happening. (What’s needed) is assurance that we won’t be doing these kind of things because it is a big transition. On the whole, it has exceeded expectations.