GST: Government Plans Relief For Rail Component Makers Saddled With Unused Tax Credit

The government is considering ways to provide relief to the makers of railway components, according to a senior official, as such vendors have seen their costs rise after the goods and services tax was rolled out.

Suppliers of parts to the national transporter pay 18 percent tax on inputs but the levy on finished goods is 5 percent. This inverted duty structure has led to accumulation of input tax credit since they pay a lower output tax. According to Udit Gupta, partner at law firm Udit Kishan & Associates, the distortion is leading to accumulation of 12 percent of the turnover as credit.

The government now plans to increase the GST on wagons and bogie components, among others, to 12 percent from 5 percent, or refund the credit, the official quoted earlier said—he spoke on the condition of anonymity as no decision has been taken yet.

The inverted duty structure favours imports, hurting local manufacturing, according to Gupta. The vendors who supply imported parts pay tax at 5 percent. “For domestic manufacturers, the real tax burden is over 14 percent, making them uncompetitive.”

Revenue Loss Fears

The issue was discussed in the GST Council’s meeting in July last year and the Fitment Committee agreed that increasing the rate to 18 percent will do away with the distortion, the official said. But there was a concern that since the accumulated credit was large, it would lead to immediate loss of revenue as railway parts makers will set it off against their tax liability, he said.

Companies like Texmaco Rail and Engineering Ltd. and Titagarh Wagons Ltd. have credit over Rs 100 crore each as on February 2018, a second official aware of the development said on the condition of anonymity. This would have increased further since then.

Titagarh Wagons is yet to respond to BloombergQuint's emailed queries, while Texmaco Rail's Chief Financial Officer AK Vijay didn't reply to text messages. The article will be updated when they respond.

“If accumulation of credit is not corrected, it will continue to create a huge cash flow problem for the industry,” said Umesh Choudhary, chairman of national committee on railways at industry body CII.

Notional Income

Indian makers of railway parts also run the risk of getting tax demands, according to Gupta. As the input-tax credit remains unused and continues to accumulate, problems in the balance-sheet arise as the unused credit is an asset that continues to grow, he said.

This credit is classified as an income under the Income Tax Act, 1961. The manufacturers may be liable to pay tax on this notional income, Gupta said.

In the pre-GST regime, there was no inverted duty structure—higher tax on inputs and lower tax on finished goods—and the problem of accumulated credit did not arise. The average tax rate on the products was over 11-27 percent.

Loss To Railways

Not only vendors to the railways, the national transporter itself suffers a loss because it can’t use input tax credit.

The Indian Railways is restricted from using the credit for payment of tax levied for goods, said Gupta. As a result, it has to pay GST in cash and its tax credits lapse. “The loss caused to the railways would amount to around Rs 6,000 crore a year,” he said.

Krishan Arora, a tax partner at Grant Thornton India LLP, agreed. The current GST rate structure and provisions seem to be adversely affecting the railways as it’s unable to fully utilise input credit or claim refund for accumulated credit due to the inverted duty structure. “Since this significantly impacts their overall working capital and operational costs, the government should consider doing away with the inverted duty structure or allow refund of such accumulated credit.”