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Flawed GST structure putting domestic makers of Indian Railways locomotives, rolling stocks at a disadvantage

Sumit Jha,Saurabh Kumar
Flawed GST structure, gst structure, indian railways, gst tariff rules, ITC, rolling stocks, GST rates, railways capital goods supplier

A distinct GST structure that exists for the railways and the suppliers of capital goods and other inputs to the transporter has put the domestic manufacturers of locomotives, rolling stocks, track fixtures, etc, at a disadvantage. The railway travellers and freight customers may not be better off either.

Under Chapter 86 of the GST tariff rules, specified items for supplies to the railways are taxed at a benign 5% but without a refund of unutilised input tax credit (ITC).

As for the railways, which pays GST for certain services, the tax rate is again 5% but the ITC is available only for input services (not for goods); according to official sources, the transporter s cash loss on restricted ITC is some Rs 400-500 crore per month. However, the suppliers to the railways are even worse off, as they don t enjoy low-cost finance and budget support as the state-run transporter. Curiously, the railways seem to be happy with the situation and not even asked the finance ministry or the GST Council as yet for a revision of the GST structure for it and its suppliers, which analysts feel is flawed. This is partly because making available ITC in full would necessitate hiking the GST rates for the railways (a politically unpalatable idea) and its assorted suppliers.

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While there are no straight-forward solutions, a more balanced (GST) structure could be worked out so that the entire supply ecosystem doesn’t suffer. A proposal has to come from the railways board, an official source said, requesting anonymity.

Of course, the suppliers of capital equipment and other goods to the railways (including scores of ancillary units in the SME sector) have represented to the GST authorities, asking for a revamp of the tax structure. They point out that their ability to compete with foreign suppliers (many of who have a much more competitive cost structure due to policy support from their governments) has been undermined, and as a result, imports of capital goods by the railways have risen. (see chart)

They also cite the fact that refund of accumulated ITC is allowed in case of several textile items where a similar inverted duty structure persists.

The GST rate on their key inputs like iron and steel scrap, ferro alloys and welding electrodes is 18%. Given that these firms supply goods, as identified under HSN, that come under Chapter 86, they are not allowed to claim refund of ITC, leading to accumulation of credit to the tune of 10% of turnover in case of supplies made to the transporter.
This has scuppered their plans for rapid expansion and investments. Some of the suppliers affected are Titagarh Wagons, Atul Engineering and Trident Auto Components. Unlike the railways, these companies raise funds on commercial terms, which are likely to become more expensive if their books show losses or reduced cash flow.
Railways officials, when contacted by FE, however, said the losses due to accumulated ITC were a compromise the transporter has reconciled to, as for the tariffs for the transporter s services have to remain affordable. If refund of accumulated ITC is permitted, it is estimated that cost to exchequer would be about Rs 1,300 crore (annually) , a railway source said.

However, analysts say if GST rate for items under Chapter 86 is raised to, say, 18%, the suppliers would be able to use ITC. This would result in lower base price of the items as accumulated ITC will cease to be a cost to the manufacturers. Thus, the railways would procure items at about the same price or less despite an increase in tax rate.