Budget 2011: Cement

The year 2010 was quite challenging for the entire cement industry. On the one hand, demand off-take was weaker than expected due to lower realty and infrastructure spending. Prolonged monsoons and logistical constraints further dampened the construction activity. On the supply front, overcapacity continued to plague the industry. Cement prices remained under pressure and caused margins to contract severely. The industry is expected to end the current fiscal at about 75% capacity utilisation. And this does not seem to be the end yet. The demand-supply mismatch is here to stay for quite some time as the total industry cement capacity is expected to increase even further over the next 18-24 months. Excess supply would reach its highest level (about 126 mtpa) in FY13 with capacity going up to 393 mtpa. On the cost front, key raw material costs, especially prices of coal show no signs of abating. Going forward, rising interest costs remain a challenge for the construction industry. Much will depend on government’s housing and infrastructure initiatives. Given this backdrop, over the next couple of years, the margins of the cement companies will continue to remain under strain.

Budget Expectations

	The value-added tax (VAT) on cement should be brought on par with other building materials like steel. While steel attracts 4 % VAT, for cement it is as high as 12.5%.
	A uniform rate of excise duty should be levied on cement. Currently, different rates of Excise Duty are levied for bagged Cement
	An abatement of 55% if the duty is based on retail sale price, as recommended by NCAER (National Council for Applied Economic Research) in their Report of 2005, should be given to the cement industry on excise duty.
	Import duty on coal, pet coke, gypsum and other fuels should be scrapped. All the three inputs attract 5% duty if imported, while there is no duty on cement import. So this is contrary to the established principle that import duty on inputs should not be higher than on the finished product.
	The cement industry should be granted "declared goods" status like steel, which would enable the sector to reduce expenditure on taxes. The State governments are restricted to levy sales tax of maximum 4% on these goods. If “declared goods” are sold inter-State, tax paid within the State is reimbursed to seller.

Budget Measures

	Incentives have been doled out for end users of cement such as the housing sector and development of infrastructure.
	To replace excise with ad valorem duties on cement: - In case of packaged cement, retail price per 50 kg bag not exceeding Rs 190 per bag (equivalent to Rs 3,800 per tonne) would entail 10% ad valorem duty plus Rs 80 per tonne from Rs 290 per tonne earlier. In case of retail price per 50 kg bag exceeding Rs 190 per bag, there would be an ad valorem duty of 10% plus Rs 160 per tonne from just 10% of retail sales price earlier. -10% ad valorem duty for all goods other than those cleared in packaged form. -For cement clinker, there would be an ad valorem duty of 10% plus Rs 200 per tonne from flat Rs 375 per tonne earlier.
	To reduce basic custom duty on two critical raw materials of the cement industry viz. petcoke and gypsum to 2.5%
	Rate of minimum alternate tax (MAT) on book profits has been increased from 18% to 18.5%.

Budget Impact

	Increased budgetary allocation towards infrastructural development and housing is likely to boost demand for cement. Thus, cement manufacturers will continue to benefit owing to increase in volumes.
	Impact of cut on customs duty on key raw materials such as petcoke and gypsum would bring some relief to cement manufacturers who have been facing margin pressures due to rising input costs.
	The new excise duty structure will increase the tax incidence on the cement industry.

Company Impact

With more incentives being spelled out for the infrastructure and housing sector, cement manufacturers will continue to benefit. This is beneficial to all cement companies, specifically the top layers catering to eastern region such as ACC and Ultratech Cement. Lower duties on key materials will aid the profitability of large players like ACC, Ambuja Cement and Ultratech Cement.