KARACHI: The government’s decision to increase Federal Excise Duty (FED) on Cement from five per cent to Rs 50 on a 50-kilogram bag, will not only increase Rs 22 on a 50 kg bag but it will also increase the Sales Tax in absolute terms as Sales Tax is being calculated on top of FED.
In the recent budget 2016-17, the federal government has proposed to change the FED mechanism from variable 5 per cent of Marginal Retail Price (MRP) to a fixed Rs 1/kg (Rs 50 per bag). This change will not only increase existing FED (around Rs 22 on 50kg bag of Rs 515), but also increase Sales Tax in absolute terms as sales tax is being calculated on top of FED. Consequently, cost will be increased by Rs 33 per bag (Rs 660 per ton).
Earlier the cement industry was paying FED 5 percent on retail price that was Rs 425 per ton, but the government has fixed Rs 1000 per ton in the budget 2016-17.
The impact of this increase would directly impact on the exports of cements to the neighbouring countries like India, Afghanistan and Dubai etc. After removing sanctions from the United States, the Iranian cement is capturing markets in Afghanistan and some parts of Balochistan.
On the other hand, the government has reduced import duty on coal from 6 per cent to 5 per cent, which will have a positive impact of Rs 1/bag. The net impact of Rs 32/bag will be neutral for the industry in the long run as contraction in supply and demand gap and robust demand will enable cement manufacturers to gradually pass on the impact to final consumers.
The government is expected to set consolidated PSDP (Public Sector Development Programme) target of Rs 1.67 trillion (up 11 per cent) for 2016-17. With no IMF restrictions and decent fiscal space, this higher government spending bodes well for the sector as this will result in increased construction activities. Further, the government has allocated Rs 188 billion for construction of roads, highways and bridges, which is an increase of about 18 per cent as compared to last year.
In order to promote housing, the government has increased maximum deductible allowance from Rs 1 million to Rs 2 million on payment of profit on debt for construction of a new house or acquisition of house. This would help increase housing demand and would result in improved cement sales, the market experts said.
The government has imposed final tax on builders/land developers on basis of per unit area, which is expected to generate Rs 25 billion in new taxes. This proposal has already been vetted by local association of builders and this to have any meaningful impact on booming construction activities in the country.
According to the industry sources the decision of the federal government to increase the prices of cement will further increase illegal cross border imports of Iranian cement through under invoicing and smuggling that will dampen the local industry’s growth and will reduce the contribution to national exchequer.
A spokesman of All Pakistan Cement Manufacturers Association (APCMA) said that increase in FED on cement is against the industry’s demand as we were seeking some reduction in taxes to further enhance domestic sales.
The industry sources said that the proposed change in FED will increase the illegal trade in the form of smuggling of cement into the country. ‘The impact of this increase calculates to Rs 34 per bag’, the spokesman added.
The spokesman appealed to the government to review its decision as this will not only affect the consumers but also the industry as fear that due to high cement prices, the consumption will come down.
Apart from the cement exports to India which increased by 33.36 percent from the low base reached last year, exports to Afghanistan and other destinations declined by 10.34 and 32.39 percent respectively in the first eleven months of this fiscal.
The exports to other destinations declined by whopping 32.39 percent due to economic slowdown in countries where Pakistan has been exporting. The government should provide incentives to the industry to take back the Afghan market and earn precious foreign exchange, the spokesman added.