The joy of rail-equipment manufacturers has been short-lived. After the 12 per cent GST rate hike announced by the government at its 37th GST Council meeting took effect from September 30, the equipment makers were served a series of circulars by the Railways. The net effect of these circulars is to negate the benefits that were meant to accrue to the MSMEs, engaged in sub-assembly work for the national carrier.

To claim the revised GST rate of 12 per cent, the Railways’ circular mandates them to roll back the impact of the GST rate hike. MSMEs would have to reduce the basic price on the pending orders tendered from July 1, 2017, to September 20, 2020.

They are required to roll back in their purchase orders (POs) the difference of 7 percentage points between the new and old rates in their tender prices already quoted and duly approved by the Railways and in place for the years 2017-18, 2018-19 and 2019-20.

The Railways’ standpoint

The move is seen as a measure to extract the excess credit accumulated due to the inverted duty structure between July 2017 and September 2020. It does not take into consideration the possible effect in terms of killing the business completely in the bargain. The reasoning behind the advisory issued by the Railways, as disclosed by a Railway Ministry official is this:

The rail-equipment makers have a large amount of closing balance of unutilised excess credit lying in their accounts.

Since those firms will be able to utilise the entire ITC now, they may be advised and persuaded to maintain the all-inclusive rate of the POs pertaining to the past, wherein a few thousand crore of old orders are still waiting to be executed.

The metro rail coach-makers are also said to be in a similar situation. They supply sheet-metal roofing and side-walling and other electrical and mechanical sub-assemblies through a tendering process.

Due to the Railways withholding payment of the tax representing 7 per cent (12-5) on the value of supplies made out of the past tender quantity, the small manufacturers have been forced to write off hundreds of crores worth accumulated credits over the past year to claim some income tax rebate.

The increased competitiveness of rail equipment made in India by large players like Alstom, Bombardier, Wabtec and GE Transportation are putting the MSMEs further on the back-foot, and made worse by cost-cutting measures imposed on them by the Railways.

The announcement to increase GST rate from 5 per cent to 12 per cent on rail goods reinstates the government’s intention to bring the industry back on track. But the action of the Railway Ministry to roll back the accumulated ITC by insisting on a transmission of the rate hike by a corresponding price reduction shows the government in poor light.

Different strokes

It is learnt reliably that one of the arms of the Indian Railways, Modern Coach Factory (MCF) head quartered at Raebarelli, Uttar Pradesh, had accepted the plea put forth by the MSMEs and other medium scale railway-equipment makers and is in the process of releasing the difference in tax amount of 7 per cent hitherto withheld by them.

While the master stroke played by another arm of the Railways, the Integral Coach Factory (ICF),Chennai, of pushing for a price reduction to roll back the rate hike will no doubt be advantageous for the Railways, it is not a good move either from the interests of the MSMEs or from the GST angle.

It is important to note that the rate structure for this sector has been always inverted right from the days of Central Excise where input purchases were charged to duty at 12.5 per cent while the duty on the final product falling under Chapter 86 was attracting duty at 6 per cent.

Now, we are back to square one with the same inverted-duty structure that existed a decade ago, and there seems to be no light at the end of the tunnel.

The MSMEs must be waiting for the government to step in do a course correction.

The writer was with the IRS

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