Pre-Budget Proposals for Steel: 2007-08

1. Need for a Policy Priority

1.1 On the backdrop of the Indian economy showing strong and consistent growth, the Government is aiming to achieving a 12% growth in manufacturing during the next 10 years or so.

1.2 This rapid industrialization of the economy will require more and more steel, a major input for the manufacturing sector and construction, will also be required to grow by around 12%pa far surpassing the National Steel Policy target of 110 million tonne per annum (mtpa) of steel capacity to reach 175-200 mtpa by 2020. The Industry has already seen the announcement of over Rs. 4 lakh crores worth of investment in new capacities over the next 15 years.

1.3 This steel expansion at home would bring rich benefits to the nation in the form of growth multipliers through forward (4.79 -CSO) and backward linkages. The current contribution of iron and steel sector to GDP is around 1.5% which is set to double in the next 10 years. While the sector is already contributing over 8% to the manufacturing output, with the multiplier value of 4 its contribution to GDP would be very significant in the years to come.

1.4 Steel being an infrastructure sector, it has a multiplier effect on the investments in a wide range of other industries such as capital goods, automobiles, white goods, construction etc. Following are measurable benefits of the steel expansion from current capacity of 43 mtpa to 200 mtpa.

 

Parameters	2005-06 A	2011-12 F	2019-20 F	Change 06vs20
1. Operating Capacity (mtpa)	43	90	200	157
2. Consumption (mtpa)	38	73	175	137
3. Export (mtpa)	4.7	17	25	20
4. Export (Rs Crores)	11081	382500	562500	551419
5. Domestic Price FOB (Rs)	23250	22500	22500	-750
6. Employment (nos)	1.2 mn	1.62 mn	3.6 mn	2.4 mn
7. Turnover (1)*(2) (Rs)	1 lac Cr	2 lac Cr	4.5 lac Cr	3.5 lac Cr
8. Tax Revenue (7)*15.5%	15,500 Cr	31000 Cr	69750 Cr	54250 Cr
Note:	(1) A- Actuals, F- Forecasts, mn - million, Cr-Crores
	(2) Consumption Forecasts are based on steel elasticity with respect to industrials production is 1.16 and industrial growth would be 9.9% as assumed in the 11th five year plan draft which will give 11.5% consumption growth.
	(3) Tax Revenue forecasted on the basis at current tax incidence i.e 15.5%.

1.5 The states like Chattisgarh, Jharkhnad, and Orissa, if they leverage their mineral wealth for value addition like steel can significantly alter their growth trajectory (incremental growth 1.2-4%).

1.6 However, steel is a cyclical industry and has the track record of delivering poor returns on the capital. Given the strategic nature of this industry governments the world over have actively promoted this industry.

1.7 The Government of India had in the last Budget made its intentions clear to make India the global steel hub. India with its comparative advantages of ideal location, natural resources (ore & coal), low cost skilled labor and overall competitiveness can truly realize this dream. However, there is a definite need of a policy thrust in this direction. Following immediate as well as long-term measures are required to boost the steel industry.

2 Direct Tax Measures

2.1 Allow complete set off of both accumulated loss and unclaimed depreciation from the book profit of steel companies for each year till such loss is fully exhausted

• Under the current provisions, accumulated losses or unclaimed depreciation as per books of account, whichever is lower, is permitted to be deducted while computing the book profit for payment of MAT. Because of such artificial method of deduction, only partial relief is allowable. Accumulated losses and unclaimed deprecation are legitimate costs/expenses and should therefore be allowed to be fully set off against profits of subsequent years. However as shown in the table below, under MAT, both companies A & B are not allowed to fully set off these costs/expenses. Further, due to such adhoc provision, B is allowed higher deductions simply because it had a higher unclaimed depreciation, though both companies are incurring the same amount of book losses.

• Because of the bad business cycle, Indian steel industry as a whole had continuously experienced heavy losses during the years between 1998 and 2003. The return on capital was hovering around 2.7% during that period against then prevailing interest of 14-18%. Even after last three of making taxable profits, the industry is yet to come out of the woods. For the proposed expansions, it is important for Indian steel companies to clean their balance sheets from past loses.

• It is therefore requested that entire loss including depreciation should be allowed from the book profit of each year till such loss is fully exhausted and after such loss is fully exhausted the company should be made liable for MAT.

2.2 Make the Steel Industry to be eligible for deduction u/s 35(2AB)(1) @ 150% of the amount incurred for R&D expenditure.

• Steel is today one of the most dynamic technology sectors. Almost 90% of the steel grades used today did not exist 10 years ago. Indian companies need to continuously invest for research and innovation in the industry to not only stay at par with global competition but also get a head of global companies.

• Indian R&D as a % of turnover in steel is only 0.26% compared to over 1% spending of world class steel companies and therefore it needs to be encouraged. Further the revenue loss on account of this measure which is already extended to sectors like automobiles will be negligible when compared to the benefits that are accruable to the nation on account of this industry's expansion.

2.3 Exemption of interest payable on ECBs from withholding tax by restoring section 10(15)(iv) (c )of the Income-tax Act.

• To realize the planned capacities in the Steel, additional investments of minimum Rs.4 lakh crores will be required in the next 15 years. Further investments on other sectors are also likely to up by manifold. So neither the Indian banking system nor any of the Indian financial institutions are capable of lending such amounts.

• Steel companies must therefore rely on foreign borrowings. Withholding tax on ECBS raises the cost of borrowing for Indian Industry. As the revenue implication on the Government will be minimal and would be more than offset by the taxes paid by the newly set up steel capacities.

2.4 Integrated steel plants with the capacity of minimum 2 million tonnes may be allowed to determine their own rate of depreciation.

• The average life of steel plants is anywhere between 40 to 50 years as we have seen in the case of Tisco and SAIL. However due to current depreciation laws, companies are forced to fully depreciate their asset within 15 years. Taking into account the Time Value of Money, this not only leads to loss of revenue for the government but also weakens/reduces the asset coverage for the companies, which in turn weakens their borrowing capabilities, especially abroad.

• Suppose the max and min. number of years for availing the depreciation allowance is fixed between 15 to 40 years this will increase the revenue of the government while simultaneously it will provide companies with the flexibility to show better asset coverage to get large funding from abroad for their expansions. So it is a win win situation. This would require a change in both the income tax Act and Companies Act and may be made applicable only for the steel sector. An independent valuator may decide the life of each plant and accordingly the companies can distribute their depreciation.

2.5 Exempt Full Rental Income from Income tax to promote housing sector and to reduce the housing shortage in the country

• At Present upto 30% of rental income is exempted from income tax, which is not sufficient to promote housing sector in the country.

3 Indirect Tax Proposals

(A) Customs Duty

3.1 The customs duty structure is inverted with raw materials that go into the consumption attracting higher rates of duty than the finished products. The duty rates on inputs going for the manufacture of steel range from 5 % to 7.5 % ( Coke -5 %, Ferro Alloys 7.5 %) and the finished product 5 % ( HRC, CRC and GP/GC-5 %).

Maintain status quo on import duty on steel and correct inverted duty structure by reducing the customs duty on following raw materials to boost competitiveness

• Price of some of these raw materials, especially Zinc have shot up by over 100% during the last one year.

3.2 Export of Iron Ore should be tapered off

• Iron ore exports have been increasing at an alarming rate during the last 4 years having grown by a massive 116% from 41.64 mt in 2001-02 to 90 mt in 2005-06. Almost 80% of these iron ore exports are going to China to fulfill its steel industry's requirements, leveraging our mineral wealth for China's advantage. Over Rs 4 lakh cores of investments in steel industry are highly threatened due to this rampant free export of iron ore.

• India's total Iron ore reserves of 23.59 billion tonnes fall in two categories - Magnetite and Hematite. While this may look large the per capita reserves of India is only around 21 tonnes against 347 tonnes in Brazil and 2000 tonnes in Australia. Further most of the Magnetite ore lies in ecologically sensitive areas of Karnatka. Therefore effectively India has only 13 billion tonnes of proven iron ore resources which can be utilized for domestic value addition. At the current rate of growth of over 20% of iron ore production and if exports continue to grow at the same rate, India's known Hematite reserves will last for only 25 years.

3.3 Duty on project imports for green field and brown field expansions for steel projects should be made 0% for the next 15 years.

• India does not have adequate indigenous capabilities to produce machinery or technology for steel plants. Therefore almost entire steel plant is being imported. Nearly 50% of cost of the steel project is on the plant and machinery. The peak duty being 12.5%, it means that overall project costs are automatically higher by the 6.25%. This is one of the reasons why cost of setting up projects in India becomes very high. Making the duty nil will not only reduce the Project costs substantially but will also make Indian Steel even more globally competitive. It will attract more investments into the industry and the revenue loss on account of this measure would be more than offset by the taxes paid by the newly set up steel capacities (Shown in the table 1)

(B) Excise Measures

3.4 Reduce excise duty on the following items to make end products affordable to the common man as well as to create domestic demand led industrialization.

• By all standards, India's per capita consumption of most commodities including steel are well below the Global levels. China experienced a sudden increase in demand in 1994, when the government introduced a standard 17% VAT (effectively 14% of retail price) on factory prices for most manufactured goods and services. This boom was responsible for China's rapid growth during the late 1990's. India can expect a similar surge as with every 25-percentage point decline in prices, consumer demand increases three to five-fold according to McKinsey.

• The current indirect tax incidence on the most of the products is in the range of 30-35%. Goods and Service Tax (GST) in countries like New Zealand (12.5%), South Korea (10%) are much lower than India. Therefore country should aim for reducing the overall tax burden below 15% in the next 5 years. To start with the excise duty on the following commodities may be reduced. The past track record of surge in the tax collection (which is currently growing at 17%), suggests that the government has enough room to reduce overall indirect taxes on commodities without affecting its revenues.

3.5 For integrated steel manufacturers, excise duty should be on the normal selling price ex- factory gate and transportation cost and distribution charges at depots should not be included to prevent stockyards to be considered commercially unviable. Notification No.13/2000 may be restored for easing the difficulties in valuation of material transferred to stockyards/depots by Integrated Steel Plants

(C)Cenvat

3.6 Steel used in construction, road building and other infrastructure activities to be made modvatable.

3.7 Where any goods cleared for export without payment of duty are subsequently diverted for home consumption, interest is chargeable @ 24% per annum on the duty payable, calculated from the date of clearance from the factory of production or any other premises as approved, till the actual date of payment of duty.

Since the goods in question are not sold and is only removed from the factory specifically for export purposes and as per the export contract any part quantity diverted due to any reasons whatsoever should not be subjected to interest. It may also be stated here that there is no malafide intention involved and the removal of the goods from the factory is strictly as per the export contract.

Alternatively the Department may consider charging an interest rate of not more than current 15% being the minimum rate chargeable as interest, on delayed payment of duty, under Section 11 AB and not penal interest @24%.

3.8 The facility of "transit point" as permitted under Circular No. 430/63/98-CX dated 16.11.98 should be allowed for all land exports.

3.9 Allow CENVAT credit on Petrol and Diesel consumed in the steel industry

Steel is a energy intensive industry which forms 5-15% of operating cost of production. Since CENVAT credit is not available on petrol and diesel consumed in the steel industry, oit suffers from a cascading effect. Petroleum products are heavily taxed to the extent of 40-50% and thus make Indian steel industry less competitive. When we are aiming at going for a comprehensive value added tax regime by 2010 there is no reason why these two products have been left out of the VAT regime.

4 Broad Policy Changes

4.1 Evolve a national plan where Center-States to be made responsible to provision of all necessary projected related infrastructure. Also, Investment in infrastructure to be stepped up from 4.6% of GDP to 7-8%.

• The biggest problem that Indian industry faces is the lack of adequate basic infrastructure support. In India project related infrastructure like land, water, power, connecting roads, rail links, etc are not made available to even large and medium scale projects unlike in other countries. Therefore, setting up of manufacturing facilities in India is a very costly affair. The country need to create infrastructure in advance for enabling to large projects to come up.

• Land & Water: An integrated steel plant requires around 500 acres per million tonne (mt) for its plant. Creation of additional capacity of 157 mt, will require 78500 acres of vacant land. There is need to create large land banks suitable for industrial use and proper R & R also. Steel is also water intensive. 200 mt of steel capacity would require about 1600 million cum of water which is equivalent of the requirement of 2.4 crores of people/year.

4.2 Captive Access to Iron Ore and Coal to be provided as and when investment commitment of Rs 5000 Crores or more is made by a company . There should be a national policy.

• Although India has adequate natural resources, Indian domestic industry does not have an assured access to these reserves. There is no clear policy preference in the allocation of mines (especially iron ore) in place to encourage domestic value addition.

• Further, state governments require steel companies to achieve milestones before recommending for mineral concessions. However, banks & financial institutions insist on assured raw material supply to fund the projects and hence, no captive mines means no financial closure. Also land acquisition and investment in civil works without knowing the site of raw material places is a major risk.

• Therefore as soon as investment is committed by a steel company there should be policy to immediately allocate captive leases for the required quantity of ore and coal for the project. However, conditions may be imposed that if required investments are not made in the specified time period the leases would be cancelled.

4.3 End use restrictions on ECBs be relaxed for status holders to allow them to retire their Rupee debt and to enable them to raise project finance afresh.

• The industry experience reveals that foreign lenders are not considering ECBs for Greenfield projects favorably.

• Indian lenders/banks are not in a position to lend fresh due to their current exposure.

• If the government allows ECBs for refinancing of the Rupee debt, then companies can raise ECBs for retiring Rupee debt and unleashed lending capacity of Indian Banks can be used for funding for new capacity expansion for large exports.

• Now that the Tarapore committee has recommended, it is the beginning step to move towards full capital account convertibility.

4.4 Ensure Soft Interest Rate Regime

• Interest rates have been going up for the last 2 years. At a time when the Indian manufacturing & infrastructure sectors have planned over 500 billion dollars of new invesments in the next 5 years, the rising interest rates are turning out to be a bg dampner on their plans.

• Even today, the real interest rate in India is 2-.3% higher than the global average rate. If we allow interest rates to go up further, the resurgence in industrial activity leading to industrialization of India will elude us once again.

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