Construction Equipment, Infrastructure and GST

Construction Equipment growth forecast 2017: Figures from the ICEMA (Indian Construction Equipment manufacturers association) say that 2016 saw a sales volume growth of 41.5% as compared to that of 2015. The big jump was mostly carried on the back of backhoe loaders, pick and carry cranes, excavators and earth moving machinery. For FY 2017 the sales figures were expected to by pass the 2011 volumes by a sizeable margin. As a matter of fact the expected sales volumes for 2018 are in the vicinity of a whooping 96,730 units.

These forecasts however were made in the Pre- Demonetisation and Pre GST era. Demonetisation saw the sales of construction equipment slowing down in the last 2 months of 2016. As the effects of demonetisation were finally wearing off, GST took effect on July 1st 2017. Industry experts still expect growth in the construction equipment segment despite the 6 to 8% increase in the cost of construction equipment. Experts are of the opinion that even if a conservative estimate is to be made, the segment can be expected to grow at a rate of 10-15% if not more.

Impact of Infrastructure on Construction equipment: The construction industry in India will be majorly driven by urban infrastructure and roads projects. The government is focused on increase the rate of road construction per day to 40Km from the current 23Km by mid 2018. The NHAI has announced that it will bid out highway projects for 30,000Km in the coming three years. Add to that initiatives like the Smart Cities, Swatch Bharat Abhiyaan and other major sanitation and water supply projects and you will get a good adea of how much growth is expected in the construction sector.

The Swach Bharat Abhiyaan is largely dependent on heavy machines like backhoe loaders

The railways are expanding and new metro lines have already started work with more in the pipeline. Urban infrastructure, creation and development of ports, development of new air ports, creation of transport corridors, increased focus on mining and irrigation projects will mean a growing tidal wave of business for the industry. The infrastructure industry falls under the 18% GST bracket. In addition to that, the raw materials required by the construction industry are also bound to get cheaper, leading to large profit margins.

GST as it applies to the construction equipment industry: Construction equipment come under the 28% tax bracket under GST and have traditionally fallen in the luxury items category. Despite the fact that the construction equipment industry caters to the infrastructure sector, the fact remains that the input tax is 28% while the output tax is a merger 12%. The construction equipment industry will have to absorb the difference balance of the taxes. The immediate impact of the anticipated price hike, is expected to be 15-20% drop in sales, which is obviously huge for an industry still coming out of a slump and recovering from the effects of demonetisation.

While the GST has its drawbacks, it has its benefits too. Traditionally leasing activity was plagued by double taxation of service tax and sales tax. Under GST, the dilemma is solved with only a single tax in picture. This single tax system will boost leasing activity in the infrastructure sector eventually translating to benefits for the construction equipment sector. Similarly, the industry is also set to benefit from efficiency in the supply chain, warehousing and logistics that will be a result of the single tax system.

The heavy 28% tax will in part be offset by the capital saved from the supply chain and relatively reduced raw material costs under the new regime. 5-8% costs can be saved in transportation, 10-12% costs saved in warehousing and upto 25% cost savings inventory holding costs, eventually leading to 10-12% overall savings on the supply chain costs. Introduction of input tax credits in the construction and mining industry would help lessen the burden tax.

Despite the recent roadblocks, the construction equipment industry is all set and expected to grow at 10-15% if not more. Most of this growth is coming form asset creation by infrastructure companies that are seeing an upswing in activities due to the government’s heavy focus on creation and development of infrastructure across the country. In addition to the infrastructure and mining sectors, government initiatives like the swach bharat abhiyaan too, rely heavily on the construction equipment industry. Especially on the backhoe loaders and excavators to pick and transport the waste form one place to another.

All in all, GST is expected to have neutral to minimal side effect on the construction equipment industry despite the expected marginal rise in the cost of these heavy machines. All said and done, prospects of growth for the industry are still bright and on a growing curve.