GST & Indian Railways Sustainability

RAMAKRISHNAN T S

Doctorate in Public Systems from IIM Ahmedabad and currently teaches at TAPMI, Manipal 

With the passage of the Goods and Services Tax (GST) Bill in Parliament, there is a sense of well-being in the country, as it is expected that this tax would turn India into a single market, cut the flab in the logistics industry and remove distortions created by inter-state taxes, thereby make the manufacturing sector more competitive. Growth of the manufacturing sector would spur growth of the logistics industry. The transport sector would be happy with the double benefit of growth in its business and reduction in transportation costs.

But Indian Railways (IR) should be worried with the arrival of the GST, unless it wants to remain in a sthitpragya state.

Why so?

Because IR’s sustenance, freight traffic, — which accounts for about 70% of its revenue from transport operations — has been plateauing of late, registering about 1.095 billion tonnes in 2014-15 and 1.107 billion tonnes in 2015-16.

Indian Railways had commissioned the National Council of Applied Economic Research (NCAER) to assess the prospects of its freight traffic in 2016-17 as well as to suggest possible strategies.

NCAER recommended reduction of freight rates, removal of 10% port congestion charges, review of 15% season surcharge, some changes in operations such as reviewing the two point loading restriction, restoring the long- term committed business segment of short- distance freight traffic with concessions and abolishing dual freight rates for transporting iron ore (30% more for export than for domestic use). All these recommendations were made essentially on the principle of price elasticity — that with decreased freight charges, demand would increase substantially and hence, overall revenue would also increase. IR removed 10% port congestion charges and 15% season charges effective from May 1, 2016. It abolished dual freight rate for transporting iron ore effective from May 10. These measures did benefit IR — a three% overall increase in freight loading — but there was also a seven% overall drop in revenue in June 2016 compared to June last year. This apart, in April and May this year, there was a decrease in freight loading by two% from the figure during the same months in 2015. In a nutshell, IR did not generate as much revenue in the first quarter of 2016 as it did in the same quarter last year. Neither the existing freight charges nor the reduced freight charges helped IR increase its revenue from freight traffic — decreased freight charges did help it transport some more freight but with a loss of revenue. Why? Price elasticity works only when the service delivery is the same across competitors. IR’s service delivery has been worse than other transport modes. It became convenient for IR to go for the knee- jerk measure of reducing freight rates based on the NCAER report without even assessing by itself what was essentially wrong with its freight service model. NCAER, on its part, did not analyse the issue in a holistic manner to arrive at path- breaking solutions to increase rail freight traffic.

What was the core issue that stopped IR from increasing its freight transport output? It is this: IR has been unable to provide faster and timely transportation of non- bulk freight transport and hence has been unable to make a foray into non-bulk freight transportation. Whether it is the transportation of raw material, partly processed goods or finished goods, those who look for faster and committed delivery don’t prefer transporters who transport goods at their own will and are non- committal about delivery.

To understand this fully, we need to know the freight transport pattern in general. There are two categories of freight — bulk and non- bulk materials. Materials defined by weight and volume such as coal, iron ore, food grains, petroleum and cement are bulk materials.

There is a qualitative difference in the transportation and handling of bulk and non- bulk materials. Some of the bulk items such as iron ore and coal are of low value, whereas most of the non- bulk items are invariably of high value. Materials in transit also form the inventory.

Hence, the transportation of non-bulk materials happens in smaller consignments, rather than accumulating and transporting them in one go. End-to end transport also has to be faster, safer (for the material) and the material has to be delivered in the committed time, even if the transportation cost is higher. On the other hand, the sole criterion for transportation of low- value bulk material is that it should be cheap. Given this condition, IR had a clear edge over road transport in transporting low- value bulk materials of coal and iron ore. IR also has an edge in transportation of high- value bulk materials such as cement, fertilisers, food grains, petrol, oil and lubricants, especially if these are transported over long distances. As a result, bulk items contribute about 89% of freight loading and 85% of freight earnings of IR. However, IR pays a price for transporting bulk items, as 40% of the wagon movement is on empty rakes. This is a huge flab IR carries for capturing and retaining low- value bulk material transportation.

In bulk freight traffic, coal is the single major source of revenue for IR, contributing about 30%, against 29% of the entire passenger transport.

Hence this would hit IR’s financials. The NCAER study estimated that freight transport for IR would grow at 2.1% in 2016- 17 and half the growth would come from coal alone. However, IR may not be able to achieve any addition to coal transportation volume as conditions are not conducive.

As of 2016 India has surplus power and its power sector has been steering towards solar power. Against this backdrop, IR cannot depend any more on coal to augment its freight traffic and hence, its revenues. Moreover, pipeline and coastal shipping have also forayed into transportation of bulk items, giving IR tough competition. For medium distances, cement transportation has already moved towards trucks. In such a situation, it is difficult for IR to retain existing bulk freight transport volume, let alone augment it.

Rationalise passenger transport to gain freight traffic

The capacity released thus would help the Indian Railways move freight traffic at an average speed of 50 km per hour. This would enable it to make inroads into transportation of non-bulk items

To overcome the plateauing of freight traffic, the Indian Railways' (IR) Hobson's Choice is to increase transportation of non-bulk freight. The larger issue for IR is providing faster and more reliable end-to-end connectivity than road transport, rather than a comparison of its freight transport fares with that of road transport. In India, a truck travels about 280 km in a day; freight trains cover about 576 km (at an average speed of 24 km per hour) during the same period.

However, for non-bulk freight, less frequency, lack of facility to transport smaller consignments, cost and uncertainty associated with last-mile connectivity in rail freight transport mean that truck transport has remained competitive.

The issue becomes much larger for IR with GST. With the removal of state border checkpoints, a truck is expected to travel about 440 km in a day. Hence, to capture non-bulk traffic, IR needs to increase the average speed of its freight trains from 24 kmph to at least 50 kmph. There is no restriction on the part of IR's trains (either passenger or freight) to reach a maximum speed of about 90 kmph on any section of the network -almost all stretches support that speed. The issue is about priority in accessing track infrastructure and hence, the associated reduced average speed. Although about 70% of revenues from transport for IR comes from freight transport, it gets the least priority in the waterfall model of allowing access to tracks. Also, it uses only about 33% of the IR's network capacity. Luxury trains such as Shatabdi, Rajdhani, Duronto travelling at an average speed of 80 to 100 kmph, Express/Mail trains with an average speed of 50 to 60 kmph and ordinary (passenger) trains running at an average speed of 36 kmph get first, second and third preference, respectively. Freight trains come next in the order of preference.

Although a detailed study would yield a blueprint for how IR could achieve both higher passenger volume and freight transport for the given network, the directions in which it should move are outlined here. To achieve an average speed of 50 kmph, freight trains should get access to at least 50% of IR's network. Then the question is how the existing volume of passenger traffic can be maintained, if not increased, with just 50% access to network capacity against the current 67% access.

The share of passenger traffic in ordinary trains decreased from 37.5% in 2005-06 to 28.42% in 2014-15, whereas the share of faster trains increased from 62.5% in 2005-06 to 71.58% in 2014-15. Since 2013-14, passenger traffic in ordinary trains has been decreasing in absolute numbers also. Even some of the Mail/Express and luxury trains have been running without much demand for years together.

The Comptroller and Auditor General (CAG) of India has been highlighting this anomaly consistently in its earlier reports. For instance, in its report in 2009, the CAG highlighted that 30% of the newly introduced trains in nine zones between 2002-03 and 2007-08 had less than 50% occupancy; yet many of them are still running. The Bibek Debroy report submitted in 2015 mentioned that there are at least eight luxury trains, which have been running on losses. Their losses are because of poor occupancy, as evidenced from the hundreds of tickets available even on the day of journey of these trains.

Against this backdrop, IR should go for a major overhaul of the schedule of its passenger trains. Although there are regular official orders that instruct railway zones to identify trains with an occupancy rate of 50% and reduce their services or coaches, there is no concerted effort in that direction on the basis of train data analysis.

The first measure I would recommend in this direction is that IR operate passenger trains based only on demand; populist trains introduced in the last two decades without commensurate patronage should be trimmed by reducing their frequency, if not altogether stopping them. Even as several trains have more than 200 waitlisted passengers every day, running some trains with so many vacant seats is a criminal waste of the scarce resource of a railway network.

The second measure I would recommend is that IR estimate the total transport demand (rail, bus, car and air) in terms of O-D pairs between cities or clusters and then reschedule trains that provide faster connectivity between the cities or clusters with limited stop service at originating and terminating cities or clusters.

Although Railway Minister Suresh Prabhu has not yet yielded to the pressures of additional stops or unviable trains, more than enough damage has already been done. That damage has to be reversed.

The third measure I would recommend is that IR phase out at the earliest ordinary trains that have lost patronage and which cause congestion on a high-density network. IR locomotives take about 10 minutes to reach their maximum speed permitted on that section. The problem with ordinary trains is that with stoppages as frequent as every 15 km, they have been decelerating even before accelerating to reach the maximum speed. The basic theme of all these measures is that trains (both passenger and freight) are supposed to continuously run all the time, except for pick-up and drop at points determined by the O-D data.

If the flab in scheduling of passenger trains is removed, according to the measures suggested here, IR could achieve the same passenger traffic - or even more - by utilising just 50% of its network. The average speed of passenger trains would shoot up by at least 25 kmph, thereby leaving 50% of the network for freight traffic. With the capacity released by this rationalising measure, freight traffic would be able to move at an average speed of 50 kmph, thus making major inroads into the transportation of non-bulk items. Without a rationalisation in passenger transport, IR may lose high-value bulk and non-bulk freight traffic to road transport completely. It would then have to live like a parasite on the subsidy provided by the Budget.

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Article Collated by Surya Narayan Nayak

GST impact on SEZ, EOU & DTA

‘One nation, One tax’. This slogan has gained currency to justify introduction of the proposed national Goods and Services Tax (GST). This catchy slogan is rather misleading but deserves to be taken seriously, as an objective to be achieved in due course.

GST as envisaged at present is far from the ideal of a single tax working seamlessly through the supply chain of all goods and services. Many items will be out of its net. Some types of taxes will not be covered. Exemptions will be there. States will have the right to levy new taxes. Taxes levied by local bodies continue. Even so, it is a beginning. In its present form as envisaged, GST promises to widen the base, simplify processes, bring greater compliance and make it easy to carry on business. More important, it gives an opportunity to raise questions regarding continuation of some other exemption schemes.

India is fragmented by way of different tax dispensations for special economic zones (SEZ), export oriented units (EOU) and the domestic tariff area (DTA). SEZs are deemed to be foreign territories for the purpose of application of certain tax laws. EOUs till recently were bonded warehouses but now operate under special tax exemptions. Different businesses in the DTA get different types of exemptions, under the excise, customs, service tax and sales tax laws.

The SEZ scheme was introduced in 2000, as an improved version of the earlier Free Trade Zone (FTZ) and Export Processing Zone ( EPZ) schemes. Special legal dispensations by way of the SEZ Act, 2005, and SEZ Rules, 2006, were put in place with great hopes of facilitating creation of world- class infrastructure where investment would flow, generating a lot of employment and exports. Liberal tax exemptions were given to SEZ developers and units set up in SEZs for manufacturing, trading and for providing services. However, the scheme has not succeeded as expected. It is time to examine whether this scheme should continue.

The EOU scheme was introduced in 1980, when domestic economic policies were very restrictive. The scheme succeeded in that environment and even for years after liberalisation of the economic policies. However, for the past few years, the scheme’s advantages have eroded, as they’ve been brought nearly at par with DTA units in fiscal benefits. The income tax exemption for EOUs have been taken away. DTA units are also able to import capital goods dutyfree against the export obligation. The only benefit not available for DTA units but available for EOU is refund of central sales tax ( CST) on purchases for export production.

On the flip side, DTA units get benefits under the Services Exports from India scheme; EOU ones do not. The CST refund benefit will go with the adoption of GST. So, there might not be good enough reasons to continue with the EOU scheme.

Just as multiplicity of taxes results in complications and higher compliance costs, a multiplicity of schemes to boost exports also result in unnecessary difficulties and pointless paperwork. It would be better to scrap superfluous schemes and end many of the exemptions that now serve very little purpose.

So, on this Independence Day, let us hail the initiative to bring in something new by way of GST and hope it will help generate fresh ideas.

GST has benefits for infrastructure

There are both positive and negative impacts of the tax, but the net result for the sector is advantageous

This is GST ( goods and services tax) season; and as the dust settles on the commencement of the long journey to implement the historic GST regime, it is worthwhile to take stock of how it impacts specific aspects of Indian infrastructure. Here are seven ways GST affects the sector — three positive, and four negative.

Electricity ( impact: negative): GST is expected to inflate electricity costs by up to eight per cent as the government has decided to keep electricity out of the ambit of this new tax dispensation. Power producing companies — both renewable and conventional — would have to pay GST for their inputs such as fuel and machinery but will not be able to get these taxes refunded, given that their output — electricity — is exempt. This higher cost of producing electricity will then be passed on to consumers under the “ change of law” clause in power purchase agreements ( PPA). Developers selling electricity in the spot market or on a non- PPA basis would have to factor in the higher cost.

Works contracts and EPC ( impact: positive): GST seeks to provide muchneeded clarity on works contracts, and therefore, on the engineering, procurement and construction ( EPC) business line. Works contracts are proposed to be taxed as “ services”. This means the GST rate and provisions, like place of supply rules et al, as applicable on services will apply to works contracts. The major gain from this treatment is that the tax would be now charged on the actual contractual base. Also, local versus inter- state works contracts, that at present leads to innumerable disputes, should get eliminated. Hence, EPC contract prices should come down somewhat on account of this new tax- efficient structure, which in turn should benefit project owners.

Cement ( impact: positive): Cement is acrucial input to the infra sector, and GST is expected to impact it positively. The overall indirect tax incidence is currently estimated to be around 25 per cent. The cement industry is also expected to benefit from lower costs of logistics. Overall, a decrease in cement prices is expected.

Logistics ( impact: positive): The GST is expected to enable a reduction in logistics cost by as much as 20 per cent to 30 per cent, as firms reconfigure their supply chains on four counts. First, as India becomes one big market, there will be larger but fewer warehouses. Second, it will lead to a larger number of bigger trucks on roads as there is greater adoption of the hub- and- spoke model. Third, these changes will lead to greater economies of scale for transport operators and lead to more companies outsourcing their logistics operations. Four, reduction in waiting and idling time at inter- state barriers and checkpoints is expected to provide a huge relief.

Advisory, consulting, engineering and project management services (impact: negative): As with all other services, firms providing these services to the infrastructure sector will have a negative impact due to the higher incidence of GST at 17 to 18 per cent vis- à- vis the current 15 per cent.

Abolition of tax holidays and exemptions (impact: negative): There are different tax holidays and exemptions for infrastructure development and operations at both the central and state levels. Whilst there is the hope that in the final analysis, these tax holidays and exemptions will be allowed to run their course, the lurking fear is that they will be removed.

Civil aviation ( impact: negative): Five petroleum products — crude, natural gas, aviation turbine fuel ( ATF), diesel and petrol — are excluded from the coverage of GST for the initial years while the remaining petroleum products —kerosene, naptha and liquefied petroleum gas ( LPG) — are covered. Flight tickets are likely to get costlier as airlines will not be able to claim credit on tax paid on jet fuel. The current service tax ranges from 5.6 per cent to nine per cent of the base fare, which is considerably less than the GST rate that is being spoken about, of 15 to 18 per cent. Currently, airlines can claim what is called a cenvat credit on the central excise duty for fuel. They stand to lose this in the GST regime as ATF is outside the purview of GST.

While there is this bundle of negatives and positives, this columnist is of the opinion that on the whole, GST has a positive impact on the sector. Increase in prices of airline tickets and electricity are soon absorbed and forgotten.

But the positives that emanate from rationalisation of taxes on works contracts, reduction in cement prices, the huge benefit to logistics and the elimination of a raft of complex exemptions and tax holidays has clear long- term advantages.

We can create GSTN identity for 90% of taxpayers anytime: Navin Kumar

Navin Kumar
Chairman, Goods and Services Tax Network

Take us through the GSTN journey so far.

We started from scratch in May 2013. At that time our target date was not clear.

We were told for the first time in October 2014 that April 1, 2016, was our target date. It was then we started the recruitment process, as we had already built the organisation structure.

Our first challenge was to prepare for the RFP ( request for proposals) in the absence of a GST framework. It was unclear what we should put in the RFP and what work we were supposed to do.

We took the permission from the stateempowered committee of finance ministers to work on the draft and had appointed PwC as our consultant. We floated the tender in April 2015 and selected the vendor, Infosys, in September 2015.

In November 2015, we gave the work order. According to the RFP, the vendor (Infosys) will provide us the support for five years from the date GST is rolled out. In between, we had interacted with the industry and went to Nasscom asking its members for suggestions and feedback about their needs and what could be the likely interface.

What was the industry feedback?

We were stunned by their feedback. We had told them we wanted to work on a built- own- operate- transfer ( BOOT) model. They said, thank you very much. The companies said they had burnt their fingers, and the BOOT model was dead and buried.

They cited instances where they had built the system, operated it but were still not getting the revenues because of various reasons. They said if you want to build the system, you have to pay the pre- operative cost, which is the capital cost.

There were instances when the central and the state governments had floated tenders and no one came to bid for them. The industry gave around 1,500 inputs and suggestions. We took most of them into account.

Did such meetings help?

We held a pre- bid meeting and incorporated their suggestions in the RFP through corrigendum. Finally, the big five — Microsoft, Tech Mahindra, Infosys, TCS and Wipro — sent their proposals. It was achallenge for us to select one because all the proposals were really good.

Where do we stand today on software development?

Prototyping of the user interface is almost over. Code writing is also half done. The software will be first tested by Infosys and then by us. The process will begin in October and last till January. We gave Infosys a go- ahead to purchase hardware a day after the Rajya Sabha cleared the GST Bill. Once the software is loaded and tested, we will take a final approval from the Standardised Testing Quality Certification ( STQC).

The approvals are expected by midFebruary. And then, we will have dry runs till March.

When will the migration of existing taxpayers take place?

Those who already pay VAT, service tax and central excise tax will be subsumed in the GSTN. Later other, small taxes, such as entertainment tax and luxury tax, will be migrated to GSTN. The current taxpayers will not be asked to register again. They will be asked to provide their PAN and be given a unique identification number under the GST. Currently, 6.5 million people pay value added tax, 2.5 million people pay service tax and another 300,000400,000 people central excise tax. We have already validated PAN of 90 per cent of these taxpayers and we can generate their

GSTN number any day.

With the Rajya Sabha passing the goods and services tax ( GST) Constitution amendment Bill, the focus has shifted to the Goods and Services Tax Network ( GSTN), the non- profit organisation that is building the information technology architecture. It will be the backbone of the reform, slated to be rolled out next year. NAVIN KUMAR, chairman, GSTN, tells Sahil Makkar and N Sundaresha Subramanian that his organisation was not caught by surprise by the quick turn of events. It is confident of putting in place hardware and software requirements.