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Insight | Time: Mar 20 2019 4:02PM
VAT reduction impact on polyester industry
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VAT is to cut down from 16% to 13% since Apr 1 2019. Its direct impact on polyester profit results from the reduced rate and players’ buy and sell spread.

Distribution of the profit squeezed from VAT cut depends on each sector’s bargaining power
For example, if polyester plants hold stronger bargaining power against downstream, they may keep selling price stable or raise offer before the VAT is cut, which can be seen from recent price fluctuation in polyester products. PFY and PET bottle chip producers maintained the price firm as usual. Meanwhile, if polyester plants have stronger bargaining power than upstream, polyester plants are likely to push feedstock to decline. If bargaining power is so-so, polyester plants may arrange feedstock purchase as early as possible, and draw up invoice for deduction. Downstream producers will also demand pre-tax settlement, to cater to future development. But this will involve producers’ feedstock purchase invoice, if downstream and upstream can reach consensus, then uniform tax rate is negotiable, and vice versa.

Assume PET bottle chip selling price at 8400yuan/mt after tax, and with no fluctuation within short, based on 16% VAT, the tax=after tax sales revenue/(1+16%)*16%=8400/1.16%16%=1158.6yuan/mt, while after Apr 1, the tax=8400/1.13*13%=966.4yuan/mt. The spread is 192.2yuan/mt, but this is not the ultimate VAT PET bottle chip plant needs to pay, the figure needs to deduct VAT generated during feedstock and auxiliary materials purchase. In this way, actual impact on market price and enterprises’ profit is limited, while cash flow may be the one to bear the brunt of VAT cut.

Hence, for highly competitive industries, VAT cut may bring limited positive impact, or in other words, impact on the industry depends on which sector holds more power. One thing for sure is that delivery of polyester plants is quite likely to expand in drastic.

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