The GST rates were announced by the GST Council on May 18th and May 19th. There are still some items like bidis and gold for which GST rates will be finalized in the next meet of the GST Council in June. This leaves the government with a little over 40 days to officially implement the GST effective from July 01st 2017. But before getting into the nuances of the implications for various sectors, there are 4 broad things that one must understand about the intent of the GST…
- The core intent of the GST rates was to ensure that the GST implementation is not inflationary, as has been the experience with some other countries. As a result, the GST Council has made an attempt to keep the GST on sensitive food items in the range of 0-5% and transport at 5%.
- GST cannot be purely looked as a tax rate, but one should look at the simplicity that it brings in the business and trade. GST makes entire country as a single homotenous market. Take the case of the multiplexes, even though the impost under GST may be higher, the fact that plethora of state and local levies are getting subsumed, which makes it much simpler.
- There is an issue of credit on tax paid on inputs, which was not available in many cases in the past. However, under GST the input credit in such cases will be automatic and seamless. That will reduce the effective GST rate of GST in most cases.
- GST will force Indian companies to revamp their logistics networks in a more optimal fashion without worrying about state level taxes. That will result in a lot of value discovery through optimization of logistics function…
Impact on key sectors
With the government focus on keeping tax on items of mass consumption low, this sector could be the clear winner. While milk, grain and cereals are exempt from GST; other products like sugar, tea, coffee and edible oil will attract just 5% GST. This will benefit companies like Nestle. While, personal care items will be taxed at the peak rate of 28%, items of mass consumption like hair oils, soaps and toothpaste will be taxed at 18%. This will be beneficial for companies like Marico, Dabur and Colgate. Overall, the food side of the FMCG business is likely to benefit from the GST.
Auto could be a slightly mixed bag as the impost will vary across categories. With the standardization of GST for automobiles at 28%, two-wheelers and small and medium cars may face a higher impost. While this may be slightly negative for players like Bajaj Auto, Hero Moto, Maruti, etc, we believe that this will be passed on to consumers. Among the commercial vehicles space, GST and Ashok Leyland may see higher GST, although input credit will somewhat neutralize the impact. Tractors will be largely neutral as the rates will remain the same.
The GST Council has put items like refrigerators and ACs in the maximum 28% category. This will lead to a higher impost on these companies and could impact companies like Voltas and Havells. However, with robust summer demand, they should be able to pass on these costs to the consumer. These companies will also benefit fundamentally as GST will bring more companies under the organized ambit and reduce the unfair competition from unorganized players.
Cement and Steel:
For cement manufacturers the peak rate of tax may go up slightly under the GST regime. However, there is an additional benefit for them as the GST on coal and metal ore has been cut to 5%. For cement companies, this will largely offset the higher GST impact. At the same time, steel and power companies that depend heavily on coal will also benefit from the lower GST on coal. JSW and Tata Steel may be the key beneficiaries.
Multiplexes and Cinemas:
These companies may be slightly unhappy that they have been bracketed in the highest category along with gambling and betting activities. That almost looks akin to imposing a “Sin Tax” on movies. However, multiplexes will benefit from subsuming of plethora of state and local taxes into one single tax and also from input credits. PVR and Cinemax may find the GST rates neutral at best.
GST on Services:
Unlike the current regime where service tax is imposed at a flat rate of 15% across all services, the GST will have four slabs of 5%, 12%, 18% and 28% exactly like the GST on goods. For example, the GST on telecom will be 18%, higher by 3% from current levels. However, the availability of input credit will partially neutralize this impact. However, making transport service GST at 5% will be anti-inflationary. GST will be just 5% on economy flying, which will help airline companies like Spice Jet and Indigo give a bigger push to the Udaan program.
Broadly, the GST rates are likely to be neutral to positive for the Indian markets overall. Of course, the fine print will give much greater clarity on this subject.