One nation, one market, one tax
Some sectors to get relief, others may feel the pinch
The Goods and Services Tax (GST) has been termed a potential game changer, the single biggest tax reform in independent India, one that the government says is founded on the concept of “one nation, one market, one tax”.
What remains to be seen, however, is how the GST rates — from 5% to 28% — will affect various consumer-facing sectors of the economy:
AUTOMOBILE: DEMAND TO DRIVE AWAY DIP IN CAR SALES
GST adds to the challenges the sector has faced, from demonetisation and then implementation of more stringent emission norms.
The passenger car segment is expected to see an overall reduction in tax outgo, with bigger cars and SUVs benefiting from lower tax rates. ICRA Ltd has estimated the total tax on small cars at 29% from the current 31.4%, while for an SUV, the tax rate will fall from 55.3% to about 43%. In the near term, however, car dealers have been cutting down on stock levels, which is expected to affect sales growth.
The bright spot is that demand growth forecasts are robust, and analysts expect sales growth of 8-12% in FY18 for passenger cars and two-wheelers. GST is not expected to have a significant impact on commercial vehicle sales, according to ICRA.
CEMENT: SOME RELIEF FOR MAKERS IN TAX PAYOUTS
Contrary to expectations of cement firms, which were hoping for an 18% GST rate, the sector has been categorised in the 28% slab. Despite that, cement makers will see some relief in tax payout as the effective tax rate for packaged cement is anyway 29-31%.
On the raw materials front, taxes on coal, limestone and lignite have been cut to 5%
However, the fuel mix of many cement firms currently has a higher proportion of imported petroleum coke. Meanwhile, a clean energy cess on coal and royalty to states for quarrying limestone remains.
Given the already subdued demand and the lack of clarity on the impact of GST, prices are unlikely to surge in the near term.
CONSTRUCTION: INPUT COST CREDIT TO OFFSET HIGHER RATE
So far, the construction sector, including real estate, has had an effective tax outgo of between 11% and 18%. It varied based on the nature of the contract, the service tax applicable on the services availed and also various taxes on goods used in construction. Under GST, the entire works contract is charged 18% tax. However, in spite of higher rates, the sector is likely to gain from the input tax credit that is available under GST rules.
CONSUMER GOODS: ANTIPROFITEERING TO CHECK GAINS
Packaged consumer goods makers’ sales growth will be hit in the near term as trade channels have cut purchases in the run-up to GST.
Overall impact is seen as neutral as rates have been cut on mass consumption items and hiked on higher-end products.
Anti-profiteering rules say gains from lower tax and input tax credit are to be passed on to consumers, limiting any immediate gains due to GST. A medium-term worry is how areabased exemptions are treated. In the longer run, organised companies are expected to gain share.
JEWELLERY: LOWER TAX RATE TO ENSURE NO DENT IN DEMAND
The GST rate on gold jewellery has been fixed at 3%, lower than expectations of a 5% rate. The new rate is close to the current 2%. Hence, it should not affect consumer buying dramatically. Additionally, the tax rate on jewellery making charges has been cut to 5% from 18% decided earlier. This should bring some relief as the tax levied on buyers declines and to that extent, is favourable for demand.
HOTELS: HIGH-END CHAINS WILL HAVE TO PAY MORE
From a pre-GST tax rate that varied between 18% and 25% based on state levies, GST classifies hotel into four buckets based on room tariffs. Those with room rates below ₹1,000 will be tax-exempt, although the rest will be taxed at 5%, 12%, 18% and 28%. The highest 28% has been slapped on hotels with above ₹7,500 room rates. So, high-end luxury chains will pay more compared with pre-GST levels.
MULTIPLEXES: INPUT TAX CREDIT WILL BRING BENEFITS
Multiplexes are expected to benefit, primarily owing to input tax credit on fixed costs such as rent and common area maintenance. The GST rate has been fixed at 28% for tickets costing over ₹100. This is higher than what the industry had expected. However, the food and beverage (F&B) segment will attract 12-40% under GST depending on the composition of F&B items. Nevertheless, the negative impact of GST is expected to be offset by input tax credit. On an aggregate basis, rating company ICRA Ltd expects operating margins of industry players to expand by 2.5-2.8%.
TELECOM: COMPANIES TO BE HIT BY A HIGHER TAX BURDEN
Telecom companies, already weighed down by high taxes and levies, now need to contend with an additional 3% tax with the shift to GST. A service tax of 15% was applied to telecom services earlier. Post-paid subscribers will see a roughly 2.6% addition to their gross bill. But incumbents such as Bharti Airtel Ltd and Idea Cellular Ltd are likely to absorb the additional cost for many of their pre-paid tariff packs. On the other hand, the availability of input tax credit is expected to reduce operating costs and capital expenditure. Thus, the impact on profit margins could be small.
VALUE FASHION: GETS A LEG-UP
The 5% GST rate on apparel priced below ₹1,000 is expected give a fillip to the value fashion business.
Post Goods and Services Tax ( GST), the entire value chain— raw material to the finished product—will come under the tax net.
This, according to Ambit Capital Pvt. Ltd, will reduce the price gap between the unorganised sector and organised companies. Also, input credit can help lower costs for organized firms. On the other hand, in the segment where apparel is priced above ₹1,000, the GST rate of 12% may force companies to raise prices.
According to ICRA Ltd’s calculations, the effective tax rate on apparel priced above ₹1,000 right now is less than the 12% GST rate.