How will the GST rates impact various sectors…

In May 2017, the GST Council announced rates for most of the goods and services. There are a handful of goods like gold, bidis and cigarettes where the final rates of GST will be announced during the June meeting of the GST Council. Broadly, the impact of GST on various sectors must be analysed along four broad lines. Remember, it is not just about rates…

  • The rates of GST need to be compared with the combined central and state levels taxes that are being levied in the current dispensation. Remember, GST subsumes excise duty, VAT, sales tax, service tax and a host of other local and state levies.
  • Secondly, it is not just about the rates of tax. Under the GST regime, there will be seamless availability of input tax credit (ITC) on tax paid on the inputs that go into the final output. This applies to GST on goods and services.
  • Thirdly, GST will bring a lot of smaller companies and businesses into the GST fold. As a result the advantage that the unorganized sector enjoyed over the organized sector will diminish. This is more applicable in case of sectors like capital goods, electrical equipment, textiles, auto ancillaries etc.
  • Lastly, GST is all about efficiencies. Currently, most of the large businesses have structured their distribution and logistics infrastructure based on state level taxes. With GST subsuming all these into one single tax, companies will be in a position to design their distribution and logistics based on business needs rather than on state taxes. This will make the entire distribution and logistics structure more efficient and optimal.

Let us now look at how GST will impact various sectors, in the light of the rates announced…

Food processing Companies…

To keep inflation in check, the government has made an effort to keep the tax on food and food products at very low levels. For example, the GST rates on cereals and milk has been kept at 0% while the GST on sugar, pulses and beverages has been kept at 5%. This will be beneficial to the cost structure of companies in the food processing business. Companies like Britannia, Nestle and Hindustan Unilever fall in the category of companies that will benefit from this move.

Toiletry manufacturers…

While personal care items will be taxed at the peak rate of 28%, most of the items of mass consumption like hair oils, soaps and toothpaste have been fixed at 18%. This will bring down the average impost on companies that are into the manufacture of mass usage toiletries as they will become cheaper. While the benefit is likely to be passed on to the customer, it will help prise open markets in the rural and semi-urban areas in a big way. The key beneficiaries will be companies like Dabur and Marico in this space.

Automobile Manufacturers…

The impact on the auto industry is likely to be neutral to positive. For example, small cars will see a neutral impact but manufacturers of SUVs will end up paying lower GST rates. This will be positive for major auto manufacturers as their margins come from SUVs while volumes come from smaller cars. On the front of smaller cars, while the rate of GST may be higher, the availability of input credit will more than compensate for this additional impost.

Air Conditioners and Refrigerators…

White goods have been placed in the highest bracket of 28% GST and they may see a slightly higher impact of GST. To that extent it will be negative, but considering the growing demand for these products, the companies will be able to pass on the costs to the end customer. To that extent it should be neutral. But the big benefit will be that they will get the benefit of input credit and above all the squeezing of the unorganized sector will be a big boost for these companies which are vulnerable to competition from the informal sector. Overall impact should be neutral to positive.

Multiplex companies…

Most multiplex companies are quite disappointed that the cinema business has been placed in the same category as betting and gambling. That may be a tad unfair but they too have some reasons to cheer about. Currently multiplex are subject to a plethora of levies including VAT, service tax and entertainment tax. Now, all that gets subsumed into GST! Additionally, the seamless input credit will also benefit the multiplex companies.

Telecom and other services…

For most service companies the GST will be negative on a gross basis. That is because the service tax rate will go up from 15% to 18% post the implementation of GST. However, the benefit of input tax credit will compensate for the same. For example, if you use assets to provide a service, then the credit for tax paid on these assets is not available as a set-off against the service. Under GST, this credit will be available in a seamless fashion and that will make the proposition quite attractive for service companies.

The moral of the story is that broadly, the impact of GST is likely to be accretive. In most countries, the impact on GDP growth has been 1.5% to 2% annually, post the implementation of GST. The GST Council has done well to factor in the inflation risk into GST rates. The focus will now be on the implementation of the GST.

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