Wednesday, August 3

#GST: Revolution in the way India Inc does Business


By Anand Laddha & Sahil Kapoor 

Indirece taxes in India have driven businesses to restructure and model their supply chain and systems owing to multiplicity of taxes and costs involved. With hopes that the Goods and Services Tax (GST) will see the light of the day, the way India does  business will change, forever.  

Total tax collection in India (direct & indirect), currently stands at Rs 14.6 lakh crore, of which almost 34 per cent comprises indirect taxes, with Rs 2.8 lakh crore coming from excise and Rs 2.1 lakh crore from service tax. With the implementation of the GST (Goods and Services Tax), the entire indirect tax system in India (excise, state-level VAT, service tax) is expected to evolve.  

The tax revenue mix can change as per the economic condition of the country. In developing countries, indirect taxes comprise a higher share of total taxes; in developed countries, their contribution is significantly lower.  

For example in Australia, indirect tax contributes just 13 per cent of total tax collection. After GST, the percentage of indirect tax is expected to increase in India.  

Not covered under the GST purview  

Petroleum products  

Entertainment and amusement tax levied and collected by panchayat /municipality/district council  

Tax on alcohol/liquor consumption  

Stamp duty, customs duty  

Tax on consumption and sale of electricity  


GST objectives:- 

Some of the primary objectives of GST-based taxation are:  

1. Ensuring availability of input credit across the value chain  

2. Minimising cascading effect of taxation  

3. Simplification of tax administration and compliance 

4. Harmonisation of tax base, laws, and administration procedures across the country  

5. Minimising tax rate slabs to avoid classification issues  

6. Prevention of unhealthy competition among states  

7. Increasing the tax base and raising compliance  

Implementation challenges:- 

Lack of adaptation  

Lack of trained staff  

Double registration can increase compliances and cost 

Lack of clear mechanism to control tax evasion  

Hard to estimate the exact impact of GST  

Impact on inflation: 

Under the proposed GST, effective tax rate on goods (comprising around 70-75 per cent of the CPI basket) will decline.  

A significant proportion (35-40 per cent) of goods (majorly agriculture products) are not subject to tax and we expect a status quo in future.  

At present, services-oriented components constitute ~25-30 per cent of the CPI basket with a major share belonging to housing, transport and communication sector . Service tax is not imposed on certain (12 per cent of the CPI basket) services and these services are expected remain exempt under GST regime. A hike in tax rate on services is unlikely to have any material direct impact on CPI.  

Thus, the overall transition to GST will not have a significant impact on inflation  

Sector wise impact of GST:- 

Automobiles: The effective tax rate in the sector currently ranges between 30 per cent and 47 per cent.  

Highlights:- 

> On implementation of GST the tax rate is expected to oscillate between 20-22 per cent.  

> It is expected to drive overall demand and reduce cost for the end user by about 10 per cent.  

> The transportation time and the overall cost will be reduced as the goods will be transferred from one state to another by easily surpassing various octroi and check points.  

> In addition to this, the cost for the logistics and supply chain inventory will be curtailed by almost 30-40 per cent.  

Impact: In a long run, GST is expected to remain positive for automobile sector.  

Key beneficiaries: Maruti Suzuki, Hero MotoCorp, Bajaj Auto, Eicher Motors, Ashok Leyland  
Consumer durables 

The current tax rate for the sector ranges between 7 per cent and 30 per cent.  

Highlights:- 

> The implementation of GST will essentially benefit companies, which have not availed tax exemptions in the past.  

> It will lead to the reduction of the price gap between the organised and unorganised sector.  

> The warehouse/logistics costs across the operational and non-operational segments will be curtailed. This will improve the operational profitability by almost 300-400 bps.  

> The 7th Pay Commission is also expected to boost demand and fund inflow in the consumer durables sector by the end of the year.  

Impact: The impact may remain neutral or negative, specifically for companies which either enjoy tax exemptions or fall under the concessional tax bracket. 

Key beneficiaries: CGCE, Havells, Voltas, Blue Star, Bajaj Electricals, Symphony, Hitachi  

FMCG 

Impact: The impact may remain neutral or negative, specifically for companies which either enjoy tax exemptions or fall under the concessional tax bracket. 

Key beneficiaries: CGCE, Havells, Voltas, Blue Star, Bajaj Electricals, Symphony, Hitachi  

Furnishing and home decor 

Impact: Currently, the effective tax rate for the sector ranges above 20 per cent.  

Highlights:-  

> After the implementation of GST, paints and other construction chemicals companies will benefit from lower tax rate.  

> At present, the market share for the organised sector is about 65-70 per cent. Effective tax correction practices under the GST regime will ensure that the price difference amongst the unorganised sector and the organised sector is narrowed. This will improve opportunities for the organised sector.  

> The overall cost and competitiveness in products such as like ceramic tiles, faucets, sanitary ware and plywood & laminates manufacturer will be curbed.  

Impact: - Implementation of GST is expected to bring the unorganised sector under a uniform tax base and improve growth opportunities for the organised sector.  

Key beneficiaries: Asian Paints, Berger Paints, Kansai Nerolac, Akzo Nobel, BASF India, Pidilite, HSIL , Cera Sanitaryware, Greenply, Greenlam Industries, H&R Johnson (Prism Cements), Kajaria Ceramics  


Logistics 

Highlights: The implementation of GST will lead to lower transit time and thereby generate higher truck utilisation.  

This will boost demand for high tonnage trucks and lead to overall reduction in transportation costs.  

It will facilitate seamless inter-state flow of goods, which is expected to directly accelerate demand for logistics services.  

Impact: The logistics sector is largely fragmented and comprises many unorganized players. Several players in the unorganised sector avoid tax which generates a cost gap between them and the organized players.  

With the GST coming into picture, we expect an overall positive impact, with a reduction in the cost competitiveness as all the players will be brought under a uniform tax base, thereby improving growth opportunities for the organized players.  

Key beneficiaries: VRL Logistics, GATI, Blue Dart, Transport Corporation of India, Snowman Logistics  

Cement 

Currently, the tax on cement ranges between 27 per cent and 32 per cent.  

Highlights:  

> The tax rate for the cement sector is expected to decline to 18-20 per cent under the GST regime.  

> This is expected to lead to savings in the transportation cost, which currently comprises up to 20-25 per cent of total revenue.  

> Thereby, overall realisations of cement companies will substantially improve post GST rollout.  

Impact: The impact of GST will be positive, as the companies will also be able to save on their logistic costs, due to rationalisation of warehouses and lower transportation costs (due to decline transit time).  

Key beneficiaries: ACC, Ultratech, JK Cement, Shree Cement.  

Entertainment 

We have divided in two main categories i.e. Multiplexes and Media. We expect a significant impact on both the sectors after implementation of GST.  

Multiplexes: This category attracts different taxes such as service tax, entertainment tax and VAT among others. Currently, the effective tax ranges between 22-24 per cent.  

Highlights:  

> It is expected GST tax rate will trickle down to 18-20%.  

> Reduction in taxes will lead to an increase in average ticket price (ATP) and higher revenue.  

> There exist several challenges pertaining to:  

> Availiblity of limited credit for service tax paid on lease rentals, maintenance cost, advertisements, security charges.  

> No credit is available on the taxes paid on capital expenditure.  

> The VAT credit on available on the purchase of F&B can be offset against VAT liability on F&B sales.  

> Entertainment tax rate on box office collections ranges between 22-24 per cent and the same is not cenvatable against any input taxes.  

These will be addressed after the implementation of GST.  

Impact: The overall impact is expected to be positive and the Ebitda margins of the players are expected to increase by 250-350 bps.  

Key beneficiaries: PVR, Inox Leisure  

Media 

Currently, the effective tax rate for the DTH providers ranges between 20-21 per cent ( this includes service tax of 14 per cent and entertainment tax of around 5-7 per cent).  

The effective tax range for the broadcasters is around 14-15 per cent.  

Highlights:-  

> On implementation of GST, a blanket rate of around 18-20 per cent will apply, which is lower than current tax rate for the DTH provider and higher for the broadcaster.  

> Currently the news and print sector is exempted from all indirect taxes. Post GST, we expect concessional rates to be introduced in this sector.  


Impact:- 

> Implementation of GST will be healthy for the DTH providers and downbeat for broadcasters.  

> The overall impact on the news and print sector will be neutral.  

Key beneficiary: Dish TV  

Marginally negative : Zee, Sun, HT Media and Jagran Prakashan  

Textiles/garments 

The effective tax rate for the sector currently ranges between 6-7 per cent  

Highlights:-  

> Under the GST regime, there is no clarity whether a lower rate will continue for the readymade garments.  

> Companies may be negatively impacted in case the output tax rate is high.  

> Going forward, several export companies may also avail duty drawback benefits. Though we await more clarity on the impact of these benefits.  

Key players to be impacted: Arvind, Raymond, Page Industries  

Pharma 

Currently, the sector enjoys various location-based tax incentives. The effective tax rate (excise duty) for most companies is much below the statutory tax rate (6 per cent).  

Highlights:-  

> The concessional tax bracket for the sector is expected to continue.  

> The existing tax exemptions will continue until expiry of the tax exemption period. Going forward it will be difficult to bring forth the new exemptions.  

> GST is also expected to address inverted duty structure and lower logistic costs for the sector.  

Impact:-  

The impact of GST is expected remain neutral for the pharmaceutical sector.  

IT & ITeS 

Currently, the IT industry is subject to an effective tax rate of 14 per cent.  

Highlights:-  

> The tax rate under GST is expected to increase to 18-20 per cent.  

> The industry earns a large part of its revenue from exports, which will continue to be exempt under GST.  

> Litigation around taxability of canned software will probably end under GST regime as there will be no distinction between goods and services.  

Impact:-  

Impact on the IT industry is expected to range from being neutral to slightly negative.  

Telecom 

Currently, telecommunication services are subject to service tax of 14 per cent.  

Highlights  

> The tax rate is expected to increase to 18 per cent under GST.  

> It is expected that the telecom companies may pass the increased tax burden on postpaid subscribers.  

> Availability of input tax credit will lower the sector's capex cost.  

Impact: Increase in effective tax rate may be marginally negative for the sector. The telecommunication companies may not be able to pass on all the increase in taxes to all the end consumers, especially the ones in the lower Arpu prepaid segment.  

Metal 

Currently, the effective tax rate for base metal products is 19-21 per cent:  

> VAT ranges from 4-5% depending on the state  

> Excise 12.5%, CST 2% and entry taxes in respective states.  

Impact: Under GST, it is not known whether metal products will attract a special rate that is lower than the standard GST rate.  

Banking and financial services 

Currently the effective tax rate is 14 per cent, which is levied only on fee component (and not interest) of the transaction.  

Highlights:-  

> Under GST, effective tax rate on fee-based transactions is expected to increase to 18-20%.  

> As the taxs on the input services will increase, operating expenses (comprising of rent, legal & professional fee, advertisement, insurance, telecommunication and other expenses) will also increase marginally.  

Impact: With the implementation of GST a moderate increase in the cost of financial services such as loan processing fees, debit/credit card charges, insurance premiums, etc. is expected.  



Credits:
Anand Laddha is a Research Analyst and Sahil Kapoor is the Chief Market Strategist of Edelweiss Securities. Views expressed in this article are their own.

The article has been published on ET at the link given below. Copyrights are owned by them/writers. We don't claim or represent any ownership on the article.


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