Hopes about passage of Goods and Services Tax (GST) Bill were rekindled after the indirect tax reform proposal got an overwhelming support at the meeting of the empowered committee (EC) of state finance ministers in Kolkata. Recent Rajya Sabha elections have also increased the probability of the GST Bill being cleared in the coming monsoon session of Parliament with the new composition of the upper house more favourable for passage of the legislation.
On Tuesday, while briefing the media after Empowered Committee of state FMs meet, Finance Minister Arun Jaitley said, “Virtually all states have supported the idea of GST except Tamil Nadu which has some reservations.”
If the bill is cleared in Rajya Sabha in the upcoming session, the roll-out could be by April 1, 2017. The government had earlier targeted rollout of the nationwide single tax regime from April 1, 2016 but the constitutional amendment bill on GST has been stuck in the upper house due to opposition by the Congress party.
GST aims to simplify the current indirect tax regime by bringing all central and state levies.
A government panel in December 2015 recommended three broad rates for GST— (1) 17-18% as the standard rate for most goods and services, (2) 12% for essential items and (3) 40% for luxury items, tobacco etc. Precious metals will be taxed at 2-6%.
It also aims at simplifying country’s complex indirect tax system by (1) the ‘reclassification’ of the current huge number of tax rates into three broad rates and (2) the move to a common/standard rate for most goods and services.
According to experts, roll of GST will benefit sectors like logistics, automobiles, consumer durables, telecom, among others. Though implementation of GST is some time away, stocks may start discounting the impact sooner.
With the help of Kotak Institutional Equities, we look at the sectors that could benefit from GST rollout:
Automobiles: The automobile sector could benefit significantly if the government accepts the recommendations of the GST panel and puts automobiles (except luxury cars) in the general category of standard goods and services with a rate of 17-18 per cent. In particular, UVs attract indirect taxes of over 40 per cent.
FMCG: Several consumer staples attract nil or low indirect tax currently. Even if they are classified as essential items, they could still attract the lower GST rate of 12 per cent. Edible items like bakery, edible oils, honey and certain beauty and personal care items like coconut hair oil and sanitary napkins could see a higher tax incidence. Logistics costs in FMCG companies could come down as they rationalise their warehouses to cater to the pan-India market as opposed to individual warehouses for each state. This could also help them save significantly on their working capital requirements.
Consumer durables: The current incidence of tax on this sector (12.5 per cent excise on the cost of production – which is typically 50-55 per cent of the final selling price – and 12.5-14.5 per cent of state VAT on the selling price) could significantly come down to the standard GST rate of 17-18 per cent of the selling price. This could have a positive impact on sectors like air conditioners, fans, microwave oven, refrigerator and washing machines, among others.
Media and entertainment: Multiplex companies like PVR pay 25 per cent of the ARPU (average ticket price + F&B spends per head) in the form of taxes in three broad areas— (1) entertainment tax of 27 per cent on net ticket sales, (2) VAT on F&B of 8 per cent and (3) service tax on input costs for which there is no set off available. GST will reduce the overall tax burden and can help increase the EBITDA margin of PVR by 300-400 bps.
Telecom: The current service tax rate of 15 per cent on telecom bills will add their bit to the standard GST rates, thereby increasing the cost to the consumer marginally.