The ITC share price jumped 3.7% to an intra-day high of Rs 427 on the National Stock Exchange. There are primarily two reasons behind this surge. The 56th GST Council meeting decided to revamp GST tax slabs, effective September 22. This is expected to boost the FMCG sector sales ahead of the festive season. Secondly, the consumer goods giant commits Rs 20,000 crore in fresh capital expenditure.
GST on daily essentials dropped to 5%
In the FMCG sector, the new GST rate will help bring down prices of daily essential products such as hair oil, soap, toothpaste, shampoo, toothbrushes, kitchenware, and bicycles. This is because they will now have only 5% GST. Ultra-high temperature milk, paneer, chena, and all types of Indian breads, such as roti and paratha, will not be subject to GST at all. ITC Chairman & Managing Director Sanjiv Puri stated that the government’s push to simplify the GST regime could act as a powerful consumption trigger.
ITC plans big capital push
Coming to the second point, ITC will be raising investments in its fast-moving consumer goods (FMCG) and agriculture segments, said Puri. While talking to CNBC-TV18 stated that the FMCG major has committed Rs 20,000 crore in fresh capital expenditure. The sheer focus will remain on expanding its FMCG portfolio, strengthening agriculture linkages, and scaling its paperboard operations.
Not just that, the GST Council put the sin goods, tobacco, under the 40% GST bracket. However, this is a plus point for ITC as an additional cess gets cut out, dropping the tax rate by 5 percentage points (ppt) effectively. “ITC could potentially benefit, as the shift to an ad-valorem rate of 40% (likely by year-end) implies a 5 ppt tax cut. Also, the regime potentially removes tax uncertainty, a positive for ITC,” said Jefferies.
Jefferies on ITC
Currently, Tobacco is taxed at 28% GST plus cess, which is a mix of specific and ad valorem duty. “The current rate structure will continue till the loans are repaid, post which it will move to the 40% slab, which will be levied on the retail selling price instead of the transaction value (ITC’s selling price),” said Jefferies.
“Post this, no compensation cess will be levied. However, it is not clear at this stage whether NCCD (which is separate from GST) will continue. Even if NCCD continues at the current rate, the total tax incidence on cigarettes will be lower by 5%, based on our understanding,” said Jefferies.
However, in the context of timelines, we need to see if the government levies any other form of taxation to offset this benefit. “If a revised lower tax is confirmed, we expect the tobacco industry to take down prices, which would make them competitive against illicit competition and help gain share,” stated Jefferies.