GST: Impact on key sectors

Fixing rates for six sensitive items will be top priority for the GST Council, which is slated to meet in New Delhi on June 3, just 27 just days befor

The two-day brainstorming session of the GST Council completed its task more or less on May 18 and 19 at Srinagar, with the announcement of the Goods and Services Tax (GST) rates on 1,200 goods and 500 services. The Council has arrived at 18% tax rate as a standard rate on majority of the goods and services. However, there are still some politically sensitive items like bidis, gold, textiles, footwear and agriculture implements, among others, for which the rates will be finalised in the next meet of the GST Council in June. Fixing of rates on lottery service is also yet to be finalised.

This leaves the government with a little over 40 days to officially implement the GST effective from July 1, 2017. “We are in a state of readiness for July 1 rollout,” Finance Minister Arun Jaitley said after the meeting.
But before getting into the nuances of the implications for various sectors, there are four broad things that one must understand about the intent of the GST.

The core intent of the GST rates was to ensure that the GST implementation is not inflationary, as has been the experience with some other countries. As a result, the GST Council has made an attempt to keep the GST on sensitive food items in the range of 0-5% and transport at 5%.

According to Vaibhav Agrawal, Head of Research and ARQ, Angel Broking, GST cannot be purely looked as a tax rate, but one should look at the simplicity that it brings in business and trade. GST makes the entire country as a single homogenous market. Take the case of multiplexes, even though the impost under GST may be higher, the fact that a plethora of state and local levies are getting subsumed, which makes it much simpler.

There is an issue of credit on tax paid on inputs, which was not available in many cases in the past. However, under GST, the input credit in such cases will be automatic and seamless. That will reduce the effective rate of GST in most cases, he said.

What the GST rates mean for key sectors in India:

• FMCG Companies: With the government focus on keeping tax on items of mass consumption low, this sector could be the clear winner. While milk, grain and cereals are exempt from GST; other products like sugar, tea, coffee and edible oil will attract just 5% GST. This will benefit companies like Nestle. While personal care items will be taxed at the peak rate of 28%, items of mass consumption like hair oils, soaps and toothpaste will be taxed at 18%. This will be beneficial for companies like Marico, Dabur and Colgate. Overall, the food side of the FMCG business is likely to benefit from the GST.
• Automobiles: Auto could slightly be a mixed bag as the impost will vary across categories. With the standardisation of GST for automobiles at 28%, two-wheelers and small and medium cars may face a higher impost. “While this may be slightly negative for players like Bajaj Auto, Hero MotoCorp, Maruti, etc, we believe that this will be passed on to consumers,” Angel Broking said. Among the commercial vehicles space, Ashok Leyland may see higher GST.
• Consumer Durables: The GST Council has put items like refrigerators and ACs in the maximum 28% category. This will lead to a higher impost on these companies, and could impact companies like Voltas and Havells. However, with robust summer demand, they should be able to pass on these costs to the consumer. These companies will also benefit fundamentally as GST will bring more companies under the organised ambit and reduce unfair competition from unorganised players.
• Cement and Steel: For cement manufacturers, the peak rate of tax may go up slightly under the GST regime. However, there is an additional benefit for them as the GST on coal and metal ore has been cut to 5%. For cement companies, this will largely offset the higher GST impact. At the same time, steel and power companies that depend heavily on coal will also benefit from the lower GST on coal. JSW and Tata Steel may be the key beneficiaries.
• Multiplexes and Cinemas: These companies may be slightly unhappy that they have been bracketed in the highest category along with gambling and betting activities. That almost looks akin to imposing a “Sin Tax” on movies. However, multiplexes will benefit from subsuming of a plethora of state and local taxes into one single tax and also from input credits. PVR and Cinemax may find the GST rates neutral at best.
• Healthcare and Education: Grandfathering of current exemptions for services (including healthcare & education) leaves limited anomaly on the taxability services and the Council has clarified that no additions shall be made to the exemption list, Amit Sarkar, Partner & Head,  Indirect Tax,  BDO India, said.
• GST on Services: Unlike the current regime where service tax is imposed at a flat rate of 15% across all services, the GST will have four slabs of 5%, 12%, 18% and 28% exactly like the GST on goods. For example, the GST on telecom will be 18%, higher by 3% from current levels. However, the availability of input credit will partially neutralise this impact. However, making transport service GST at 5% will be anti-inflationary. The GST will be just 5% on economy flying, which will help airlines like Spice Jet and IndiGo give a bigger push to the Udaan programme.
• Telecom and Financial Services: A rate of 18% for telecom and financial services may appear higher against the current service tax rate of 15%; however, these sectors are likely to derive substantial benefits on the input credit front, given the eligibility of credit on the goods which was not the case under the current regime.
• Restaurants: Overall positive impact for restaurants having less than Rs 50 lakh turnover, and non-AC restaurants, given that they shall be taxed at 5% and 12%, respectively, with full input tax credit as against the current tax incidence of approximately 19-20% [VAT + ST] for AC restaurants. It is noteworthy that restaurants having less than Rs 50 lakh of turnover may also opt for the composition scheme, subject to the conditions prescribed.
• Construction/Works Contract: With respect to works contract service, though the 12% rate with full input tax credit could be an overall boom for a civil contractor as against the current taxes at 6% (central) and 1-5% (state), it may still lead to potential disputes regarding movability and the applicable rates thereon [works contract vs composite supplies].

The impact of GST has been a mixed bag for the Capital Goods and the consumer sector. While the Capital Goods sector would benefit from a lower tax rate on contracts, there would be higher tax incidence on cables and transformers, Motilal Oswal Securities said in its report.

A few segments in the consumer sector would see higher effective taxes and need to take price hikes to offset cost pressures from increased taxes. Key changes/surprises vs expectations were for a) Fans, which were expected to come in the 18% bracket, but have been bought at 28% (currently at 24%) and need price hikes, b)Air-conditioners, which have been put in the 28% bracket and would need 2-3% hikes, c) Transformers put in the 28% GST rate vs the current 18% implies price hikes need to be taken, d) Cables, which were earlier in the 18% bracket taken to 28%, and e) Work contract, which is in the 15-20% range (depending on the VAT rate) taken to 12% is a positive for the construction sector (L&T, BHEL).

Under the new tax regime, industry stabilisation will take a couple of quarters. However, the benefits of GST on business practices and company strategies will be seen only in the medium term (1-3 years). “The extent of business efficiency is estimated to be higher in goods as compared with services. At present, supply chains across major manufacturing industries are strategised, based on tax arbitrage aspect,” CRISIL Research said.

Seamless tax treatment under GST will eliminate the need of multiple warehouses across states.
Broadly, the GST rates are likely to be neutral to positive for the Indian markets overall. Of course, the fine print will give much greater clarity on this subject.

Effects:
All tax payers
With need for registration and filing of returns in multiple states, compliance costs are likely to go up. Overall tax compliance, too, is expected to go up. This will also impact some of the smaller entities in SME-dominated sectors. Over the longer term, this is likely to lead in consolidation and gain in market share for the organised sector

Impact on manufacturing states
The destination-based taxation structure of GST implies that states with manufacturing bases will potentially lose revenue which will be compensated by the central government – about Rs. 500 b in the first year. The key states that will require compensation are Gujarat, Maharashtra, Uttar Pradesh, Tamil Nadu and Haryana. Proceeds from the additional cess on sin goods/ luxury items will constitute the pool from which the states would be compensated for any revenue loss.

Existing companies which have signed MoUs with states
Several states have, in the past, offered tax incentives to companies for setting up manufacturing units. Dilution of the power of states to levy independent taxes/offer exemptions under GST regime, will impact existing projects too. State governments and impacted companies will need to find out solutions. However, at present there is lack of clarity on this issue.

Revenue authorities    
Tax monitoring will become easier on account of the robust GST network platform where all returns can be accessed instantly and in a user-friendly manner. This will help revenue officials monitor the sequence of supply of goods and services as well as flow of input tax credit.

Financial institutes    
GST will increase working capital requirements across major manufacturing sectors on account of tax liability on inter-state ‘stock transfer’. Accordingly, businesses will not be able to claim their tax credits until the shipped goods are sold. To reiterate, stock-transfers in the current regime does not attract any tax even during an interstate transfer.