The Magic Wand Moved, GST Dream to Be Turned Into Reality

Yes, one of the most beautiful dreams that Indian economy dreamed took a step forward for turning in to the reality. The much waited and talked about ‘One Nation, One Tax’ GST finally got a nod from Rajya Sabha Yesterday. The day when the way India does business will change forever, is around the corner. Currently, total tax collection in India, Direct and Indirect, stands at Rs. 14.6 lakh crore, with Rs. 2.8 lakh crore coming from excise and 2.1 lakh crores coming from service tax. The entire tax system in India will evolve with the implementation of GST. The percentage of Indirect taxes is expected to increase in India as it is a developing country where Indirect taxes comprise a higher share of total taxes. While in the developed countries the role of Indirect taxes is significantly lower.

The Road Ahead:

Yesterday, on 3rd August 2016, Rajya Sabha passed the Constitution amendment Bill and now the bill is set to be sent for presidential reference. Subsequently, the Bill will be transmitted to the Lok Sabha, which also needs to approve the amendments by two-thirds majority. Then, the President will refer it to the state assemblies. At least half the state assemblies would need to ratify the Bill by the two-thirds of the majority. The bill will then go for presidential consent before being notified in the gazette. After all these procedures, Parliament would take up the actual GST Bill, possibly in the winter session. The actual GST Bill should take care of the concerns about state governments being allowed to raise revenue in emergency situations. The subsequent GST Bill should not be categorized as Money Bill, by passing Rajya Sabha. The bill still has a long way to go before it reaches the destination.

CPI Basket:
Only 20-25% items of the CPI basket will be significantly affected by GST that includes:

• Food and Beverage: Food and Beverage will bear the most impact of the bill. The impact on this item amounts to 46% of the total.
• Housing: The next significant impact is going to be on Housing which constitutes 10% of the total impact.
• Transport and communication: This item from the basket will have the 9% of the impact.
• Clothing and Fuel and Lights: Clothing, along with the fuel and lights will have 7% impact on each.
• Health: The health sector will be experiencing 6% impact.
• Education: Education might be affected by 4%.
• Tobacco and Alcohol: This sector remains least affected on 2%.
• Others: The remaining 9% impact will be distributed among the other sectors. 

 Not under the confines of GST:
Although the bill has covered almost everything except certain areas mentioned below:

• Petroleum products
• Entertainment and amusement taxes by Panchayat/municipality/district council
• Liquor consumption
• Stamp Duty and Custom Duty
• Consumption and sale of electricity 

Sectors Affected By GST:

Needless to say, GST will affect almost all the major sectors of Indian Economy.
Automobiles:  Currently, the effective tax rate in the sector lies between 30% and 47%. On the implementation of GST the tax rate isTata Motors supposed to oscillate between 20 to 22%. Also, the bill is expected to drive the overall demand and reduce the cost for the end user by 10%. Since, the goods will move smoothly interstate surpassing various octroi and check points, the transportation cost and the overall cost will be reduced. The cost for the logistics and supply chain inventory will be curtailed by almost 30 to 40%. Overall, in the long run, GST will remain positive for the sector. The key beneficiaries will be Maruti Suzuki, Hero MotoCorp, Bajaj Auto, Eicher Motors, and Ashok Leyland.

Consumer Durables and FMCG:  The ongoing tax rate for this sector ranges between 7 to 30%. The
implementation of GST bill will essentially benefit companies which have not availed tax exemptions in the past. It will reduce the price gap between the organized and unorganized sector. The operational profitability will improve by 300 to 400 bps as the warehouse and the logistics cost across the operational and non-operational segments will be curtailed. Moreover, the 7th pay commission will boost the demand and the fund inflow in this sector by the end of the year. So, in short, the companies which either enjoy tax exemptions or fall under the concessional tax range may feel the neutral or negative impact. CGCE, Havells, Voltas, Blue Star, Bajaj Electricals, Symphony, Hitachi will however remain the key beneficiaries.

Furnishing And Home Décor: As of now, the effective tax rate for the sector ranges above 20%. The
lower tax rates after the blue_starimplementation of GST will benefit paint and other construction chemical companies. There are chances for improved opportunities for the organized sector whose market share is about 65 to 70%. GST will narrow down the difference in price between the organized and unorganized sector by effective tax correction practices. The overall cost and competitiveness in ceramic tiles, faucets, sanitaryware, plywoods and other similar home furnishing products will be reduced. GST will bring the unorganized sector under a uniform tax base hence improving the growth opportunities for organized sector. Asian Paints, Berger Paints, Kansai Nerolac, Akzo Nobel, BASF India, Pidilite, HSIL , Cera Sanitaryware, Greenply, Greenlam Industries, H&R Johnson (Prism Cements), Kajaria Ceramics remains the primary benefactors.

Logistics: GST will lower the transit time, generating the higher utilization of trucks. This will, further, boost

the demand for high tonnage trucks, reducing the overall transportation tax. The facilitated and seamless flow of goods will directly accelerate the demands for logistic services.  GST will bring all the organized and unorganized players in the logistics under one tax base, reducing the cost difference between them. The Key beneficiaries for the sector are VRL Logistics, GATI, Blue Dart, Transport Corporation of India, Snowman Logistics.

Cement:  Currently, the tax ranges between 27 and 32% for this sector which will decline to 18 to 20%

under GST. The decline will be because GST will lead to lower transportation cost which comprises of 20 to 22% of total revenue. This means that GST will remain positive for Cement sector as they will be able to save a lot in their transportation and logistics cost. Companies like ACC, Ultratech, JK Cement, Shree Cement remains the main beneficiaries.

Entertainment: Multiplexes in this segment have various different taxes under it which currently ranges

While, in media the current tax rate is 20 to 21%. GST will bring the rate down to around 18%. GST will levy concessional tax rates on news and print sector. GST will be downbeat for the broadcasters but healthy for DTH providers. The overall impact of GST on the sector will be neutral. While Dish TV and the likes will gain, Zee, Sun, HT Media and Jagran Prakashan will see marginally negative impact.
between 22 to 24% and is INOX Leisureexpected to trickle down to 18 to 20%. Average ticket pricing and the revenue will go up as a result. Implementation of GST will address many issues that the sector has been facing. The effect of GST will be positive overall benefitting PVR, Inbox Leisure etc mainly. The EBITDA margins of the multiplex players will increase by 250 to 300 bps.

Textiles: The impact of GST on this sector is not very clear. Currently the tax rate for this sector ranges between 6 to 7%. They may be negatively impacted if the output rates rise. The key players that will be impacted most are Arvind, Raymond and Page industries.

Pharma: Pharma sector currently enjoys location based tax incentives and the effective tax rate for most companies is much below the statutory tax rate of 6%. GST is expected to carry on the concessional bracket and the tax exemption for this sector will continue until they expire. GST will have neutral impact on the sector.

IT and ITeS: The sector currently has the effective tax rate of 14% which will go up to 18 to 20% after GST is implemented. Exports will still stay exempted from where the sector earns a huge chunk of its revenue. Since, GST will no longer leave any difference between the goods and the services, the litigation around the taxability of canned software will end probably. GST might neutrally impact the sector or may have slightly negative impact on it.

Telecom: The Telecom is subject to 14% of service tax currently which is expected to go up to 18%. The increased tax burden might be passed on to the postpaid users by the sector. Telecom’s CapEx cost will be lowered due to the availability of input tax credit. The impact of GST might be marginally negative for the sector as they may not be able to pass the entire burden to the end users.

Metal: The effective tax rate for base metal products is 19-21 per cent currently. VAT ranges from 4-5% while ExciseTata Steel remains at 12.5% and CST at 2% along with the entry taxes. The effect of GST on this sector is not yet clear regarding where they will attract a special rate that is lower than the standard GST rate.

Banking and Financial: Currently the effective tax rate is 14 per cent, which is levied only on fee component on the transaction which may rise up to 18 to 20%. As the taxes on the input services will increase, operating expenses will also rise. GST will moderately increase the cost of financial services such as loan processing fees, debit/credit card charges, insurance premiums, etc. is expected.




Conclusion:
GST will impact almost all the sectors of the economy; some strongly while some not so. It will be interesting to watch the sectors unfolding themselves under the wings of GST. A lot is going to change after the implementation of the bill which will, in turn benefit the Economy and the consumers in long run. The country is hopeful and praying for GSt to shape the country of their dream.