GST Council to meet Today, Tax rate in Limelight

The much awaited GST has entered the Central phase today. The three-day meeting of the GST Council will take a decision on the tax bands and level out issues like compensation formula for the new indirect tax regime. The government is keen to utilize the meet to make a pact with states so it can push the bill in the winter session of parliament that is to start at November 16. The Council is chaired by Finance Minister Arun Jaitley, with state finance ministers or other representatives as members.

The Tax Rate Talk:

The tax rate is a vital point that will have a relevance to the common man. The rate bands for essential and luxury goods are likely to be worked out. The Centre will probably propose a four-tier tax structure under the GST, with a peak slab of 26 percent. Approximately 20-25 percent of all taxable goods, along with those consumed by the middle class, could come under the peak rate. The thought is to arrive at a common ground with the states that are anxious over revenue loss.

The discussion paper that will be presented at today’s meeting is believed to have proposed a standard rate of 18 percent.

Currently, there is a four tax slab with the highest at 26 percent, lower than the 40% rate that is proposed for very limited demerit items. A lower rate of 26 percent can be implemented on more items.

The states are asking for a standard rate of 22 percent, whereas the Centre has pressed for one of 18 per cent. The lowering of the top slab by including more items may act as a middle-ground for the Centre and the states.

 

The GST panel, headed by Subramanian, had proposed a “sin tax” of 40 percent on limited demerit items like aerated drinks, luxury cars, pan masala, tobacco and tobacco products. This brought out the protest from the aerated drinks sector with Coca-Cola arguing that the 40 percent tax would leave the company with no alternative but to shut down certain factories.

At present, aerated drinks with added sugar pulls a central excise duty of 18 percent and a state value added tax of 12.5 percent, making the total indirect tax 30.5 percent. The Subramanian panel advocated a low rate of 12 percent for certain items, a standard rate of 17-18 percent for a majority of items and for the precious metal, it recommended a range of 2-6 percent.The 26-per cent rate might be imposed on big cars, besides other premium or luxury items and there is a possibility of another slab over 26 per cent for them.

Other Agendas:

• Compensation Formula: Like Tax rate, this one is again going to be a tough nut to crack. At the first GST Council meet, 3-4 alternatives were discussed but a verdict could not be reached. According to the proposals, a state can be compensated if the revenue under GST falls short of the standard tax earnings in the best three years out of the past five years. Secondly, of the five years, two outliers are omitted and an average is taken. If the revenue under GST is lesser than this, then states get compensated. Third, a base year can be fixed which would be 2015-16 and a particular growth rate will be decided for all states. If the income falls short of that, then the state gets compensated. Another proposition was on a fixed rate of revenue growth and give compensation. The Bill attempts to provide full compensation to states for first five years of rollout of the GST regime. Previously, the 100 percent compensation to states was limited to only first three years. On the other hand, the Select Committee of the Rajya Sabha had in its report suggested 100 percent compensation for possible loss of revenue for five years.
• Service Tax Assessment: The Council will also discuss on the problematical issue of the Centre retaining power to assess 11 lakh service tax filers under the new dispensation. While a decision to this was taken at the first meeting of the GST Council, at least two states were indecisive on approving the minutes of the meeting, stating they are not in favor of losing power of assessment of these assesses.

Benefits for Logistics:

With GST, the ride for logistics just got better. This indirect tax Bill, which is likely to result in a uniform tax across goods and services, except petroleum, alcohol, tobacco and selected products, will alter the way industries, logistics and supply chains operate. The Bill is set to be rolled out on April 1, 2017 and will optimize production, inventory and distribution nationally. Besides this, the GST Bill will also help speed up cargo movement.

A 2015 combined report by the Transport Corporation of India and the Indian Institute of Management – Calcutta (TCI-IIM-C) shows that the stoppage expense, i.e., average expense incurred due to the stops along the way such as check-posts and customs per ton-km has increased from Rs. 0.16 per ton-km to Rs. 0.28, a 75 percent increase between 2011-12 and 2014-15.

Over the past one year, the movement in stock prices of logistics players has been mixed. TCI share price and Allcargo Logistics have gone up by 9 and 13 per cent, respectively, while the GATI share price and VRL Logistics were beaten down by 19 and 16 per cent, respectively.

Similarly, the price to earnings ratio (trailing 12-month earnings) of major stocks such as Allcargo Logistics (16 times), GATI (31 times), VRL Logistics (28 times) and Transport Corporation of India (16 times) are lower than their three-year average.

This indicates that the positive impact of GST may not have been completely priced in yet. With a fixed GST rate that is expected to vary anywhere between 18 and 22 percent, together with virtual melting of State boundaries, the abundant smaller warehouses in many locations are projected to be consolidated into bigger ones.

The Transport Corporation of India is by now in the process of building GST-ready warehouses across four locations in India and so are others. With the Tax structure in place, the containerization in full throttle and reduction in transit time, GST is set to benefit Logistics in more than one way.

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.