GST Will Change The Way India Does Business - Who Will Win, Who Will Lose - The Economic Times

9/27/2016
GSTwillchangethewayIndiadoesbusiness:Whowillwin,whowillloseTheEconomicTimes
GSTwillchangethewayIndiadoes
business:Whowillwin,whowilllose
Aug03,2016,11.11AMIST
PostaComment
ByAnandLaddha&SahilKapoor
IndirecttaxesinIndiahavedrivenbusinessesto
restructureandmodeltheirsupplychainandsystems
owingtomultiplicityoftaxesandcostsinvolved.WithhopesthattheGoodsandServicesTax
(GST)willseethelightoftheday,thewayIndiadoesbusinesswillchange,forever.
TotaltaxcollectioninIndia(direct&indirect),currentlystandsatRs14.6lakhcrore,ofwhich
almost34percentcomprisesindirecttaxes,withRs2.8lakhcrorecomingfromexciseandRs2.1
lakhcrorefromservicetax.WiththeimplementationoftheGST(GoodsandServicesTax),the
entireindirecttaxsysteminIndia(excise,statelevelVAT,servicetax)isexpectedtoevolve.
Thetaxrevenuemixcanchangeaspertheeconomicconditionofthecountry.Indeveloping
countries,indirecttaxescompriseahighershareoftotaltaxesindevelopedcountries,their
contributionissignificantlylower.
ForexampleinAustralia,indirecttaxcontributesjust13percentoftotaltaxcollection.AfterGST,
thepercentageofindirecttaxisexpectedtoincreaseinIndia.
NotcoveredundertheGSTpurview:
1.Petroleumproducts
2.Entertainmentandamusementtaxleviedandcollectedbypanchayat/municipality/district
council
3.Taxonalcohol/liquorconsumption
4.Stampduty,customsduty
5.Taxonconsumptionandsaleofelectricity
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GSTobjectives:
1.Ensuringavailabilityofinputcreditacrossthevaluechain
2.Minimisingcascadingeffectoftaxation
3.Simplificationoftaxadministrationandcompliance
4.Harmonisationoftaxbase,laws,andadministrationproceduresacrossthecountry
5.Minimisingtaxrateslabstoavoidclassificationissues
6.Preventionofunhealthycompetitionamongstates
7.Increasingthetaxbaseandraisingcompliance
Implementationchallenges:
1.Lackofadaptation
2.Lackoftrainedstaff
3.Doubleregistrationcanincreasecompliancesandcost
4.Lackofclearmechanismtocontroltaxevasion
5.HardtoestimatetheexactimpactofGST
Impactoninflation:
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UndertheproposedGST,effectivetaxrateongoods(comprisingaround7075percentoftheCPI
basket)willdecline.
Asignificantproportion(3540percent)ofgoods(majorlyagricultureproducts)arenotsubjectto
taxandweexpectastatusquoinfuture.
Atpresent,servicesorientedcomponentsconstitute~2530percentoftheCPIbasketwitha
majorsharebelongingtohousing,transportandcommunicationsector.Servicetaxisnotimposed
oncertain(12percentoftheCPIbasket)servicesandtheseservicesareexpectedremainexempt
underGSTregime.Ahikeintaxrateonservicesisunlikelytohaveanymaterialdirectimpacton
CPI.
Thus,theoveralltransitiontoGSTwillnothaveasignificantimpactoninflation
SectorwiseimpactofGST:
Automobiles:Theeffectivetaxrateinthesectorcurrentlyrangesbetween30percentand47per
cent.
Highlights:
OnimplementationofGSTthetaxrateisexpectedtooscillatebetween2022percent.
Itisexpectedtodriveoveralldemandandreducecostfortheenduserbyabout10percent.
Thetransportationtimeandtheoverallcostwillbereducedasthegoodswillbetransferred
fromonestatetoanotherbyeasilysurpassingvariousoctroiandcheckpoints.
Inadditiontothis,thecostforthelogisticsandsupplychaininventorywillbecurtailedbyalmost
3040percent.
Impact:Inalongrun,GSTisexpectedtoremainpositiveforautomobilesector.
Keybeneficiaries:MarutiSuzuki,HeroMotoCorp,BajajAuto,EicherMotors,AshokLeyland
Consumerdurables
Thecurrenttaxrateforthesectorrangesbetween7percentand30percent.
Highlights:
TheimplementationofGSTwillessentiallybenefitcompanies,whichhavenotavailedtax
exemptionsinthepast.
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Itwill
leadto
the
reductionofthepricegapbetweentheorganisedandunorganisedsector.
Thewarehouse/logisticscostsacrosstheoperationalandnonoperationalsegmentswillbe
curtailed.Thiswillimprovetheoperationalprofitabilitybyalmost300400bps.
The7thPayCommissionisalsoexpectedtoboostdemandandfundinflowintheconsumer
durablessectorbytheendoftheyear.
Impact:Theimpactmayremainneutralornegative,specificallyforcompanieswhicheitherenjoy
taxexemptionsorfallundertheconcessionaltaxbracket.
Keybeneficiaries:CGCE,Havells,Voltas,BlueStar,BajajElectricals,Symphony,Hitachi
FMCG
Impact:Theimpactmayremainneutralornegative,specificallyforcompanieswhicheitherenjoy
taxexemptionsorfallundertheconcessionaltaxbracket.
Keybeneficiaries:CGCE,Havells,Voltas,BlueStar,BajajElectricals,Symphony,Hitachi
Furnishingandhomedecor
Impact:Currently,theeffectivetaxrateforthesectorrangesabove20percent.
Highlights:
AftertheimplementationofGST,paintsandotherconstructionchemicalscompanieswillbenefit
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fromlowertaxrate.
Atpresent,themarketsharefortheorganisedsectorisabout6570percent.Effectivetax
correctionpracticesundertheGSTregimewillensurethatthepricedifferenceamongstthe
unorganisedsectorandtheorganisedsectorisnarrowed.Thiswillimproveopportunitiesforthe
organisedsector.
Theoverallcostandcompetitivenessinproductssuchaslikeceramictiles,faucets,sanitary
wareandplywood&laminatesmanufacturerwillbecurbed.
Impact:ImplementationofGSTisexpectedtobringtheunorganisedsectorunderauniformtax
baseandimprovegrowthopportunitiesfortheorganisedsector.
Keybeneficiaries:AsianPaints,BergerPaints,KansaiNerolac,AkzoNobel,BASFIndia,Pidilite,
HSIL,CeraSanitaryware,Greenply,GreenlamIndustries,H&RJohnson(PrismCements),Kajaria
Ceramics
Logistics
Highlights:TheimplementationofGSTwillleadtolowertransittimeandtherebygeneratehigher
truckutilisation.
Thiswillboostdemandforhightonnagetrucksandleadtooverallreductionintransportation
costs.
Itwillfacilitateseamlessinterstateflowofgoods,whichisexpectedtodirectlyacceleratedemand
forlogisticsservices.
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Impact:Thelogisticssectorislargelyfragmentedandcomprisesmanyunorganizedplayers.
Severalplayersintheunorganisedsectoravoidtaxwhichgeneratesacostgapbetweenthemand
theorganizedplayers.
WiththeGSTcomingintopicture,weexpectanoverallpositiveimpact,withareductioninthecost
competitivenessasalltheplayerswillbebroughtunderauniformtaxbase,therebyimproving
growthopportunitiesfortheorganizedplayers.
Keybeneficiaries:VRLLogistics,GATI,BlueDart,TransportCorporationofIndia,Snowman
Logistics
Cement
Currently,thetaxoncementrangesbetween27percentand32percent.
Highlights:
Thetaxrateforthecementsectorisexpectedtodeclineto1820percentundertheGST
regime.
Thisisexpectedtoleadtosavingsinthetransportationcost,whichcurrentlycomprisesupto
2025percentoftotalrevenue.
Thereby,overallrealisationsofcementcompanieswillsubstantiallyimprovepostGSTrollout.
Impact:TheimpactofGSTwillbepositive,asthecompanieswillalsobeabletosaveontheir
logisticcosts,duetorationalisationofwarehousesandlowertransportationcosts(duetodecline
transittime).
Keybeneficiaries:ACC,Ultratech,JKCement,ShreeCement.
Entertainment
Wehavedividedintwomaincategoriesi.e.MultiplexesandMedia.Weexpectasignificantimpact
onboththesectorsafterimplementationofGST.
Multiplexes:Thiscategoryattractsdifferenttaxessuchasservicetax,entertainmenttaxandVAT
amongothers.Currently,theeffectivetaxrangesbetween2224percent.
Highlights:
ItisexpectedGSTtaxratewilltrickledownto1820%.
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Reductionintaxeswillleadtoanincreaseinaverageticketprice(ATP)andhigherrevenue.
Thereexistseveralchallengespertainingto:
Availablityoflimitedcreditforservicetaxpaidonleaserentals,maintenancecost,
advertisements,securitycharges.
Nocreditisavailableonthetaxespaidoncapitalexpenditure.
TheVATcreditonavailableonthepurchaseofF&BcanbeoffsetagainstVATliabilityonF&B
sales.
Entertainmenttaxrateonboxofficecollectionsrangesbetween2224percentandthesameis
notcenvatableagainstanyinputtaxes.
ThesewillbeaddressedaftertheimplementationofGST.
Impact:TheoverallimpactisexpectedtobepositiveandtheEbitdamarginsoftheplayersare
expectedtoincreaseby250350bps.
Keybeneficiaries:PVR,InoxLeisure
Media
Currently,theeffectivetaxratefortheDTHprovidersrangesbetween2021percent(thisincludes
servicetaxof14percentandentertainmenttaxofaround57percent).
Theeffectivetaxrangeforthebroadcastersisaround1415percent.
Highlights:
OnimplementationofGST,ablanketrateofaround1820percentwillapply,whichislower
thancurrenttaxratefortheDTHproviderandhigherforthebroadcaster.
Currentlythenewsandprintsectorisexemptedfromallindirecttaxes.PostGST,weexpect
concessionalratestobeintroducedinthissector.
Impact:
ImplementationofGSTwillbehealthyfortheDTHprovidersanddownbeatforbroadcasters.
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The
overall
impacton
thenews
andprint
sectorwill
beneutral.
Key
beneficiary:
DishTV
Marginally
negative:
Zee,Sun,
HTMediaandJagranPrakashan
Textiles/garments
Theeffectivetaxrateforthesectorcurrentlyrangesbetween67percent
Highlights:
UndertheGSTregime,thereisnoclaritywhetheralowerratewillcontinueforthereadymade
garments.
Companiesmaybenegativelyimpactedincasetheoutputtaxrateishigh.
Goingforward,severalexportcompaniesmayalsoavaildutydrawbackbenefits.Thoughwe
awaitmoreclarityontheimpactofthesebenefits.
Keyplayerstobeimpacted:Arvind,Raymond,PageIndustries
Pharma
Currently,thesectorenjoysvariouslocationbasedtaxincentives.Theeffectivetaxrate(excise
duty)formostcompaniesismuchbelowthestatutorytaxrate(6percent).
Highlights:
Theconcessionaltaxbracketforthesectorisexpectedtocontinue.
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Theexistingtaxexemptionswillcontinueuntilexpiryofthetaxexemptionperiod.Goingforward
itwillbedifficulttobringforththenewexemptions.
GSTisalsoexpectedtoaddressinverteddutystructureandlowerlogisticcostsforthesector.
Impact:Itisexpectedremainneutralforthepharmaceuticalsector.
IT&ITeS
Currently,theITindustryissubjecttoaneffectivetaxrateof14percent.
Highlights:
ThetaxrateunderGSTisexpectedtoincreaseto1820percent.
Theindustryearnsalargepartofitsrevenuefromexports,whichwillcontinuetobeexempt
underGST.
LitigationaroundtaxabilityofcannedsoftwarewillprobablyendunderGSTregimeastherewill
benodistinctionbetweengoodsandservices.
Impact:Itisexpectedtorangefrombeingneutraltoslightlynegative.
Telecom
Currently,telecommunicationservicesaresubjecttoservicetaxof14percent.
Highlights:
Thetaxrateisexpectedtoincreaseto18percentunderGST.
Itisexpectedthatthetelecomcompaniesmaypasstheincreasedtaxburdenonpostpaid
subscribers.
Availabilityofinputtaxcreditwilllowerthesector'scapexcost.
Impact:Increaseineffectivetaxratemaybemarginallynegativeforthesector.The
telecommunicationcompaniesmaynotbeabletopassonalltheincreaseintaxestoalltheend
consumers,especiallytheonesinthelowerArpuprepaidsegment.
Metal
Currently,theeffectivetaxrateforbasemetalproductsis1921percent:
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VATrangesfrom45%dependingonthestate
Excise12.5%,CST2%andentrytaxesinrespectivestates.
Impact:UnderGST,itisnotknownwhethermetalproductswillattractaspecialratethatislower
thanthestandardGSTrate.
Bankingandfinancialservices
Currentlytheeffectivetaxrateis14percent,whichisleviedonlyonfeecomponent(andnot
interest)ofthetransaction.
Highlights:
UnderGST,effectivetaxrateonfeebasedtransactionsisexpectedtoincreaseto1820%.
Asthetaxsontheinputserviceswillincrease,operatingexpenses(comprisingofrent,legal&
professionalfee,advertisement,insurance,telecommunicationandotherexpenses)willalso
increasemarginally.
Impact:WiththeimplementationofGSTamoderateincreaseinthecostoffinancialservicessuch
asloanprocessingfees,debit/creditcardcharges,insurancepremiums,etc.isexpected.
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