GST Bill passed by Rajya Sabha

Goods and Services bill has been passed by Rajya Sabha recently. An integrated national market will create economic efficiency in the sense that Adam Smith wrote about a few centuries ago. Supply chains will be streamlined. Smooth movement of trucks across state borders will reduce the need to maintain large piles of inventory. Small companies will become more competitive. Tax evasion will come down as companies will need bills to claim tax credits. The ease of doing business will improve.

While it is difficult to quantify the impact on various sectors until the government announces the final GST rate, analysts and economists are assuming a standard rate of 17-18%.

If that happens, then companies in the manufacturing sector are expected to benefit, while those in the services sector stand to lose. Like all indirect taxes, the GST too is regressive. It is levied at a flat rate on all consumers, irrespective of their income. One of the goals of a good tax system is to depend less on such regressive taxes. So, the GST rate should be kept low.

Of course, some of the immediate problem of regressivity will be ironed out since the prices of goods are likely to come down while the prices of services are likely to go up. The consumption baskets of the poor are skewed towards goods rather than services. So, there will be an initial positive redistributive effect as the new tax system kicks in.

The GST seems to be on its way to finally becoming a reality. 

Sector-wise  likely impact on various sectors and stocks

1) Automobiles: The auto sector is likely to emerge as a winner from GST implementation, provided the rate is below the total tax incidence for the sector (>27%). GST is expected to lead to lower prices for the end user and thus boost demand. Companies to benefit include Maruti Suzuki India Ltd and Mahindra and Mahindra Ltd. Both stocks have outperformed the market so far this fiscal year. Analysts believe some impact of GST could well be priced in at current levels.

2) Multiplexes: Multiplex companies pay around 25% of the average revenue per user (average ticket price + food and beverage spends, or F&B per head) as taxes, according to Kotak Institutional Equities. This is in three broad areas—(a) entertainment tax on net ticket sales, (b) Value-added tax (VAT) on F&B, and (c) service tax on input costs for which there is no set-off available. No wonder, GST is expected to reduce the tax burden and improve the Ebitda (earnings before interest, taxes, depreciation and amortization) margin. Stocks of PVR Ltd and Inox Leisure Ltd have increased 50% and 30%, respectively, so far in FY17, suggesting the shares are factoring in most of the positives. Of course, there are other factors that are driving these shares.

3) FMCG: If the GST rate is less than or equal to 18%, then it should be positive for most consumer goods companies, point out analysts at Citigroup. Of course, much depends on which exemptions are retained and which of the current excise benefits are “grandfathered”. In addition, there will be gains from warehouse rationalization and a better competitive position vis-à-vis unorganized firms. But gains aren’t expected to be massive and will occur gradually; as such, stocks may not react dramatically just because the GST bill is passed.

If cigarettes attract a higher tax incidence under the GST regime, then it will have an adverse impact on companies such as ITC Ltd.

4) Logistics: Supply chain management is expected to get a boost and transit time will reduce. Further, interstate trade barriers would reduce and eventually result in better interstate commerce. Consolidation of warehousing facilities is expected. Stocks that may benefit include Container Corp. of India Ltd and Transport Corp. of India Ltd. Citi’s analysts point out that the better operating environment could lead Gateway Distriparks Ltd to enter the domestic business.

5) Cement: The anticipated 18% GST rate is far lower than what cement companies are paying currently, and analysts expect cement makers to pass on the benefits to consumers as demand continues to remain weak. Whether this alone will help revive demand is another matter altogether.

6) Retail: The opportunity to set off input tax credit on rent is expected to aid margin expansion. But retail companies are facing other problems. Shoppers Stop Ltd’s stock has underperformed the benchmark Sensex this year, as underlying demand remains weak and like-to-like sales growth has been lacklustre.

The losers

As mentioned earlier, services-related sectors are expected to be negatively impacted, as they may have to shell out higher taxes than what they are currently paying. Service tax rate is currently at about 15%.

1) Telecom: The moderate rise in tax outgo could hit demand and revenues. But there would be a simultaneous set-off of taxes (Cenvat, or central VAT) paid on certain capex inputs. So, the impact would be marginal. But telcos have bigger problems. Data volumes are slowing and the Reliance Jio Infocomm Ltd launch can worsen matters.

2) Consumer staples and discretionary: Many consumer staples currently have low indirect tax. Hence, GST will be negative for companies in food processing, bakery, edible oil, dairy segments and personal care items. Quick service restaurants too will be adversely impacted. Kotak Institutional Equities sees some impact on Britannia Industries Ltd and ITC.