Goods and Services Tax Bill

It's proposes a national Value added Tax to be implemented in India from June 2016. "Goods and Services Tax" would be a comprehensive indirect tax on manufacture, sale and consumption of goods and services throughout India, to replace taxes levied by the Central and State governments. Goods and services tax would be levied and collected at each stage of sale or purchase of goods or services based on the input tax credit method.

What is the function of this Bill?

 

The main function of the GST is to transform India into a uniform market by breaking the current fiscal barrier between states. Thus the GST will facilitate a uniform tax levied on goods and services across the country. Currently, the indirect tax system in India is complicated with overlapping taxes levied by the Centre and the State separately.

Advantages of GST

·      Due to full and seamless credit, manufacturers or traders do not have to include taxes as a part of their cost of production, which is a very big reason to say that we can see a reduction in prices. However, if the government seeks to introduce GST with a higher rate, this might be lost.

·       Internationally, the GST is always preferred in a unified form (that is, one single GST for the whole nation, instead of the dual GST format). Although India is adopting Dual GST looking into the federal structure, it is still a good move towards a Unified GST which is regarded as the best method of Indirect Taxes.

·  Instead of maintaining big records, returns and reporting under various different statutes, all assesses will find comfortable under GST as the compliance cost will be reduced. It should be noted that assesses are, nevertheless, required to keep record of CGST, SGST and IGST separately.

Sectoral Impact of Likely Passage of GST Bill

Automobile

2 Wheeler, Small Cars, CVs – Hero, Bajaj, TVS, Eicher, AL, Maruti

Currently, the total tax outgo is 27% (Excise + VAT + CST). A Standard rate of 18% would lead to a 9% reduction in vehicle prices thereby stimulating demand. OEMs would benefit largely from savings on logistics and warehousing related costs and a simplified tax maintenance structure.

Large Cars – M&M

Currently, M&M’s total tax outgo in the UV segment is 45% (excise + VAT + CST). Luxury cars are recommended to be taxed at higher/demerit tax rate of 40%. UV prices are therefore, likely to reduce by 5%. We see very little possibility of the SUV segment taxed at a standard rate of 18%, which if happens, can reduce prices by 27%. Large carmakers would again benefit largely from savings on logistics and warehousing related costs and a simplified tax maintenance structure.

Tractors – M&M, Escorts

Tractors are completely exempted from excise and pay an exempted rate of 4% on VAT. As such total tax outgo (including CST) would be 6%. Note that as tractors is exempt from excise, OEMs currently receive no MODVAT benefit, leading to an indirect excise duty of 7% and hence a total tax outgo of 13%. Tractors are likely to be taxed at the ‘Low’ GST rate of 12%, thereby keeping product prices unchanged.

Auto Ancillaries

Batteries – Exide, Amara Raja

GST implementation is expected to bring the unorganized players in the tax net – this should reduce the price gap between organized and unorganized players. Battery industry, with 40% of the replacement market still unorganized, and is likely to benefit from the same and we expect organized players to gain market share. Other smaller auto ancs, catering to replacement market and competing with the unorganized segment are likely to similarly benefit.

Building materials

Tiles – Kajaria

Currently unorganised sector (50% of the industry) benefits from tax evasion and lower tax rates at 18% vs. current duty of 25-27% paid by the organised players 25-27% will reduce the gap between organised and organized.

Plywood – Century ply

Currently, unorganised sector (75% of the industry) imports raw material without paying duty and final goods are sold without any duty.

Cement

Though, 18% tax rate will be lower than what the companies are paying currently (24.5% excise and VAT), we believe that the companies will pass on the benefits to consumers as demand continues to remain weak. The sector will benefit only when the pricing power is strong in the hands of manufacturers.

Consumer Durables

Symphony

Large unorganised sector in the air cooler industry (85% of total market).The unorganized segment of the consumer durables segment has been evading the indirect taxes for the past many years.  The introduction of GST will bring them within the ambit of indirect taxes and would most likely impact their competitive advantage in terms of pricing.  The narrowing of the price differential between the organised and unorganised players would help the organised players increase their market share.

Consumer and Retail Sector

FMCG

HUL, Colgate, Britannia, GSK Consumer, Nestle, Dabur, Emami, Marico, Godrej Cons

Building Products

Asian Paints, Berger, Havells, Pidilite, HSIL

All consumer companies will stand to gain with respect to supply chain and logistic. Indirect tax rate will come down to (as per recommendations to possibly 18%) which would lead to higher purchasing power. 

Fashion Retail

Shoppers Stop

Jewellery Retail

PC Jeweller, Titan

IL &FS Transportation

Implementation of e-permit/e-tolling systems, post GST, will help manufacturers save on logistics costs by reducing travel time, reducing the need for warehouses in multiple states and the need for buffer inventory

Media

Dish TV & PVR

Dish TV: The company currently pays 22% tax on revenues (assuming E-tax rate of 7.5% of revenue) and 4% as special additional duty (SAD). With GST implementation, total tax outgo will reduce depending on the final GST rate (we have done scenario analysis in table below). Further, SAD will also get subsumed with GST implementation. At 18% GST rate, Dish TV would have margin expansion 400bps. We have not assumed 1% additional inter-state movement surcharge as there is no clarity on the same.

PVR: The Company currently pays 22% E-Tax on gross ticket sales, 7-8% VAT on F&B sales, service tax on inputs (rentals, maintenance and others). With GST implementation total tax outgo will reduce depending on the final GST rate (we have done scenario analysis in table below). Primary benefit to PVR would be offset of service tax paid on inputs (~Rs600-650mn in FY16), this amount will further increase as service tax rate will also increase from 14.5% to 18% (in GST regime). At 18% GST rate, PVR would see EBITDA upgrade of 22% on our current assumption Rs4010mn for FY17E, implying 400-500bps margin expansion.