GST Becomes A Reality

 

"While the nation attempts to adjust to the new reality – GST, we try to look at the opportunities that the new tax reform presents to the investors"
By Yogesh Supekar

As GST becomes a reality in India and business houses attempt to adjust to the new normal, it is extremely important to assess which sectors and industry will be most impacted by the historic tax reform that has been long awaited in India.

GST will be enforced starting July 1 and markets dynamics will take its own course influencing stock prices.

The benefits of GST are welldocumented and by now it is a given that GST is expected to boost the tax collection by broadening the base of tax payers and bring in supply chain efficiencies in the medium to long term. This outcome of GST implementation for sure will benefit immensely the organised trade. As layers of taxation reduce, the ease of doing business becomes a reality.

While the GST can bring in economies of scale for several businesses and can be expected to drive consolidation in logistics and warehousing segments, the worrisome aspect will remain the fear of inflation.

The inflation is a real danger as a consequence of GST implementation. Empirical evidence shows that inflation has risen whenever GST has been implemented in any particular economic region.

According to Sanjeev Zarbade, VP-PCG Research, Kotak Securities,"GST is a tax trigger which will facilitate "ease of doing business" and simplify tax compliance. In the near term, some increase in costs is expected on account of the formalisation of the GST regime, hence CPI inflation is likely to see some increase.

In terms of sectoral impact, the GST rates announced have been higher than existing rates (excise+sales) on sectors such as autos, two-wheelers, beverages, FMCG products, movie exhibition and paints. These sectors may have to take price hikes to absorb the higher tax incidence, in which case, there may be a temporary slowdown in demand. On the other hand, sectors such as lubricants, coal, adhesives, hair oils would face lower tax incidence. That would be a positive both in terms of demand growth and margins.

In the long run, it is expected that organised players in sectors such as logistics, retail, consumer electricals stand to gain on account of narrowing of tax advantage enjoyed by the unorganised players over the organised ones."

One Nation, Eight Tax Rates Structure

There will be zero tax rate for essential items that is used by the common man--fresh meat, fish, chicken, eggs, milk, butter milk, curd, natural honey, fresh fruits and vegetables, flour, besan, bread, prasad, salt, bindi, sindoor, stamps, judicial papers, printed books, newspapers, bangles, handloom etc. Then we have the 5 per cent, 12 per cent, 18 per cent and 28 per cent slabs. The sixth slab is the additional cess on luxury goods. The seventh slab will be at 0.25 per cent for the rough diamond and the eighth and final is for gold at 3 per cent.

GST : SECTORAL IMPACT

Oil & Gas sector

While the economy will be cheering the introduction of GST, the oil & gas sector players will be an unhappy lot. The GST is expected to adversely affect the oil & gas industry as the sector will have to comply with both the current tax regime and the GST framework. This double compliance may increase the cost for the oil & gas sector, as at least five petroleum products, viz. crude oil, natural gas, motor spirit, high-speed diesel and aviation turbine fuel have been excluded from the GST.

The other products such as LPG, naphtha, kerosene and fuel oil are included in the GST. The upstream companies will also have to bear the higher tax incidence at 18 per cent from current 15 per cent as services contribute a significant proportion for these companies. This higher tax incidence would impact the upstream companies adversely.

Agriculture

GST implementation, from the look of it, if we consider the proposed rates, seems to be a mixed bag for the agriculture sector.

The fertilisers are likely to become expensive by 5 per cent to 7 per cent, assuming the price hikes are not nullified by increased government subsidy. Fertilisers, that currently attract VAT of up to 8 per cent in several states, will now attract 12 per cent tax under the new GST regime.

Pesticides will be placed in 18 per cent rate slab. Currently, the excise duty levied on pesticides is 12 per cent and certain states levy a VAT of 4-5 per cent.

The current GST structure does not augur well for the food processing industry.

Having said that, a smooth GST regime is expected to break the inter-state barriers on movement and facilitate direct linkage between the food processors and the farmers. This may be a positive outcome for both the food processors and the farmers.

Manufacturing

We believe that one of the biggest beneficiary of GST implementation will be the manufacturing sector in India. There will be manifold indirect benefits of supply chain efficiencies kicking in the system, apart from ease of doing business which may attract higher foreign funds.

For manufacturing players, there will be increased fungibility of credit on goods and services. The cost of procurement and production can be expected to reduce owing to full credit on tax on interstate sale. Those manufacturers that imports considerable amount of goods as raw material may benefit, as the credit of import duties will make imports cheaper. As all the imported consumer goods will benefit, the retailers also stand to benefit."

Media and Entertainment

Elimination of multiple taxes, i.e entertainment tax, luxury tax, VAT, service tax, etc and clubbing together all these into a single tax, i.e GST, augurs well for the media and entertainment sector. GST implementation will facilitate credit between goods and services and prevent cascading of taxes, thus leading to increased profits for companies in entertainment sector. GST also simplifies levy and valuation on composite transactions, which can reduce litigation challenges and related costs that impact the companies in this sector.

Within the sector, the impact of GST will be negative for film exhibition business as the effective tax rate has increased under the new tax regime. However, the seamless availability of credits is a positive for the film exhibitors."

Banking, financial services and insurance

The banking and financial services cost for the end consumer will increase as the tax rates increase from currently 12.36 per cent to more than 20 per cent. The increase in rates will be minimal though on mundane banking services. "Overall for the banking sector, from the customer's point of view, there will be marginal impact. Incremental tax because of GST will be minimal, to say the least. ATM charges, DD charges and other transaction charges will not be meaningfully impacted," says A.K. Sridhar, CIO, India First Life Insurance.

On whether GST will increase the insurance premium, A.K. Sridhar says, "When it comes to insurance sector, the cost of policy for the policyholders will go up marginally. There will be 75 bps to 1.2 per cent increase in the cost (premium payment). The taxes will go up from 12 per cent to 18 per cent.

The term plans, for example, will come under 18 per cent tax bracket. The cost for term plans will go up by 6 per cent, whereas the premium for endowment plans (traditional plans) is expected to get costlier by 1.5 per cent. I do not think the demand for insurance products will be impacted due to the increase in cost owing to GST, as the premiums especially for the term plans are extremely competitively priced in India.

Overall, as market matures, the premiums for term plans may come down that is a different issue, but immediately the premiums will increase."

GST can create some temporary disruption in the market though, and the same can be expected in the BFSI sector. D. Arul Selvan, Executive VP & CFO, Cholamandalam Investment and Finance Company Limited, believes there will be disruption owing to GST implementation for two to three quarters.

He further states that, "In the long run, the BFSI sector will benefit as this will entail better transparency in dealing, quicker turnaround time for transporters resulting in better earning potential and hence lower delinquencies.""

Telecom

GST implementation will bring in clarity on classification disputes on software, franchise fees, SIM cards, etc. and can simplify levy and valuation on composite transactions by eliminating multiplicity of taxes - VAT, service tax, entry tax. Telecom operators via the industry body Cellular Operators Association of India (COAI) have approached the government for a reduction in the 18 per cent GST rate, arguing that the benefit of input credit is not enough to fully compensate the higher tax incidence in the newly proposed tax regime.

According to the COAI, the increase in GST rate by three per cent will not be compensated by the reduction of cascading tax costs. It looks like the increased burden of three per cent will be applicable on the entire revenue and the benefits of input taxes will accrue only on procurement of capital equipment, etc, which is only a small percentage of the revenue. Telecom firms consume a number of key inputs, such as diesel and electricity that continue to be outside the GST regime for which no credit is available.

The new GST rates as decided by the GST council stands at 18 per cent. At present, telecom consumers are charged 15 per cent in the form of tax and cess over their phone bills. If the GST rates are not changed as per the COAI recommendations, it is clear that the new GST rates will tax telecom companies higher by a couple of percentage points at least (netting for tax credit, which is expected to be around one per cent) and that may impact profitability of the industry, unless telecom companies find a smarter way to pass on the bill to the end consumer.

Automobile Sector

Cars will be taxed at the top GST rate, plus a cess in the range of 1 per cent to 15 per cent. Small cars will be charged 1 per cent cess on top of 28 per cent tax, midsized cars will attract 3 per cent cess and luxury cars 15 per cent cess on top of the peak rate.

Under the current tax system, there are several taxes applicable on this sector like excise, VAT, sales tax, road tax, motor vehicle tax, registration duty, all of which will be subsumed by GST. Though it is too early to provide an in-depth analysis of cost per product post-GST implementation, as some ambiguity remains due to tax rates and incentives or exemptions provided by different states to the manufacturers or dealers for manufacturing car, bus, bike.

The implementation of GST would reduce the cost of manufacturing of cars due to the subsuming of different taxes levied currently. Under the GST, the taxes would be charged on the consuming state, rather than the origin state, which would give a boost to the growth rate of the automobile industry.

Infrastructure & real estate

As with many sectors, simplification of levy and valuation on composite transaction by doing away with multiple taxes such as VAT, service tax, etc. will prove to be extremely beneficial to the sector.

However, under the GST regime, there will be increase in total tax incidence on certain products such as cement and steel, which may increase the real estate prices for the end consumer. How much will this price rise impact the real estate demand cannot be ascertained for sure, but there could be a marginal negative impact on the demand.

This is what Munish Doshi, Chairman, Acme Housing Group, has to say on GST, "The impact of GST on real estate sector will be ascertained on the volume of effect on sales of a property, which largely depends upon the tax structure and the sentimental value attached. Industry has experienced that the trust factor has been taken care of by imposing RERA, for both developers and buyers. On the other hand, GST being levied at 12 per cent by the government is much higher than the prevailing tax structure of service tax and VAT, eventually increasing the final buying price of the home."

Textiles

The GST Council has been able to keep the new GST rates on various textiles, including cotton fibres and lowpriced garments, at almost the current levels, thus managing to avoid any flaring up of garment prices. The GST rates on silk and jute fibres are kept at zero.

The rates for readymade garments above Rs.1,000 each will be attracting 12 per cent GST, which is higher than the current tax incidence of roughly 7 per cent that prevails in many states (2 per cent excise duty and 5 per cent VAT).

However, the input tax credit facility under the new regime is expected to offset the perceived loss due to higher tax rates. Overall the GST rates on garments look to be reasonable and may lead to some items being cheaper post-GST implementation.

The shirts, for example, that are priced below Rs.1000 will be attracting 5 per cent GST rate.

Even though the rates for most textile items are kept at 5 per cent, there are few items such as man-made fibre (MMF), fabric and yarn, dying and printing units and embroidery items where the new tax rates are higher at 18 per cent. These items may lead to higher input costs and can adversely impact the entire textile value chain.

FMCG

Indian FMCG sector, the fourth largest sector in the Indian economy, is also one of the fastest growing sectors in India. GST implementation will affect the way FMCG players operate in India.

As of now, FMCG players have to pay many taxes like VAT, service tax, excise duty, Central sales tax. Once GST is implemented, it will subsume all these taxes under a single tax, i.e GST. The current tax rate for the FMCG industry, including all the taxes, is around 22-24%.

FMCG companies stand to benefit as the GST rates are finalised at 18 per cent for few products. Certain products like soaps, toothpaste and hair oil will attract 18 per cent GST rate.

The major benefits owing to GST for the sector are reduction in logistics cost and stock transfers within states. Distribution cost of the FMCG sector currently amounts to almost 2 to 7 per cent of the total cost. Owing to GST, the distribution cost is expected to drop to 1.5 to 2 per cent post implementation.

Significant cost reduction in terms of transportation and storage of goods will be achieved due to smoother supply chain management, payment of tax, claiming input credit and removal of CST under the GST regime. This reduction in cost can make the consumer goods cheaper.

More clarity will emerge before July 1 which will help us understand full impact of GST. A lot of FMCG companies have their warehouses in states like Himachal Pradesh/Uttaranchal as they enjoy a lot of holidays/benefits/exemptions under the current tax regime.

We do not have clarity as to whether all the tax holidays/ benefits/exemptions would exist under the GST once it is implemented. The warehousing rationalisation will have an impact on the total cost for the FMCG players.

Says Nitasha Shankar, Senior Vice President and Head of Research, Yes Securities (I) Ltd, "GST would affect the FMCG companies in three ways. First, there would be saving in the effective tax rate, which would broadly come down to 18% in most categories and 5% in case of staples. At present, FMCG companies pay taxes at ~24-25%, including excise, VAT, etc.

Therefore, in terms of the tax rates, there would be savings to the tune of 6-7% in most cases. In addition to this, the companies would also see saving on account of rationalisation in warehouses as they would no longer need to maintain state-wise warehouses, which would help in improving operational efficiencies for the companies. And finally, they would benefit from the shift from unorganised to the organised sector"

Gems and Jewellery

The GST Council's decision to impose a 3 per cent GST on gold is expected to be beneficial for players (organised) in the gems and jewellery industry. With 3 per cent GST rate on gold, not only will the jewellery be costlier, but also it will lead to higher incidence of illegal gold trade.

With an existing 10 per cent import duty, consumers in India will have to pay an effective duty of 13 per cent on gold jewellery, which is higher than the earlier 12.5 per cent that comprised of 10 per cent import duty, 1 per cent value-added tax, 1 per cent excise duty and 0.5 per cent cess.

On the retail front, almost 30 per cent of the jewellery sector is organised and hence the GST implementation will be positive for jewellery makers who cater to the retail consumers in India. However, for those payers in the industry who rely on exports of rough diamonds, the GST implementation has negative impact as the GST Council has decided to impose 0.25 per cent GST on rough diamonds. The industry already operates on thin margin and the increasing competitiveness of the industry will make it unprofitable for the industry to cut and polish the rough diamonds in India. While commenting on the new GST rates PR Somasundaram, Managing Director, India, World Gold Council, said, "The Indian government's decision to apply 3% GST on gold is an encouraging step in the current context to stabilise the industry and address the concerns of the millions employed in the industry. Together with customs duty of 10%, the total tax on gold is still high and will continue to have an impact on the jewellery industry. This may be an opportune time for the government to cut the import duty and bring down the total tax on gold significantly lower, so that unauthorised imports are totally eliminated and industry embraces transparency in letter and spirit under GST."

CONCLUSION

It is clear that there are a few sectors that stand to gain more than the others owing to the new GST regime. Investors, while maintaining a long term view, should not shuffle their portfolios based on GST rates and developments alone.

As a tactical strategy, a long term investor can use the opportunity to accumulate identified stocks if the market corrects from the current levels owing to the disruption caused by the implementation of GST.

The benefits of GST far outweigh the disadvantages, if any, for the economy, which is expected to improve owing to the GST tax reform and the equity markets can gain further ground. Active portfolio management is all about identifying stocks that may outperform in the long run and assigning judicious weightage to individual stocks. It is pragmatic to identify stocks from sectors that are expected to do well in future. GST may well be a trigger for certain sectors to start outperformin

Five Stocks that stand to gain owing to GST

TATA STEEL

BSE Code: 500470
CMP: 522
FV: 10
Market Cap (F.F.): 34994.66 (Rs. Cr.)

Tata Steel Limited is a top global steel company with commercial presence in over 50 countries. On the financial front, Tata Steel's revenue increased 24.29 per cent to Rs.52,564.93 crore in FY17 as compared to the previous financial year. The company's operating profit rose 53.57 per cent to Rs.12,290.41 crore in FY17 on a yearly basis. Its profit after tax also increased 260.44 per cent to Rs.3444.55 crore in FY17, as compared to the previous financial year.

On segmental revenue front, Tata Steel has earned 38.82 per cent from Tata Steel India operations, 34.58 per cent from Tata Steel Europe operations and 16.34 per cent from other traderelated operations in FY17. Tata Steel's automotive sales comprised 43 per cent of the total market share, company's industrial products, projects and exports grew 47 per cent in FY17, whereas the branded products comprised 45 per cent of total sales of the company during the fiscal. Moreover, the company's ferro alloys and minerals division gave an unexpected boost to its sales.

The company is seeking an aggressive growth strategy on the domestic front in line with the government's emphasis on domestically manufactured steel along with a revived thrust on infrastructure, affordable housing and tax reforms.

The Goods and Services Tax (GST) rate for steel has been decided at 18 per cent, while the GST rate for coal and iron ore is decided at 5 per cent, which is expected to bring down the input costs for the steel company. Further, the company will also witness a reduction in logistics costs with the implementation of GST. The exclusion of gas from the ambit of GST will also widen the profit margins for its gasbased steel plants, resulting in an added reduction in its operational cost.

LAKSHMI MACHINE WORKS

BSE Code:500252
CMP: 5074
FV: 10
Market Cap (F.F.): 3,557.44 (Rs. Cr.)

Lakshmi Machine Works is engaged in manufacturing and selling of textile spinning machinery, computer numerical control machine tools, heavy castings and parts and components for aerospace industry. Its products and services include aero structure components, aero engine components and sheet metal fabrications. On the financial front, Lakshmi Machine Works' revenue decreased 12.71 per cent to Rs.2499 crore in FY17, as compared to the previous fiscal. The company's EBITDA declined 23.31 per cent to Rs.259 crore in FY17 on a yearly basis. Its net profit also decreased 8.71 per cent to Rs.224 crore in FY17, as compared to previous financial year.

On the segmental revenue front, Lakshmi Machine Works has earned 82.91 per cent from textile machinery division, 16.04 per cent from machine tool & foundry division and remaining 1.05 per cent from advanced technology centre in FY17. The Goods and Services Tax (GST) rate for textile machinery has been fixed at 18 per cent by the GST Council. As per the announced GST rate, there is no drastic difference in the existing purchases and sales of machineries.

LT FOODS

BSE Code: 532783
CMP: 67.20
FV: 1
Market Cap (F.F.): 591.53 (Rs. Cr.)

LT Foods is a branded specialty foods company. The company is engaged in milling, processing and marketing of branded and non-branded basmati rice, and manufacturing of rice food products in the domestic and overseas market.

On the financial front, LT Foods' topline increased 10.53 per cent to Rs.3287 crore in FY17, as compared to the previous fiscal. The company's EBITDA too rose 10.93 per cent to Rs.396 crore in FY17 on a yearly basis. Its net profit also boosted 62.74 per cent to Rs.117 crore in FY17, as compared to the previous financial year.

LT Foods' India and international sales volume has witnessed growth of 27 per cent and 14 per cent, respectively, on a YoY basisin FY17. The growth has been driven by consistent brand investments and with the addition of new consumers in each segment, not only India but globally as well.

The impact of GST rates on farm products such as edible oils, tea and coffee is seen as neutral, with no major impact on the end-prices for consumers. The 5 per cent GST on branded wheat products could make them marginally expensive, as the industry may choose to pass the tax burden to consumers.

SICAL LOGISTICS

BSE Code: 520086
CMP: 255
FV: 10
Market Cap (F.F.): 439.62 (Rs. Cr.)

Sical Logistics is primarily engaged in providing integrated logistics services. The company's divisions include port handling, road logistics, retail supply chain solutions, customs house agency, shipping division and goodwill travels division.

On the financial front, Sical Logistics' net sales increased 18.59 per cent to Rs.922 crore in FY17 as compared to previous financial year. The company's EBITDA too rose 47.13 per cent to Rs.149 crore in FY17 on a yearly basis. Its net profit also boosted more than double to Rs.38.35 crore in FY17, as compared to previous financial year.

Sical Logistics has been awarded with a letter of acceptance (LoA) by Mahanandi Coal Fields for extraction of coal by deploying surface miners on hiring basis, mechanical transfer of the same by payloaders into tipping trucks and transportation at a contracted value of Rs.289 crore.

Sical Logistics has approved the proposal to initiate the process to acquire majority equity stake in a company in the express logistics business with an annual revenue of Rs.40 crore. The company also approved proposal to initiate the process to acquire majority stake in a company in warehousing and distribution business with an annual revenue of Rs.20 crore.

STOVEC INDUSTRIES

BSE Code: 504959
CMP:2538
FV: 10
Market Cap (F.F.): 153.69 (Rs. Cr.)

Stovec Industries is engaged in the development and production of consumables for their use in textiles and graphic printing industry. The company's products and services include perforated rotary screens and automatic rotary screen printing machine. It also offers digital ink and sugar screens.

On the financial front, Stovec Industries' revenue increased 12.15 per cent to Rs.52.68 crore in Q1CY17 as compared to the same period previous fiscal. The company's EBITDA too rose 28.81 per cent to Rs.11.43 crore in Q1FY17 on a yearly basis. Its net profit also boosted 21.41 per cent to Rs.7.18 crore in FY17 as compared to previous financial year.

On the segmental revenue front, Stovec Industries has earned 82.62 per cent from textile consumables and textile machinery, 12.89 per cent from galvanic and remaining 4.51 per cent from graphics product in CY16.

Stovec Industries is consistently delivering better financials. The company's topline increased 25.98 per cent CAGR in the last four years ending with CY16. Its EBITDA too rose 31.31 per cent in CY13-CY16. Its bottomline also increased 23.92 per cent in the last four years.

Mahesh Patil 
Co-CIO, Birla Sun Life Asset Management Company

It is widely speculated that GST once implemented will be disruptive in the near term. In your view, will it impact the Q1 and Q2 earnings of many companies?

We expect businesses to draw down their inventory going into GST (Q1) and rebuild it again post-GST (Q2). The corporates indicate that dealers could carry lower stock going into GST.

There could be a topline impact, but not for the entire quarter. It could be only for the month of June. We can expect a bottomline impact as well, since discounts are being offered to clear stocks. Having said that, we cannot quantify the impact for the listed space as a whole. The Q2 might also see some impact which would reduce progressively as clarity emerges and inventory re-building may happen.

Empirical evidence shows that wherever GST has been implemented, the inflation rate has gone up, at least in the initial stages. What is your take on GST implementation and inflation? How will this influence the decision on policy rates?

Overall, GST implementation will have a neutral to lower impact on inflation. GST council has ensured that GST rates are not too different from the existing rates. In fact, full passthrough of GST rates can lower CPI by 20-40 bps due to the set-off mechanism. However, in the near term, there could be an asymmetric impact, i.e., tax increases are passed on, but tax cuts are not, which may not be material.

RBI would look at a whole lot of factors, apart from impact of GST on inflation. Our house view has been that there is more room for RBI to cut rates in the next few months due to lower than targeted inflation.

Which sectors in your view will be positively impacted and which sectors negatively impacted due to GST?

Sectors like building material and jewellery will be positively impacted as organised players would take market share from the unorganised ones.

Some sectors would pay lower rates as compared to the current rates, and these will be positively impacted. These sectors are: auto (large cars, SUVs), LED lighting fixtures, select consumer staples (oral care, adhesives and soaps)

Negative surprise in rates was in shampoo, paints, cables, CFL lighting, city gas distributors and media exhibitors. Movie exhibition, telecom, consumer durables (AC) will be adversely impacted.

Over the long term, we don't see the new GST rates as being sector negative anywhere since price increases will be passed on. Even in goods where tax incidence has risen, growing incomes and falling credit costs are likely to minimise demand impact. Besides, the effective tax incidence on some of these goods may not rise at all due to availability of input tax credits.

What change in portfolio strategy would you recommend for long term investors, owing to GST?

The long term investors are advised to stay put. There may be minor disruption in the implementation of probably the most complicated project the market has closely seen. If a correction arises due to that reason, it would be a buying opportunity. There are lot of positives to take from GST – shift from unorganised to organised players, increase in tax collections, increase in efficiency of operations etc. GST is growth accretive and hence should not concern the long term investors.

Deb Mukherjee 
CEO, Wisdom Capital

Will GST impact the consumption pattern in automobile industry?

The automobile industry in India is continuously growing and producing a large number of cars annually. This growth of the sector can be attributed to the ever-growing demand of the buyers. Under the current tax system, there are several taxes applicable like excise, VAT, sales tax, road tax, motor vehicle tax, etc., which will be subsumed by GST. At present, it is too early to provide the analysis of cost per product post-GST implementation, as some ambiguity due to the various types of taxes still exists.

At present, if you want to buy a used car, you will have to pay VAT, and in some states, a composite rate and excise/VAT are not applicable on advance received for supply of goods. Many states also provide different investment-linked incentive schemes to the original equipment manufacturers (OEMs)/ components. The sale of goods without any form of consideration is also exempted from being taxed. The importers and dealers currently are ineligible for the CVD and excise duty paid by OEMs. Some of the vehicles that are exempted from the NCCD/auto cess are electrically-operated vehicles, three-wheeled vehicles, hydrogen vehicles based on fuel cell technology, vehicles used solely as taxis, the ones used by physically-disabled persons, hospital ambulances.

The two taxes charged to the end consumer currently are excise and VAT. The average combined rate of the excise and the VAT is 26.50-44 per cent, which is higher than the expected rates of 18 and 28 per cent under the GST. With this rate, the burden of tax on the end consumer under GST will be less.

The automobile industry is very competitive in nature; this is why currently there are a lot of free services/warranties offered by the car manufacturers. These free goods/services are not taxed under current tax laws. But under the GST, the free services/warranties would also be eligible for taxation. Due to the subsuming of different taxes levied currently, the cost of manufacturing cars would be reduced. Under the GST, the taxes would be charged on the consuming state rather than the origin state. This would give a boost to the growth rate of the automobile industry.

In your opinion, what will be the implication of GST on the automobile sector?

The implementation of GST aims to bring in the eradication of several taxes which are currently levied on the automobile sector, such as excise, VAT, sales tax, road tax, and motor vehicle tax. The clarification as per how the GST will create an impact on the automobile industry is still in a haze, but the request of the Society of Indian Automobile Manufacturers (SIAM), of clubbing all the present taxes under one excise duty is being considered, as the automobile industry is the highest taxed industry in India.

The GST hopes to bring positive outcomes for the Indian automotive industry by making the processes more transparent and one single percentage of levied taxes, rather than several location-based taxes.

Considering the sales and purchase of the car segment, GST will soon to provide profits to this sector. The taxes under GST are expected to come down to 10-15%, as levied on luxury cars, as opposed to the current tax system of 52%-55%, and 1% on small petrol cars, as opposed to the current 29%. As far as the hybrid car segment is considered, new incentives and schemes need to be considered since the hybrid car segment is expected to get more expensive after the taxation system of 28% tax, with an addition of 15% cess levied on the purchases.

Corporate Voice

R.K.Jain
Group President (Corp. F&A)

"With the new GST rates being implemented at 18 per cent for flexible packaging industry, things will not change much as, under the current tax structure, the total tax incidence comes at 17.5 per cent. So, there will be no material impact on our customers, and any which way the difference gets passed on to the end consumer. On the whole, there will be no major difference for the sector, except that the industry will get more organised. "

B. J. Maheshwari
Whole Time Director & CS-cum-CCO,
Dwarikesh Sugar Industries Ltd.

"As far as sugar industry is concerned, we do not see any major inflationary impact due to implementation of GST. The rate finalised by the GST Council for sugar is 5%, which is more or less the same as what we are currently paying (Rs.200/quintal). Similarly, rates agreed upon for byproducts like ethanol (GST of 12%) is more or less in line with industry's expectations. So, overall, we don't see any major inflationary impact due to GST, though some more clarity is required like tax structure for different types of sugarcanes. Whether this rate of 5% would be uniform for all types of sugarcanes, like fresh or dried and seed or different, needs to be seen."

Sorbh Gupta 
Associate Fund Manager –Equity 
Quantum Mutual Fund

"The indicative rates suggest the daily consumption product basket will see a decline in tax rates under the GST regime. However, the government has made it clear that the benefit of lower taxes will have to be passed on to end consumer. Hence, there will be no change in profitability due to lower taxes. The consumer staples are non-discretionary in nature, so this will not result in any structural change in demand too. However, with lower logistics bottlenecks and no multiplicity of taxes the transportation cost and time should reduce. Finally, as the companies will get input credit on all the items covered under GST, barring a few exceptions, the cascading of taxes will reduce.

The companies manufacturing goods under area-based exemptions will continue to be exempt till the promised period. However, they will have to pay tax first and then claim a refund later. This is to avoid disturbing the credit chain under the GST. The government stance is clear that no new area-based exemptions will be rolled out from now on."