Greater clarity on the GST Bill will emerge once the revenue neutral rate (RNR) is fixed by the Council and the specific GST rates for various goods and services are laid out. However, assuming that the GST RNR will be in the range of 17-18% one can broadly draw conclusions about how various sectors will get impacted by the passage of the GST Bill.
How will GST impact business in India?
For businesses it will be overall positive as nearly 11 central and state taxes will get combined under the ambit of GST. That will provide a lot of simplicity, speed and cost saving for Indian companies. More importantly, companies will be able to design their sales, warehousing and logistics strategies based on the needs of the business rather than the tax dynamics of the business. This will add efficiency and profit-focus to business overall.
Impact on cement and capital goods…
Most cement companies are facing an incidence of 25-27% indirect tax and in a competitive scenario it becomes difficult to pass on the higher taxes to the consumer. GST will reduce the effective indirect tax incidence to about 18%. This will enable cement companies to reduce their prices in tune with lower tax burden. Cement companies will have an additional benefit. Cement is a largely regional business due to the high cost of transportation. A major contributor to the cost of transporting cement is the multiplicity of duties, taxes and levies. With all these taxes subsumed into GST, it may become possible to move cement profitably to more distant geographies.
Most capital goods companies currently pay a levy of 28-30% and that will stand reduced to about 18% in the post GST scenario. There is another advantage for specific segments of capital goods like electric goods. There is a strong unorganized sector operating in these lines of business that are able to compete due to the lower incidence of tax. GST will bring most of these small manufacturers under the ambit of GST and help shift of the industry to more organized structure. This will benefit the organized players as a whole.
Impact of GST on Telecom and Media sectors…
Telecom could be one of the losers in the post-GST scenario. Currently, telecom companies pay around 15% (14% ST + 0.5% Swacch Bharat Cess + 0.5% Krishi Kalyan Cess) as service tax and hence they may end up paying a higher tax of 300 basis points. This will be negative as far as telecom stocks are concerned. This will make the telecom services substantially more expensive. In a competitive market which is already reeling under the price war unleashed by Reliance Jio, this could be a hiccup for all telecom service companies.
For media companies, the impact of GST is likely to be more neutral. On the one hand, the higher incidence of service tax from 15% to 18% will be negative for media companies in a highly competitive market. On the positive side, the entertainment tax will get subsumed into the GST and hence this will be positive for DTH operators and multiplex operators.
Impact of GST on automobile sector…
Auto companies could be the key beneficiary in the post-GST scenario. The tax incidence on most auto companies is currently around 28-29%. Hence a reduction to the GST level of 18% will substantially reduce the burden on the end consumer. However, it is expected that the shift may benefit entry level cars more. Higher-end luxury cars and SUVs that use diesel may be taxed at the sin-rate to discourage their consumption. But the bigger benefit for auto companies from GST will be the creation of a single-national market. Moving goods across states will be easier and cheaper and will enable these auto companies to better expand their all-India warehousing and operations.
Impact of GST on logistics and retail…
These are two key sectors that are likely to be deeply impacted by GST. Most retail companies use substantial real estate and hence rental costs are a major part of their operating costs. GST may permit input tax credit on rent paid and that could substantially expand the margins of these retail companies. But the real far-reaching impact of GST will be on logistics. Currently, the logistics set-up is based on state level levies and taxes. Under the GST regime, India will become a single market and hence warehousing and transport decisions will be made on the basis of economics and efficiency. This will open up a huge opportunity for logistics companies in opening new business lines for themselves.
Of course, a lot will depend on the level of RNR that is finally decided upon and how the dispersion of merit and demerit goods from the RNR is determined. A lot will also depend on how many of the current exemptions and tax credits are retained and how many are done away with. But surely, the impact on industry overall is likely to be more positive than negative.