Single tax, multiple effects

Since the announcement of items in GST slabs, various sectoral indices show variance in performance — while FMCG and auto indices have risen 8.2% and 3.9%, respectively, healthcare and realty indices have fallen 7.9% and 5.4%

By: ENS Economic Bureau | New Delhi | Updated: June 2, 2017 7:32 am
GST, GST rates While GST is expected to have a positive impact on the economy in the medium to long term, as it aims to widen the tax net, it might lead to some disruptions in the near term. Illustration: Subrata Dhar

Last month, the GST Council arrived at a consensus on the fitment of items in GST rate slabs and announced them for most goods and services in line with the government’s aim to roll out the goods and services tax regime on July 1. Since the announcement of rates, the benchmark Sensex at the BSE has jumped 2.3 per cent and closed at 31,137.6 points on Thursday, reflecting an overall optimism around the announcement. However, different sectors have reacted differently to the GST Council’s decision. While there is a general view that most of the GST rates have a neutral impact on the indirect tax burden for the industry, a look at the performance of various sectoral indices shows variance in performance over the last 10 trading sessions since the announcement of rates.

While the FMCG and auto indices at the BSE rose the most, by 8.2 per cent and 3.9 per cent, respectively, in the past 10 trading sessions between May 19 and June 1, the healthcare and the realty indices have been the worst performers as they fell 7.9 per cent and 5.4 per cent, respectively.

While GST is expected to have a positive impact on the economy in the medium to long term, as it aims to widen the tax net, it might lead to some disruptions in the near term. A report prepared by ICRA states that the implementation of GST would have three major implications for the corporate sector — expand availability on input tax credit, higher tax compliance with business moving to organised sector and reducing bottlenecks and improved efficiencies in supply chain and logistics. “Closer to the implementation date however we would expect some disruptions, as the distribution chain gets rid of channel inventory to avoid potential inconvenience after transition. The working capital cycle of the industry is also expected to expand marginally, after the GST implementation,” says the ICRA report.

On May 18 and 19, the GST Council announced that 81 per cent of the 1,211 goods would be taxed at up to 18 per cent. In the case of services, while healthcare and education have been kept in the exempt category, transportation would be taxed at five per cent and items such as five-star hotel accommodation and entertainment will be taxed at 28 per cent. A report prepared by Morgan Stanley research says that while GST is likely to have a minimal direct impact on the Consumer Price Index (CPI)-based inflation, the rates will have varying impact on various sectors. “The impact of GST rates would likely be positive for consumer staples and media, and negative for airlines and oil & gas. For automobiles, hotels, and telecommunications, the impact is likely to be neutral to marginally negative; for cement and steel, it should be marginally positive,” says the Morgan Stanley report.

Most of the tax rates for the items in the CPI basket are likely to be taxed at a lower rate under GST as compared to the existing tax regime. While implementation holds the key, ICRA, however, points out: “Assuming that GST does have the intended effect of increasing tax compliance, the tax burden would increase, too, and could lead companies to pass the costs of increased tax compliance on to the consumer, though at a later stage…. The final impact will depend on the trends in aggregate demand and output gap after the implementation of GST.”

Key sectoral impacts

Auto segment will see different cars and bikes getting impacted differently. According to an analysis by ICRA, with the passenger vehicle segment will see reduction in overall taxation under GST as it will subsume infrastructure-cess currently levied on the segment, but the extent of reduction in overall taxes will vary across segments and bigger cars and SUVs will benefit. On the other hand, the two-wheeler segment will attract a GST base rate of 28 per cent, compared with the existing tax rate of 30 per cent. Motorcycles above the 350 cc segment will attract an additional cess of three per cent, leading to an overall tax rate of 31 per cent.

The growth in fast-moving consumer goods (FMCG) stock over the past 10 trading sessions is in line with the overall decline in the tax rate for consumer staples. The GST Council decided to tax toilet soaps, hair oil, shampoo, toothpaste, etc, at 18 per cent, against the existing rate between 22 and 24 per cent.

The pharmaceutical sector will see a marginal rise in their rates and the companies have seen a decline in their share prices. According to Finance Minister Arun Jaitley, the finished medicines now come under the slab of 12 per cent rate in GST as against an existing combined excise duty and value-added tax (VAT) of nine per cent. Moreover, the bulk drugs, which are used as ingredients to manufacture finished medicines, have been kept at 18 per cent in GST rate slab. Till date, this used to be around 12.5 per cent. The pharma companies are worried about how much time it would take for refunds to come as per the new inverted duty structure of GST.

While a lot will depend on the implementation of GST and expansion in availability of input tax credit, the Morgan Stanley report says that its implementation will give rise to a simplified tax structure, help to integrate state economies, increase compliance and tax revenue collections, and improve the competitiveness of domestic production.

“With the elimination of multiple tax rates and cascading impact of tax, GST is expected to improve overall efficiency in the allocation of key factors of production — land, labour, and capital. The overall impact of better allocation of resources, plus improving efficiency of domestic production and exports, is likely to improve overall growth,” says the report prepared by Ridham Desai, equity strategist, Morgan Stanley.

While estimates from the National Council of Applied Economic Research show that gross domestic product (GDP) could increase by 0.9 to 1.7 per cent, a report by the CEA-led panel says that the boost to growth is expected to come from making investments more attractive and estimates that GDP growth could see a minimum boost of 0.5 percentage points.

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