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The GST Game Changer

Monday, August 08, 2016
By Dominic Rebello

The government took the first step towards making the long-awaited Goods and Services Tax (GST) into law when the Constitutional Amendment Bill was passed in the Rajya Sabha late on Wednesday sans dissent. When enacted, GST will subsume a slew of indirect taxes such as excise, sales and service tax and create a common tax on both goods and services. This will help raise the ease of doing business in India by simplifying the tax structure, improving tax compliance and reducing the cascading effect of taxation. Here is a look at how each sector will be impacted…

After a decade-long struggle, the Goods and Services Tax (GST), which has already been adopted by 160+ countries in some form or the other, sailed over the first of three hurdles when the Rajya Sabha unanimously adopted the Constitution Amendment Bill to facilitate its legislation.

Coming up next is the GST Council, comprising the Finance Minister and nominated State Finance Ministers, which is expected to be formed in 2 months to deliberate on the specific features of the tax including the final rate structure, exemptions, threshold limits and date of implementation on petroleum products.

Further, the Constitution Amendment Bill also needs to be passed by at least 15 state legislatures (50% of the states) before becoming an Act. Then the Centre and the states will have to pass their GST laws and turn India into a unified market.

So which segments stand to gain and which won’t with the implementation of GST?

CRISIL Research took a look at how sectors would be impacted..
Sectoral impact
Automobiles and Auto Ancillaries – Positive

  • Within the passenger vehicle industry, mid-size segment (1,200-1,500 cc) will be the largest beneficiary with an estimated duty decline of nearly 20%. Small cars segment could see a price benefit of about 10% and luxury cars & UVs segment to get a limited ~5% benefit.
  • Given the intense competitive scenario & players’ struggle to maintain the market share coupled with strong financials of the companies, CRISIL Research expects the players to pass on the tax benefit to end consumers.
     - In turn, we anticipate a consumer preference to shift towards premium hatchbacks led by this shrinking gap between small cars & mid-size segment.
     - Moreover, increasing affordability, lower cost of ownership and ample launches in the mid-size segment will support the change in consumer preference as well.
     - On the top end vehicle front, Crisil does not foresee a significant impact on demand as price does not particularly dictate the purchasing decision for the segments.
  • Two wheeler industry will have a similar impact and prices will drop by about 8-10%. This will translate into better demand for price sensitive 100-125 cc segment. 150+ cc vehicles are not estimated have a significant impact.
  • Tractors are currently levied a 0% central excise duty and a 4% VAT. Under the new GST regime, central GST will remain 0% and state GST is anticipated to be in the same range as current VAT. So we do not expect much change in the demand scenario for tractors.
  • Commercial vehicle, which gets subjected to Central Excise (12.5%) and VAT (12.5%), is expected to benefit marginally depending on the RNR adopted.

GST will lead to the hub and spoke model gaining prominence, and a faster shift towards larger MHCV trucks in primary routes - to 37 tonne from 31 tonne and from 25 tonne multi-axel vehicles (MAVs) and 40 tonne trailers from 35 tonne.

  • Auto ancillary industry’s effective tax rate which is currently at 28-30% is expected to come down to 18% upon implementation of GST. However, this benefit will be passed on to OEMs, which will eventually drive expansion in auto demand. It is also expected to improve the price competitiveness of the organised players, especially in products largely sold in the aftermarket segment (e.g. batteries - where share from after-market is greater than 50%).

Cement - Positive
With GST implementation, Crisil expects the overall tax incidence on the sector to potentially decline. Typically, indirect taxes in the sector are close to 28-30% which would potentially come down post GST implementation to the effective tax rate. Further, the sector will also benefit from expected decline in logistics costs with consolidation of warehouses especially for large players with a pan-India presence.

Media & Entertainment - Positive

  • Media and Entertainment Multiplex- Positive
    Multiplexes would be a key beneficiary of GST. At present, multiplexes pay local state taxes like entertainment tax and VAT on overall revenues including food and beverages. In addition, they also pay service tax on projector equipment, utility, security, housekeeping and other cost which are paid to central government. The blended average rate for multiplex players would be ~24-25% across the country which would reduce to ~18%.
  • Media and Entertainment DTH - Positive
    DTH players pay service tax of 14.5% and entertainment tax of which varies from various states (in range of 2% to 35%). Their indirect tax outgo is ~23-25% which would reduce to ~18%.
  • Media and Entertainment Broadcaster - Negative
    Broadcasters pay indirect tax in range of 14-15% which would increase to 18% post implementation of GST.

Retailing – Positive (especially organised retailers)
Rentals which is one of the major costs for retailers attracts service tax of 14.5%. The retailers cannot set-off this costs like the other industries as the companies trading goods (retailers), which pay VAT, are not allowed to claim credit for the service tax paid on different items since they have no central tax against which this can be set off. This creates additional operating expenses for the players. However, passing of GST bill will now allow these indirect taxes (service tax) on lease rental to be set off. This will help in expansion of profitability margin. Further, the bill will also help organised retailers as the single tax will bring majority of transactions of unorganised players under the tax net and thereby reduce the price gap in retail prices of various items.

E-commerce - Neutral
Bill is expected to bring some clarity in online business. It will also open new markets for online players who face complexities of entry tax and other processes while entering in specific states.

E-commerce players have large number of sellers listed on their platform. These sellers will have cash-flow issues as they will have to claim refunds for tax paid on inputs , which e-tailers will not be able to account for. Thus, this will increase the compliance burden for e-commerce players.  

Restaurants and QSR - Negative
Restaurants and Quick Service Restaurants (QSR) currently attract Service tax as well as Value Added Tax (VAT). While Service tax is currently charged at 6% (taking into account the abatement rate of 60%, Swacch Bharat Cess and Krishi Kalyan Cess), VAT is charged at 12.5% for food items and at 25% for aerated drinks. We believe that with the exclusion of aerated drinks, the impact on the restaurants and QSRs will be negative only if the GST rate is higher than 18%.

Textiles - Marginally negative
For the textile sector, a major proportion of sales is derived from exports, which will continue to be zero-rated. Effective tax rate for the textile sector is 6-7%. If it is not classified as goods of basic necessity and the tax rate is increased, it will have a negative impact on the players catering to the domestic segment.

Telecom Services – Marginally Negative
The mobile bills for both prepaid and postpaid subscribers may go up if the rate for GST is set above 15% (the service tax (including KKC and SBC) currently paid for the mobile bills).  

IT Services – Marginally Negative
IT companies at present have a relatively simplified tax regime wherein, there is a single point of taxation which is the central service tax. Under the new GST regime, there is not much clarity on the slab applicable to the IT Companies and compliance might come under Central GST (CGST), State GST (SGST) and Integrated GST (IGST). This could lead to multiple taxation points, which will lead to increased costs for players as invoicing will now cost more. On the hardware front, movement will become smooth. Currently, duty on manufactured goods ranges from 14-15%. A rate less than this would reduce costs for certain hardware components.

Renewable Energy - Negative

  • Implementation of GST, assuming 18% rate, will increase solar power project cost by 13-15%
     - Solar modules, which account for 55-60% of total capital cost, and are largely imported, there exists no customs duty. Also, VAT and other levies like entry tax and excise duty, which together are ~5% currently, will increase to 18%.
  • However, given strong government thrust to promote renewable energy, the GST Council could exclude / provide a concessional rate renewable energy from the regime.

Hotels – Impact will be based on the location
Hotel rooms currently attract Service tax and Luxury tax. While Service tax is levied by the union government and currently stands at 8.7%, Luxury tax is a state subject. Luxury tax rate currently varies between 5% - 12.5% depending on the state. Therefore, Crisil believes that the impact on hotels will be negative or positive depending on the rate as well as the state in which the property is located. Five star hotels could attract a higher rate of 40% under GST regime, which will be a negative.

Steel - Neutral
With GST implementation, Crisil expects the overall tax incidence on the sector to potentially remain same with a marginally positive impact in states imposing high VAT considering that the steel producing states are not the key consuming centres; thereby attracting high VAT (state-specific).

Typically indirect taxes in the sector are close to 15-18% depending upon whether the sales are within or outside the state. If the GST is levied at 18% the effective tax rate will remain at similar levels and there will be no visible impact on the steel sector (slight positive bias).

Pharmaceuticals - Neutral
GST for pharma companies likely to remain similar to the current effective tax rate of ~12%. However, as the pharma industry receives area based exemption on indirect taxes, any changes in the exemption or re-negotiation of Memorandum of understanding (MoUs) between the government (state, central) and the companies can have a slight negative impact on the sector. GST will enable pharma companies to rationalize their distribution networks through consolidation of depots/warehouses and better inventory management.

Oil and Gas - Neutral
The Oil & Gas Industry would largely be marginally impacted by the introduction of GST; the reason being that 5 petroleum products (ie crude, natural gas, ATF, diesel and petrol) are excluded from the coverage of GST for the initial years while the remaining petroleum products are covered within the coverage of GST. As a result, the industry would be required to comply with both the current tax regime as well as the GST regime. So, overall impact is neutral.

Agri-commodities: Tea, Sugar, Cotton – Neutral
Most of the agri-commodities have a concessional rate of tax less than 10%. Being essential commodities, it is unlikely the GST rates will be different from the current concessional rates.

Coal and Power - Neutral

  • End-users of coal are expected to witness an increase in fuel costs with implementation of GST.
  • Excise duty on coal is levied at 6%, whereas VAT is levied at 5%. Assuming a GST rate of 18%, delivered cost of coal is likely to increase by 5-6% per tonne of coal.
  • Consequently, the variable cost of power generation from domestic coal is likely to increase by 6-8 paise per unit. On the other hand, the increase in variable cost from imported coal is estimated to increase by 12 paise per unit.
  • The increase in fuel costs are not expected to have any impact on the profitability of power generation companies. Central and Stage government projects are based on a ‘cost-plus’ principle, by which their tariffs are determined on the basis of actual cost of fuel. Consequently, we believe that the increase in fuel costs will be passed on the distribution companies by these generators.
  • The impact of the increase in power purchase costs on retail tariffs will vary on a state-to-state basis, depending upon existing tariff structure and subsidy levels.
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