GST rates: FMCG to gain, SUVs to get cheaper, small cars to get costlier

The government has broadly kept the tax rates as closest to their the existing tax rate structures

The Goods and Services Tax (GST) Council, in its crucial two-day meeting, finalised the most-awaited tax rates for various goods and services (except few items like gold, biscuits, footwear, apparel and beedi). With this, GST implementation has inched another step closer to reality, raising optimism about 1 July 2017 rollout. 

Notably, for most goods, the government while finalising the fitment of rates for various goods  has broadly kept the tax rates as closest to their the existing tax rates. 

However, for the services, the Council has agreed to four tax rate slabs (from current single  tax  rate slab currently), have been expanded  to four slabs; while, the existing exemption list for services is largely grandfathered. Although The the exempted list for goods is yet to be finalized , we expect ; it is likely to be much leaner than the current one. On an overall  basis,  the government has  levied a lower rate of 5% on basic goods & and services,  12 or 18% tax slab for the general goods & services,  and 28% (plus+ cess in some certain cases) for luxury goods & and services. 

Sector-wise implications

Sectorally, we believe that the FMCG sector stands to benefit from the reduction in lowering of tax rates for in the soaps, toothpastes and adhesives segments to 18% from v/s 22-26% currently. Similarly, indirect tax levy on lubricants has been lowered to 18% from v/s 27-28% currently. We believe that companies might either pass on the benefit of lower the reduction in duties to consumers or retain it to by sector participants will be either passed on to spur demand and or retained to boost margins. 

For automobiles, the GST rates are fixed ats 28% plus + cess (1% for small petrol cars, 3% for small diesel cars and 15% for others) . This will lead to an increase in on- road prices of small diesel cars and mid-sized cars by 1.6% and 2.1%, respectively.; On-road prices for large SUVs, however, will decline.
 

The GST rates for cement has been increased to 28% from current effective tax rate of 22-24% currently. We believe that the increase in tax rates for this sector is likely to be passed on to the consumers. 

Under the new GST rules,  indirect levy of taxes on  the works contracts have been increased to 12%, as against (v/s the current composite rate of ~ 7-11%. ) ; however, input credit is now permitted to be made available,; which, in our view, should is going to reduce the overall capital cost for setting up new infrastructure projects /facilities. Furthermore, the lowering of the tax incidence of taxation on coal (at 5% plus + cess  ) is likely to reduce the overall coal costs for merchant power plants by  5%; while, it will be a pass- through for the companies operating the plants operating under the PPAs. 
 

Inflation 

We believe that since the rates on the goods (which have a higher weightage in WPI) under GST are broadly maintained, (which have a higher weightage in WPI ) near to the existing rates the impact on it is unlikely to impact the inflation is unlikely to be materially.

Overall, we believe that the government has attempted to strike a balance and ensure that GST rates are non- inflationary. Needless to say, there are some divergences versus expectations on sectoral rates. We do not see any rationale for near-term buoyancy in markets, as rates are not disruptive and have been largely kept around existing tax incidences.

Going forward, implementation of GST will be a critical monitorable from the market's perspective. Clarity around the treatment of inventory (especially for goods where rates are going to be lowered) will be important to soothe the nerves of trade participants. We believe that GST in the medium to long term will provide a big catalyst for formalisation of economy, trigger efficiencies in supply chain, boost revenue collection for government and aid the shift towards Organized markets.

The author is head of research at Motilal Oswal.