Updated on 29 May 2017
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Impact of GST on various sectors and stocks to pick
The week gone by turned out to be a crucial one for Indian economy and equity markets as the government announced the Goods and Services Tax (GST) rates during Thursday and Friday.
Some tax rates were on expected lines, while others surprised the markets. For instance, lowering of tax on coal and capital goods came in as a big surprise for the market.
The GST Council covered almost all the sectors, however, there are still some items like bidis and gold for which, GST rates will be finalised in the next meet in June. The game-changing GST is expected to be rolled out from July 1.
Fast Moving Consumer Goods (FMCG)
Measures: On the first day of a two-day meeting of the GST Council on Thursday, it was decided that commonly used products like hair oil, soaps and toothpaste will be charged with a single national sales tax or GST of 18 per cent. These items at present attract 22-24 per cent tax incidence through a combination of central and state government levies.
Impact: The sector emerged as a clear winner with government’s focus on keeping tax on items of mass consumption low. While milk, grain and cereals are exempt from GST; other products like sugar, tea, coffee and edible oil will attract just 5 per cent GST. This will benefit companies like Nestle.
Stocks to watch: Market experts believe GST in the FMCG sector is positive for companies like Nestle, Marico, Dabur and Colgate. Overall, the food side of the FMCG business is likely to benefit from the GST. One should also keep an eye of stock like Heritage Foods.
Consumer Durables and Capital Goods
Measures: The impact of GST has been a mixed bag for the capital goods and the consumer sector. All capital goods and all industrial intermediaries would attract 18 per cent tax instead of 28 per cent. On the other hand, a few segments in the consumer durables would see higher effective taxes and need to take price hikes to offset cost pressures from increased taxes. The GST Council has put items like refrigerators and ACs in the maximum 28 per cent category.
Impact: Companies like Voltas and HavellsBSE -5.55 % may increase some price after the GST being rolled out. Some of the products like fans, cables and air conditioners may see some price hike in coming future. Air conditioners which have been put in the 28 per cent bracket and would need 2-3 per cent hikes, transformer put in the 28 per cent GST rate against the current 18 per cent implies price hikes need to be taken. Cables which were earlier in the 18 per cent bracket has been taken to 28 per cent.
Stocks to watch: Voltas, Havells and CG Consumer may benefit fundamentally as GST will bring more companies under the organised ambit and reduce the unfair competition from unorganised players
Measures: Cars will attract GST at the top rate of 28 per cent with a cess in the range of 1 to 15 per cent on top of it. Luxury cars will attract 28 per cent GST plus cess of 15 per cent. Small petrol cars will face 28 per cent plus 1 per cent cess, and small diesel cars 28 per cent GST plus 3 per cent cess. Bigger cars’ cess is on expected lines, but the cess on small cars is a surprise for markets.
However, market experts believe cess at 1-3 per cent on small cars will be absorbed by the market as seen in the case of excise duties being increased by 2 per cent in the past. Current tax rates on small cars amount to around 29 per cent. Other automobile segments like two-wheelers are at 28 per cent rate which is slightly lower than the existing indirect tax rates on two-wheelers. Motorcycles with engines of more than 350cc and above will attract 3 per cent cess.
However, the current tax incidence for Eicher MotorsBSE 1.34 % is 31 per cent and hence a 28 per cent GST plus 3 per cent cess will be neutral.
SUVs have a tax incidence of more than 40 per cent currently, so 28 per cent plus 15 per cent cess (43 per cent) is neutral for SUV manufacturers like M&M.
Multiplexes and Cinemas
Measures: The GST Council, led by Finance Minister Arun Jaitley, has fixed rate on movie tickets at 28 per cent, the highest rate slab which is also applicable for casinos and five-star hotels. Jaitley on Friday said, "Cinema halls are currently paying a service tax of 15 per cent plus a state entertainment tax that ranges from 28 per cent to about 100 per cent. All these will be subsumed under 28 per cent GST rate, bringing down costs of service significantly." However, multiplex operators said that at 28 per cent the industry has not got a fair deal.
Services Measures: Unlike the current regime where service tax is imposed at a flat rate of 15 per cent across all services, the GST will have four slabs of 5 per cent, 12 per cent, 18 per cent and 28 per cent exactly like the GST on goods.
Impact: GST on telecom and financial services will be 18 per cent, higher by 3 per cent from current levels. However, the availability of input credit will partially neutralize this impact. However, making transport service GST at 5 per cent will be anti-inflationary. GST will be just 5 per cent on economy flying, which will help airline companies like Spice Jet and Indigo give a bigger push to the Udaan program.
Stocks to watch: One should keep an eye on SpiceJetBSE 2.20 % and InterGlobe Aviation.
Cement, coal and steel
Measures: For cement, GST slab rate is at 28 per cent. The existing indirect tax incidence on cement was around 24-25 per cent. So there is a slight increase in taxes. However, there is an additional benefit for them as the GST on coal and metal ore has been cut to 5 per cent.
Stocks to watch: Steel and power companies that depend heavily on coal will also benefit from the lower GST on coal. JSW and Tata Steel may be the key beneficiaries