9th July 2017

SECTORAL IMPACT OF GST

The rate structure for all the goods and services along with GST compensation cess has been
finalized by the GST council. As per the new GST regime for goods, nearly 81% of the items fall in the
18% tax bracket or below and the remaining 19% fall in the 28% tax bracket. For services, most of
them fall in 18% tax slab as against the 15% tax slab which existed in the pre-GST regime. But the
benefit of input tax credit should create a disinflationary effect and therefore should have a neutral
or positive impact on the service industry.

Services
Service Tax slab
Healthcare Exempt
Education Services Exempt
Transport Services 5%
Financial Services 18%
IT Services 18%
Telecom Services 18%
Luxury Services 28%

Goods

Impact Industry
Positive Soaps, toothpaste, hair oil, adhesives, coal, large cars, SUVs
Neutral Cigarettes, cement, white goods, APIs, small cars, two wheelers, tractors
Negative Alcohol, paints, skin creams, shampoos, laundry, switches, three wheelers

Breakdown of goods under GST Regime

Sectors
Consumer goods/ FMCG
The FMCG companies, whose tax incidence has come down under the GST regime, are likely
to pass it on to the consumers in the form of lower prices. Tax exemption provided to
several critical products required for food processing—jaggery, cereals and milk— would
benefit this industry. In FMCG sector, there are different changes for different products.
Soaps, toothpaste and hair oils will come under 18% segment as compared to the previous
tax rate of 23-24%. GST rate for skin creams, shampoos and laundry is higher at 28%.

For most other FMCG majors, the GST rate structure is likely to be neutral or marginally
positive, as their broad portfolios would see a mixed impact. In case of HUL, for instance, tax
incidence has reduced for soap, toothpaste and tea, but increased for detergent, shampoo
and skin care. For Godrej Consumer Products, lower tax incidence on soaps and insecticides
is a positive, but higher tax rate for hair dye is a negative

Others
 Garments (costing >INR1k per unit) currently attract effective tax rate of ~6% (VAT: 5%,
Excise: ~1%), which will increase to 12% under GST. Availability of ITC (mainly service tax on
lease rentals, advertisement cost, etc) will partially offset the impact of higher GST. Prices of
garments are expected to go up by 3-4% post GST rollout
 Paints segment has seen a marginal increase in taxes. Cigarettes will attract GST rate of
28%+ cess, whereby cess will be 5% plus a specific rate. This has a neutral impact on ITC
(Company). The shares of ITC touched an all-time intra-day high of Rs.354 on 3rd July’17.
Liquor has been impacted given 18% tax on key raw materials

Current
Category GST (%) Companies Impacted Remarks
Tax (%)
Soaps, tooth paste, 24-25 18 Colgate, Dabur, HUL Uncertainty on taxation
hair oil rules on units availing
area-based tax
exemptions
Detergent, skin 24-25 28 HUL, GCPL, Marico
care, hair care
Biscuits 12-20 28 Britannia, ITC Effective tax rate for
low-price biscuits
(glucose) will go up.
Tax incidence for
premium biscuits will
decline marginally
Fruit juices 12 12 Dabur, ITC
Instant coffee, 20-24 28 Nestle, GSK
malted beverage, Consumer
chocolates Healthcare
Ayurvedic products 5 12 Dabur, Emami Higher tax incidence
will be passed on
gradually to
consumers
 Butter, Ghee, 5-12 12 Parag Milk Foods Tax incidence on
Cheese Butter/Ghee will
increase from 5% to
12%.

Overall Impact on this Industry:

 Impact due to destocking likely to normalise Q3FY18 onwards
 Companies planning to compensate its trade partners for loss (if any) incurred by them on
transition inventory. Efforts to protect margins for trade partners
 Small vendors are improving their tax compliance levels
 GST could reduce the cost of advertisement and lead to an increase in spending by firms for
promoting their products

How the stock markets have reacted:

 In the last 6 months FMCG stocks have surged as much as up to 300%.

 Other major stocks in the list of FMCG companies have also soared, with some rising as
much as about 70%, while the others gaining still decent about 20% in six months
 The FMCG blue-chips have risen in the range of 24%-42%, with four stocks outperformed the
benchmark BSE FMCG index, which has returned 29.7% in the last 6 months. Shares of ITC
Ltd are up 38% since the beginning of this year, Hindustan Unilever Ltd is up 32%, Godrej
Consumer Products is up 28%, while Britannia is up 28.41%. Another blue-chip, Colgate-
Palmolive has risen 22% since January

S&P BSE Consumer Durables performance in last 6 months

S&P BSE FMCG performance in last 6 months

Healthcare
Concerns
Until now, life-saving drugs that treat diseases like malaria, HIV-AIDS, tuberculosis, and
diabetes, had been exempted from excise and customs duties, and only a few states charged
five percent tax on them; but GST has now slotted them compulsorily under the five percent
slab, while categorising formulations into the 12 percent slab (up from nine percent) and
APIs under 18 percent.
Thus the formulations or finished goods category is expected to see a rise of 1.8% (after
considering the credits). This might result in some inflation or the additional burden being
taken up by companies.
Earlier, Ayurvedic drugs or medicines were charged an average VAT of 4% and excise of 1.5%
due to the excise free manufacturing zone benefit. Under GST, Ayurvedic medicines could
get costlier as they would be taxed at the rate of 12%.
Moreover, the distribution channel was not involved in the payment of tax and filing tax
returns, they will now need to get registered and file the minimum 37 returns annually as
required under GST. This should be a daunting task for them.

Positives
GST would help the pharma industries by streamlining the taxation structure since 8
different types of taxes are imposed on the Pharmaceutical Industry today.
Moreover, GST would also improve the operational efficiency by rationalising the supply
chain that could alone add 2 percent to the country’s Pharmaceutical industry.
One more benefit likely to accrue due to GST is the reduction in the overall cost of
technology. Currently, the technical machinery and equipment which are imported into the
country by the healthcare sector are very costly. Also, the duty which is levied is not allowed
as a tax credit under the present tax regulations. However, with GST this scenario might
change. Under GST, duty charged on the import of such equipment and machinery would be
allowed as a credit.

Overall Impact
In general, the impact of GST on the Healthcare segment is still indeterminate. However, the
Industry specialists have confidence that post implementation of GST customers and
industry players will be in a win-win situation. The Healthcare Industry would profit from the
GST implementation as it would diminish the complexities and various obstacles to the
growth of business.

Auto
Cars will come under 28% tax bracket out of which small cars will be charged a cess of 1%,
mid-sized cars will attract 3% cess and luxury cars under 15% cess. But the implementation
of GST would reduce the cost of manufacturing of cars whereby GST would be charged on
the consuming state rather than origin state. In 2 wheelers, the new tax rate will be 31% for
motorcycle with engine greater than 350cc while 28% for the rest. There has been an
increase in taxation on trucks from 8-10% to 12% under GST.

Category Previous indirect tax GST

Incidence
Cars
 Small Cars (length < 4 m ; Diesel < 1500 cc) 31% 31%
Mid Segment Cars (engine < 1500 cc) 42% 43%
Large Cars (engine > 1500 cc) 47% 43%
Sports Utility Vehicles (length > 4m ; engine >150cc 53% 43%

2 Wheelers
Motorcycles (engine > 350 cc) 30% 31%
Motorcycles (engine < 350 cc) 30% 28%

BFSI
 Banking and financial services: The taxes will increase from 12.36% to more than 20%,
however there will be minimal impact on the ATM charges, DD charges and other
transaction charges.
 Insurance: For the end consumers, with respect to the premium payment, there will be 7.5
bps to 1.2% increase in cost. The taxes are likely to go to 18% from 12%.

Telecom
There has been a 3% increase in tax rates in the form of tax and cess on the phone bills for
end consumers from 15% to 18%. As a result of high competition in the industry, incumbents
of the likes Airtel and Idea are expected to absorb the additional costs associated with their
most pre-paid plans. Although this downside is expected to be partially balanced by the
input tax credit, reducing the operating costs and capital expenditure. Overall, the sector is
expected to have marginal impact on its profitability as a result of GST implementation.

Building Materials
 Adhesives: This segment is a key beneficiary as the GST rate is 18% as against the previous
tax bracket of 24-25%.
 Cement: The GST rate is marginally higher than the previous rate of 28% but this sector is
likely to benefit due to logistic efficiencies on the other hand.
 Plywood: The GST rate is slightly more than the existing rate and therefore no tax savings in
this segment.

Category Previous indirect tax GST

Incidence
Cement & Clinker 26-27% 28%
Fans 26-27% 28%
Switches 20-22% 28%
LED lights / fixture 24-25% 12%
Adhesives 23-24% 18%
Tiles 26-27% 28%
Plywood 26-27% 28%
Air Conditioner 25-27% 28%
Refrigerator 25-27% 28%
Wires & Cables 22-24% 28%
Manufacturing
 Materials: The coal industry is likely to benefit with the GST tax rate of 5% as against 11-12%
previously, but due to railway freight coming under a higher tax slab of 18%, it might hurt
the manufacturing industry where transporting materials over long distances is required.
Steel will see a marginally higher GST of 18% as against 16-17% previously.

 Drivers:

o Reduced Cost of Production: GST will reduce the cascading of taxes and will lead to
a lower cost of production. In addition, the current tax system does not permit tax
credit of central/union taxes over state taxes and vice versa. The GST will remove
this clause, as unrestrictive tax credit will be permitted.
o Increased Working Capital: In the current system of taxation, stock transfers are not
subjected to taxes. However, once the GST is implemented, stock transfers will be
considered as supplies and will have an applied GST. This is likely to result in cash
flow hindrances and therefore, manufacturing companies may have to strategize
their supply management strategies in a manner that minimizes cash flow impact.
o Hassle-free Goods Movement: The implementation of the GST is expected to unify
the Indian market and ensure a smoother, unrestricted flow of goods across the
country. It cannot be expected that the border barriers will be done away with at
once. However, reduced compliance scrutiny is more likely to transpire.
o Supply Chain Restructuring: Tax credit on inter-state sale of goods and services will
ask for warehouse re-engineering and that can eliminate an extra layer of
warehousing in the supply chain.
o Improved Compliance Requirement: As mentioned in the OECD’s guidelines for
place of supply, GST is also expected to lead to greater requirement for compliance
obligations.
o Area-based Exemptions: As per the theory of GST, since the entire country is
considered a unified market, the location-based exemptions stand invalid. This
might be a true issue of concern for companies currently enrolled under this
incentive.