The Economic Survey 2017-18 talks at length about how the new tax regime — Goods and Services Tax (GST) — has met its initial objective of bringing more businesses under the tax net. Numbers suggest that the mop-up under the GST has been surprisingly robust.
It is also expected to usher in many long-term benefits — such as lower logistics costs, reduction in the overall tax burden by increasing the input tax credit (ITC) base, bringing more entities into the tax net by reducing the turnover threshold to ₹20 lakh and improved transparency through a better compliance mechanism — to the economy.
It is well-known that all companies, irrespective of their sector, had teething problems when it came to compliance under GST. While it is too early to measure the other benefits of the tax reform, let us look at how it has impacted India Inc.
Consumer durables
White goods including washing machines, air-conditioners and refrigerators are taxed at 28 per cent under GST when compared to about 27 per cent under the previous tax regime. Though there isn’t much difference in terms of tax rates, manufacturers would benefit from an increase in their ITC base as credit is now available for many expenses that were ineligible earlier.
Due to the misconception that prices may rise significantly after the GST implementation, many consumer durable dealers sold stock at discounted prices prior to this. This de-stocking impacted the companies in the June quarter of FY18. For instance, Whirlpool of India’s operating margin came down by 60 basis points in the quarter before GST was brought into force, due to de-stocking of higher value items that affected the product mix.
After GST, the prices of products have gone up only by two to three percentage points. Whirlpool stated that the performance of the company in the second quarter of FY18 was adversely impacted. However, it expects to benefit from the new tax regime in the medium to long term, through rationalisation of the number of warehouses across the country and from a cleaner operating environment.
Meanwhile, in the kitchen appliances segment, the GST tax rate for pressure cookers is 12 per cent, similar to the earlier indirect tax rates. But mixer-grinders, which were taxed at about 14 per cent, are now in the 28 per cent tax bracket. This increase was a big blow to the industry.
TTK Prestige, whose product portfolio includes pressure cookers and grinders, has seen a moderate performance in the second quarter of FY18, in terms of revenue and operational performance (EBITDA) due to de-stocking by channels before the roll-out of GST.
The electronic consumer durable market consists of a number of unorganised players. Over the long run, as compliance with GST increases and more players come within the tax net, the transition to an organised player is expected to benefit the sector as whole. But it is still too early to measure the overall impact of this change.
Cement
The GST rate on cement bags is fixed at 28 per cent while it was taxed at 26-31 per cent in the previous tax regime, varyingfrom State to State. Therefore, implementation has been good for some, bad for others. As far as consumers go, while a few players have passed on the tax reduction benefits to consumers, a broad-based industry trend is yet to play out. Aditya Birla group’s Ultratech Cement has reduced prices of its products by two to three percentage points, extending the benefits under GST.
The biggest benefit to the industry is the tax rate reduction on coal, its key raw material. This has fallen from 11 per centto 5 per cent and will reduce the overall cost of production for manufacturers.
GST is expected to bring down warehousing costs — many cement companies have set up warehouses in every State to cut the cost of Central sales tax on inter-State sales but by unifying the entire indirect tax system (except for Customs), the manufacturers can opt for fewer and larger warehouses. Logistics cost, which is expected to come down in the GST regime, will also help the industry, as freight costs constitute about 25 per cent of sales for cement manufacturers.
Barring muted demand in the second quarter of FY18 that impacted cement companies, GST did not materially impact companies such as Ultratech and ACC Cement.
Realty
The real estate sector has been reeling from the triple whammy of demonetisation, the Real Estate (Regulation and Development) Act, 2016 (RERA) and GST. While demand is still subdued in most pockets, the new regulations under RERA and GST are expected to bring in more transparency in the long-run, benefiting listed players in particular.
The GST rate for properties under construction is 12 per cent, which is higher than previous taxes — service tax and VAT at 5-6 per cent. The ITC base has widened considerably under GST; this allows players to offset the tax outgo substantially. Developers have been advised by the government to pass on the benefits to the customers.
Though Godrej Properties hasn’t felt the impact of GST implementation too much, Mahindra Lifespace attributed the weak profits in the second quarter of FY18 to GST and RERA.
FMCG
The fast moving consumer goods (FMCG) sector has been a key beneficiary of the GST regime as the government has reduced tax rates on various items. On an average, goods that were taxed in the range of 20-22 per cent, are now in the 18 per cent tax slab. But due to the wide range of products covered under the FMCG net, tax revisions at various GST council meets, pressure from the anti-profiteering body to pass on the benefits to customers and a notification from the consumer affairs to paste a new label or sticker of revised price on the product, it has become difficult for companies to navigate the new tax regime.
After the implementation of GST, Colgate-Palmolive had reduced the prices of its toothpaste by 8-9 percentage points. Despite the price reduction, sales volumes declined by 0.9 per cent in the second quarter of FY-18, which is attributed to the GST transition issues. But the company stated that direct trade has increased post-GST. Under direct trade, manufacturers sell directly to distributors in the other States. Pre-GST, manufacturers used to sell via wholesalers and warehouses to avoid tax on inter-State sales.
According to few other industry players, the transition to the new tax regime has somewhat stabilised and the situation has returned to normal.
Steel
The tax rate for steel products before and after GST has been an average of 18 per cent. Though the impact of GST rates is minimal, there have been indirect ramifications.
JSW Steel, whose raw material is iron ore, faced supply issues from its vendor. Due to non-availability of the raw material, the steel major’s production was less than expected in the second quarter of FY-18. It is expected to reach normalcy from the third quarter of this fiscal.