The most awaited (Good & Services Tax) GST bill is expected to be passed in the parliament in its July session starting from 18th July 2016. The main function of the GST is to transform India into a uniform market by breaking the current fiscal barrier between states. Thus the GST will facilitate a uniform tax levied on goods and services across the country. Taxes such as excise duty, service, central sales tax, VAT (value added tax), entry tax or octroi will all be subsumed by the GST under a single umbrella.
Thus, the GST will basically have only three kinds of taxes, Central, State and another called the integrated GST to tackle inter-state transactions. The major lookout for a trader is to understand its impact and identify the opportunity to make money. Below is the list of sectors which will be positively impacted by the GST coming into play. Below is also a suggested list of scripts that an investor can have in their portfolio to maximize gains.
Sector 1: Automobiles
Currently, the total tax outgo is ~27% (Excise + VAT + CST). A Standard rate of 18% would lead to a ~9% reduction in vehicle prices thereby stimulating demand. Original Equipment Manufacturers (OEMs) would benefit largely from savings on logistics and warehousing related costs and a simplified tax maintenance structure.
Sector 2: Auto Ancillaries
GST implementation is expected to bring the unorganized players in the tax net – this should reduce the price gap between organized and unorganized players. Battery industry, with ~40% of the replacement market still unorganized, and is likely to benefit from the same and we expect organized players to gain market share. Other smaller auto ancillary, catering to replacement market and competing with the unorganized segment are likely to similarly benefit.
Sector 3: Building materials
Currently unorganized sector (~50% of the industry) benefits from tax evasion and lower tax rates at 18% vs. current duty of 25-27% paid by the organized players 25-27% will reduce the gap between organized and organized.
Sector 4: Cement
Though, 18% tax rate will be lower than what the companies are paying currently (~24.5% excise and VAT), we believe that the companies will pass on the benefits to consumers as demand continues to remain weak. The sector will benefit only when the pricing power is strong in the hands of manufacturers.
Sector 5: Consumer Durables
The unorganized segment of the consumer durables segment has been evading the indirect taxes for the past many years. The introduction of GST will bring them within the ambit of indirect taxes and would most likely impact their competitive advantage in terms of pricing. The narrowing of the price differential between the organized and unorganized players would help the organized players increase their market share.
Sector 6: Consumer and Retail Sector
All consumer companies will stand to gain with respect to supply chain and gistic. Indirect tax rate will come dow to (as per recommendations to possibly 18%) which would lead to higher purchasing power? More players to come under tax net. Thus, competitiveness of organized players to further improve. In Categories, which have high pricing power, reduction might not be as much and hence, the benefits will flow down.
Jewelry retailers too, will benefit from reduced logistics costs. However, a higher rate on precious metals and gold could impact demand.