Automobile, logistics companies to reap rich GST dividend

Dated 19th December, 2014

The Narendra Modi government’s plan to introduce the goods and services tax (GST) will allow the automobiles, logistics and entertainment sectors to reap a rich dividend from the rollout targeted for next year. But for petroleum, the wait will be longer as it is not been included in the GST framework.

The GST Bill is expected to be tabled by the government in Parliament after the Cabinet cleared it on Wednesday. Analysts and corporate tax experts said under the GST, the cumulative duty rates on large cars and sports utility vehicles would fall from 41-41 per cent to 20-24 per cent, making these the biggest beneficiaries of the rollout.

For some segments of the automobile industry like tractors, which are exempted from excise duty but pay four per cent value added tax, the GST rate will increase to 12 per cent. Overall, Mahindra & Mahindra would be a beneficiary because the company earned 25 per cent of its revenue from sports utility vehicles, analysts said.

Other big beneficiaries would be logistics companies. A complicated tax regime coupled with poor infrastructure has led to high logistics costs in India at around 14 per cent of the total value of goods against seven to eight per cent in developed countries. The GST regime will make sure that companies consolidate their warehouses into four or five big ones rather than keeping one in every state to save on central sales tax (CST).

The retail industry will gain too. “The rollout of GST will help free movement of goods across states. Since tax paid in a previous state is treated as input credit, it will allow us to reach out anywhere in the country without a tax burden. It will bring in more efficiency and reduce prices for customers,” said Rakesh Biyani, joint managing director, Future Retail.

“There will be major savings in transport costs for companies, which will directly improve profitability. Today, the time taken at various check posts adds to cost at every stage. Losers will be those industries that are out of the purview, which appear to be petrol, tobacco and alcohol,” said DR Dogra, MD & CEO of CARE Rating.

Besides, experts said industries like food products and processing and fast-moving consumer goods should be better off as they currently faced multiple taxes. Electrical and chemical product companies, too, could see an improvement in profit.

Harsh Mariwala, chairman of Marico, said the big stakeholders in the GST rollout were not only the government, but consumers and industry also. “If rates are high, these will lead to inflation, which would be detrimental to consumers. When the empowered committee met a month ago, it had suggested a revenue-neutral rate of 27 per cent. It should ideally be below 20 per cent.

Earlier studies had suggested that it should be between 12 and 16 per cent if goods have to be competitively priced and there is to be no inflationary pressure. So as long as these issues are not sorted out, the GST will not achieve its objective,” he said.

Automobiles, pharmaceuticals and consumer products companies enjoy tax benefits by setting up manufacturing units in states that offer incentives like excise, VAT and income tax concessions. Many fast-moving consumer goods companies, especially in food products, enjoy rates of zero to six per cent versus the current excise rate of 12 per cent. If the GST rates go up, they will increase costs and the companies will pass them on to consumers.

Adi Godrej, chairman, Godrej Group, said the GST would add two per cent to gross domestic product growth and it was good that the Centre and states had come to terms on the issue. “Though there have been a few compromises. For instance, petroleum products have been exempted for now. So is alcohol. Once all the items are included, the full impact of the GST will be felt. But there is no denying how critical this development is. We are better off getting started with this (GST) rather than delaying it,” he said.

Corporate lawyer Sumit Lunker of BDO India said the entertainment and telecom sectors would be big beneficiaries as the GST would eliminate a multiplicity of taxes–entertainment tax, luxury tax, VAT and service tax– and end classification disputes on software, SIM cards, franchise fees, and annual maintenance contracts for telecom companies.

(This article is published in Business Standard on 19th Dec, 2014)